« April 2006 Table of Contents
Top Story: Taking stock of McCormick & Schmick's
Upscale seafood chain advances as public company, opens 60th restaurant
By James Wright
April 01, 2006
When Bill McCormick acquired a struggling, 80-year-old crawfish shack in 1972, even he couldn’t have foreseen its evolution into a nationwide chain boasting a NASDAQ ticker symbol that has investment firms saying, “Buy!”
But that’s exactly what McCormick & Schmick’s (MSSR) is now — a leading upscale seafood-restaurant operator with 60 locations in 25 states and a plan to triple that number in the next decade.
McCormick’s initial investment, the Portland, Ore., landmark restaurant Jake’s Famous Crawfish, remains where it has stood since 1892. And, in many ways, McCormick & Schmick’s still operates in a Jake’s Famous frame of mind.
Now, however, the appetites it caters to demand dividends as the house specialty. So far, any pressure to succeed only seems to be helping.
In December 2005, about a year and a half after its initial public offering, McCormick & Schmick’s hit another financial milestone when it filed for a secondary common-stock offering, pricing its shares at $22.75 each — almost double the $12.34 price of the IPO’s 6 million shares.
More than 5 million shares were sold: 380,000 by McCormick & Schmick’s and 4.7 million by stockholders in a move that significantly reduced the company’s debt.
When its 2005 revenues were announced in February, the total of $278.8 million with a net income of $11 million marked a substantial improvement over 2004, when earnings were at $238.7 million with a net income of just $703,000.
With all the important numbers on the rise, McCormick & Schmick’s economic outlook is healthy. Now, as the chain moves into somewhat uncharted waters, it will have to rely on what it does best: staying on top of industry trends. Doug Schmick, president, says the company’s future holds opportunities as vast as the sea itself.
“Thirty-four years ago, people weren’t really aware of what fresh seafood was all about, but from day one it’s been our commitment,” Schmick said during an investor conference in January.
“As you follow consumer trends, there’s never been a higher emphasis from the consumer on freshness and quality. We’re very well positioned to take advantage of that trend in the industry.”
Two years after McCormick began his transformation of Jake’s, his management organization, Traditional Concepts, took on an 18-year-old trainee named Douglas Schmick. He turned out to be a good hire, and just five years later, in 1979, the two — now partners — opened the first McCormick & Schmick’s Seafood Restaurant in Portland, Ore. Other restaurants would soon follow.
After 34 years, as the two men forged a productive professional association and friendship, both attribute the success of their relationship and their entire business to professionalism, entrepreneurialism, enjoying what they do and cultivating the talent already in place.
“It’s been a pleasure to watch it evolve over the years,” Schmick says. “We’ve become the national brand leader in our particular niche, which is affordable, upscale, fresh seafood.”
Despite the longevity of the company’s name, it has undergone several ownership changes over the years. In 1994, New York investment firm Castle Harlan Partners II acquired the majority interests of McCormick & Schmick’s and its 14 units, located mostly in the West, for $24 million and gave the brand national exposure.
Three years later, Apple South, the predecessor of Avado Brands of Madison, Ga., purchased the chain for $68.5 million and proceeded to add 18 restaurants in a little more than four years of ownership.
Then, in June 2001, McCormick and Schmick reacquired the chain through investment banks Castle Harlan and Bruckmann, Rosser, Sherrill & Co. for $123.5 million, with the intention of taking it public. The management agreement with those companies was officially terminated in 2004; meanwhile, from 1999 to 2004, the chain’s size doubled from 25 units to 50.
In 2005, McCormick & Schmick’s opened seven new sites and is planning eight openings this year.
“The company is right on track; it’s become very predictable,” Schmick says. “We pride ourselves on predictability.”
Tapping into the heartland
McCormick & Schmick’s 60th restaurant, which opened in Columbus, Ohio, in February, was the first to tap that state’s market. Another opening is planned in Cincinnati this fall. Company executives, who continually refer to the Midwest region as “underserved” or “underexposed” to upscale seafood, are viewing the nation’s heartland as a final frontier of sorts.
“The palates there are looking for food they’ve not been introduced to,” says CEO Saed Mohseni, noting that one of the company’s two Kansas City, Mo., restaurants is annually among the chain’s top five performers.
“That site is able to offer the best of both worlds, because of its proximity to both coasts.”
Can McCormick & Schmick’s be the monsters of the Midwest? Is the nation’s heartland really a viable market for oysters on the halfshell, king crab legs and red snapper?
Executive Chef Bill King certainly thinks so, and he expects good returns from No. 60. The restaurant, situated in the sprawling “lifestyle” complex Easton Town Center of Columbus, is a good example of the chain’s ability to adapt to both urban and suburban settings.
“In pure acreage, [Easton Town Center] has got to be one of the largest [shopping centers] in the country,” he says. “It’s an excellent opportunity for us.”
This year Chicago will be home to a second and third McCormick & Schmick’s, while others are planned for Minneapolis and Burbank and Santana, Calif.
They’ll open in shopping centers, hotels, freestanding sites — McCormick & Schmick’s Seafood Restaurants can be found in them all. Most are branded McCormick & Schmick’s.
But the chain also owns the brands M&S Grill, Jake’s Grill, McCormick & Kuleto’s, McCormick’s Fish House and a new upscale concept, “Jimmy’s,” which will open in the nation’s capital either this year or next, King says.
And don’t forget Jake’s Famous Crawfish, which is alive and well in Portland.
Seeking out all this new real estate in new territories is priority-one when you’re growing. Mohseni says he leaves no stone unturned in his quest to fill out successful, existing markets and cultivate new ones.
“What motivates me every day is seeing the potential of this company,” Mohseni says. “We’re recognized by quality.
“We’re a young public company but we’ve been around. That maturity helps us take advantage of the upsides.”
The “wow!” factor
Step into any of McCormick & Schmick’s restaurants, and you’ll see all the trappings of comfort, class and charm: high ceilings, mahogany bars with brass foot rails, stained-glass lampshades and the white linens you’d expect from a place that charges nearly $20 for its entrées. Some locations are seated on prime real estate: The Baltimore restaurant is right on the water, and the New York City site has patio seating on the sidewalk of 52nd Street.
What they all have is that “‘Wow!’ factor,” says Ron Paul, president of Technomic, a foodservice-industry consulting and research firm.
“The interiors are all based on a turn-of-the-century, early deco look,” adds Schmick. “It’s a timeless design, one we don’t have to re-outfit every five years.”
And since no two restaurants are exactly the same, each one reflects the traits of its home city.
“It’s like with a family,” Mohseni says. “The siblings are from the same parents, but they have different personalities.”
The average McCormick & Schmick’s is 8,000 square feet, enough room for 200 to 300 customers. And each one is successful, boasting per-unit sales of $4.7 million in 2005. The average check is $39 per guest: $45 at dinner and $22 at lunch.
Investors love statistics, and an important one in the restaurant industry is guest count. McCormick & Schmick’s draws in patrons with its long-running happy-hour program, when diners sip cocktails from the fully outfitted bar and snack on $1.95 appetizer specials like Baja Fish Tacos, Oyster Shooters and Steamed Mussels in White Wine Broth.
“Our concept has a strong bar program, and the happy-hour offerings appeal to the younger set, building a new generation of guests,” Mohseni says.
Famous for fish
Then, of course, there’s the fish. Among the restaurant’s most famous assets is its “Fresh List,” a register of at least 30 seafood species, shipped in fresh from around the world daily. Typically, there are about 85 made-to-order dishes to choose from.
On any given day each restaurant offers six to 12 species of oysters on the half shell and dishes like grilled Alaska halibut and pepper-parmesan-crusted scarlet snapper from Key West, Fla.
Like many restaurants, McCormick & Schmick’s lists the harvest origin of most of its seafood on the menu to appease guests as hungry for information as they are for seafood. And for guests who might not want fish, there’s also standard fare available, like grilled chicken with roasted-garlic butter and New York strip sirloin.
But don’t get too attached to any single dish, because the choices are always changing.
“We print menus twice a day, so every time a guest goes into a restaurant, they’ll see something different,” Mohseni says. “This is big with business travelers, [who] represent a large part of our demographic.”
About 35 percent of guests at McCormick & Schmick’s are travelers, and business and social visitors are close to a 50-50 split. A healthy gender balance — 51 percent men, 49 percent women, aged 35-54 years — comprises the chain’s target demographic. For each unit to be self-sustaining, what it serves and how are key to attracting repeat business.
“Consumers need regionalization,” Schmick says. “It’s not a cookie-cutter approach. What the consumers want from seafood in Texas is different from what they want in Beverly Hills.”
King of the kitchen
Bill King has worked in the restaurant industry for 36 years, the last 21 with McCormick & Schmick’s. As the executive chef of the budding chain, his time in the kitchen is limited to research and culinary development. But, since he oversees each restaurant opening, manages corporate culinary development and training and is director of purchasing, his fingerprints are all over the place.
And King has seen a lot of changes in his tenure. Fifteen years ago, he says, McCormick & Schmick’s sold its seafood- distribution business, Jake’s Famous Products, in order to work with a broad base of vendors across the country. The move was necessary, he says, because, as the company started to grow, it could rely on its size for buying power and no longer had the need to also handle a distribution chain.
“It just wasn’t our core competency,” he says. “Managing that and doing it well was a completely separate process. We were focused on growth. We wanted to concentrate on operating restaurants.”
King says the company now uses upward of 80 different vendors, with one or two major vendors in its eight regional markets. Having 60 units and more to come allows his buyers “broader access to products” and “propels the brand,” he says.
“We have access from the South Pacific to the North Atlantic. Our size and scope make that possible. It’s rare that a regional chef says, ‘We just can’t get that,’ because we can. Apart from seasonality, almost everything is available to us. We can put any product in any restaurant on any day.”
About half of the menu is King’s creation. Mild-flavored, white-fleshed fish are his staples, and he’s found lasting success with tilapia.
“It absorbs the other components of the dish unlike any other fish,” he says.
Other universal-appeal items like salmon, halibut, crabmeat and shrimp will always find a spot on the menu, as will wild-caught, indigenous favorites like striped bass and blue crabs in the Washington, D.C., area and cod and haddock in New England, for instance.
“Each menu should have a strong representation of its local flavor,” King says. “We celebrate our Northwest roots, so Pacific Northwest products will play a role no matter where the restaurant is.”
King’s regional chefs are responsible for the day-to-day procurement of high-quality fish for the six to 10 restaurants within their respective territories. Each restaurant, he says, is differentiated by geography, décor and the creative work of the chefs. While about half of the menu is corporately defined, chefs are given the latitude to “flex their culinary muscles,” he says.
“We maintain autonomy and unit-level decision-making that are not typical of chain restaurants. Restaurants buy their own fish every day, a key element of development and growth for them. The purchasing is a very important component of a chef’s job. A sense of ownership is very important to them.”
For the executive team at McCormick & Schmick’s, it’s now open season, as the company embarks on a voyage of aggressive expansion; it seeks an annual growth rate of 13 to 15 percent, a mark it has thus far been able to achieve. By 2015, Mohseni anticipates a total of 150 to 200 McCormick & Schmick’s throughout the United States, triple its current size.
CFO Emanuel Hilario says that McCormick & Schmick’s long history of consistent revenue and positive “comp sales” allows it to think big.
“We’ve been able to manage the cost of goods in a narrow range of values. It’s very predictable,” he says. “We have a great balance sheet, no debt — we feel very good about the future.”
“Seafood is one of the higher growth categories now, and [McCormick & Schmick’s is] No. 3 behind Red Lobster and Joe’s Crab Shack,” says Paul of Technomic. “But they’re getting new competitors; Outback is poised to compete effectively against them. Food safety and local competition will continue to be issues.
“It’s not a slam dunk — nothing is in business.” Assistant Editor James Wright can be e-mailed at email@example.com