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Top Story: Full Houses

As restaurants rebound, seafood chains claim a competitive advantage

James Wright
March 05, 2011

The restaurant industry, forever dependent on consumers’ discretionary spending, is more or less the U.S. economy’s bellwether. It’s easy to see why: When people are working and the cash is flowing, they tend to eat out more often. Over the past two-plus years, the opposite scenario has also held true.

So it makes sense to ask seafood restaurant operators, who often wear their amateur-economist hats, whether the recession is over or not. (After all, $1.5 billion was spent at restaurants daily in 2010.) 

They’re saying it is, and they don’t even have their fingers crossed. Optimism — guarded or not — is back in fashion, and that’s the best news the seafood industry could hope for after a long stretch of flat or declining sales. Restaurants’ return to profitability is huge for seafood, since historically about two-thirds of all seafood consumed in the United States occurs via foodservice. 

Don’t breathe easy just because tables are starting to fill up again: The Gulf oil spill is still lingering in consumers’ minds; restaurant chains with 20 or more units will soon have to provide nutritional information for their dishes, including calories; and lots of people are still out of work or struggling to get by. Restaurant operators are constantly required to do more to keep pace with the changes and are feeling increased pressure to perform. 

Three chains looking to grow in spite of economic challenges — Rockfish Seafood Grill, Ocean Prime and Joe’s Crab Shack — say they’re battle tested and ready for the fight. 

“In the new economy, so to say, guests expect a lot more than they used to. Discretionary income is tighter than it ever has been and they’re not going to put it at risk,” says Tommy Lee, CEO of Rockfish Seafood Grill, a 14-unit casual-dining chain based in Richardson, Texas, with locations spread throughout the Lone Star state and one in North Carolina. “[Consumers] are feeling better about their situations and, assuming they have jobs, they’ll spend money but only with businesses they trust.” 

Lee and the Rockfish team are mounting a comeback after the company floundered through a rough period that saw nearly half of its restaurants close. The troubles, Lee says, went beyond macroeconomics. Consistency and execution had weakened and the company, once a Brinker International property, was sold again in late 2009. 

When Lee was brought in as CEO in March 2010, shortly after the new ownership team took over, he walked into a “turnaround situation.” The chain’s unit count had dropped from its peak of 25 in 2004, and was hit hard by the recession. Despite closing another site in the Houston area on Jan. 1, Lee says things are looking up. 

“It’s a nice little brand. What we’ve done for the last 10 months is getting things turned around within our own four walls,” Lee says, admitting that he and other restaurant companies have zero control over consumer behavior — they simply have to adapt to it. The task at hand for seafood restaurants as Lee describes it, is made easier by guests coming in who are “thinking healthy.”

 

Bumps in the road

Healthy restaurant statistics aren’t exactly rolling in like the tide, but then again forecasts aren’t nearly as grim as they were in early 2009, just months after the global financial crisis hit. The National Restaurant Association’s Restaurant Performance Index (RPI), a monthly composite that tracks the restaurant industry’s status and outlook, rose to 100.7 in October, its highest mark in more than three years. The RPI dipped in November to 99.9, as 40 percent of restaurant operators reported a net decline in same-store sales, before rising in December to 101. In comparison, the RPI fell to 98.3 in May 2009, its 19th consecutive month below 100. 

Additionally, NRA’s industry forecast, released in early February, predicted a good year for restaurants in 2011, with sales reaching a record $604 billion, up 3.6 percent from 2010. 

Restauranteurs would be wise not to react based on numbers alone. 

“Like the economy as a whole, the restaurant industry’s road to recovery will be one with occasional bumps along the way,” says Hudson Riehle, senior VP of the research and knowledge group at NRA.  

A January report from Barclays Capital says the U.S. restaurant industry is still overbuilt and contraction — likely at a rate between 0.5 percent and 1 percent in total units — this year may result in a more balanced supply-demand equation, after two years of flat or declining unit growth.

“When you consider how miserable the economy has been, not many [restaurants] have closed up. So the whole supply-demand issue is a challenge,” says Lee. 

Many publicly traded restaurant companies, Barclays notes, are focused on incremental sales at existing locations rather than expansion; its report urged additional overall contraction is necessary. Most of last year’s unit reduction, according to the report, was in the casual-dining sector, an important category for seafood sales. 

Ed McGraw, VP-development for Ignite Restaurant Group in Houston, the parent company of casual-dining chain Joe’s Crab Shack, has never seen anything quite like what the past two years have had to offer. “Nobody has, quite frankly,” says McGraw. 

Things are gradually turning around, however. McGraw, whose expertise is in real estate and site development, says Joe’s is in much better shape than when it was acquired by JCS Holdings (now Ignite) from fellow Houston company Landry’s Restaurants in 2006 — before the economic crisis hit. At that point, there were 120 Joe’s Crab Shacks around the United States. After closing several underperforming sites, in late January the company opened No. 118 in Amherst, N.Y. Others are soon to follow. 

“We’ve excelled at turning this brand around,” says McGraw. “The focus is off of promotional price drivers and shrimp specials and back on high-quality crab [steampots]. Crab is our middle name.” 

Despite the challenges presented by the down economy, Joe’s is thinking big again. Even with scant available sites the company deems viable, McGraw expects Ignite to open about 10 new Joe’s sites this year and “maintain double-digit growth per year for the foreseeable future” with a keen focus on the Northeast. 

Rockfish Seafood Grill is also thinking about growing again after watching its unit count dwindle. 

“Over the last year, [expansion] hadn’t even been a topic. But for the first time, we’re thinking about what the next restaurant will look like and where it would be,” says Lee. “Capital markets dried up and got tight. They’re opening up a little bit now. The opportunity to grow is opening up, and you’ll see that across the industry this year.” 

 

Will work for food 

A bleak jobs outlook might be the biggest obstacle to restaurants’ success in 2011. But it’s improving: The U.S. unemployment rate fell by 0.4 percent to 9 percent in January, according to the Bureau of Labor Statistics (BLS). In December and January, nonfarm payroll increased by 139,000 jobs, with gains noted in the leisure and hospitality industries. 

The National Association for Business Economics’ latest survey of economists, released in late January, shows that the employment outlook net rising index hit a 12-year high; 42 percent of respondents indicated their firms will be increasing employment, up from 29 percent a year prior. Restaurants should employ about 12.8 million people this year, reports NRA. “Restaurant industry job growth is expected to outpace the national economy this year, emphasizing the importance of the industry to the nation’s economy,” says Riehle.

Still, there are 13.9 million people unemployed across the nation, says BLS; add to that 2.8 million people considered “marginally attached” to the workforce, at least half of whom are considered to have simply given up searching for a job. There’s no denying it — it’s still tough out there: Jobs take effort to find, as do real estate opportunities and business loans for growing chains like Joe’s Crab Shack. 

“There was a time, 10 or 15 years ago, if you happened to be out of work, you’d polish your resume and get back out there,” says McGraw. “If you could fog a mirror, you could get a job.” 

Of all the economic indicators that restaurant operators monitor, two trustworthy ones — restaurant traffic and employment trends — tend to mirror each other. “People who lose their jobs eat out less often,” deadpans McGraw. 

“Then there’s the other 20 or 30 percent who are employed but fearful they’re not going to be,” adds Lee. “Until that group feels good about the fact that they’ll have a job, they won’t spend as much on things like restaurants. All the indicators say that group is feeling better.” 

Cameron Mitchell Restaurants of Columbus, Ohio, is hoping the competition for open tables at its new restaurant in Denver will be as fierce as the competition for jobs at the trendy spot in the city’s lower-downtown neighborhood. A glitzy, 9,000-square-foot Ocean Prime, an upscale seafood concept, opened there in late January. 

“We had 3,000 applications for 140 positions,” says the company’s namesake founder and president Cameron Mitchell. “That allows us, with that kind of demand, to drive down our labor costs and get a better quality person, and employee, and ultimately better sales.” 

Mitchell has made shrewd moves of late. Ocean Prime has become his new seafood focus, nearly three years after selling the Mitchell’s Fish Market, Columbus Fish Market, Mitchell’s Steakhouse and Cameron’s Steakhouse concepts to Ruth’s Chris Steak House for $94 million. The new Ocean Prime restaurants are about 20 percent larger and bring in more revenue — about $7 million per unit per year, more than the $4.3 million annually that Mitchell’s Fish Market units brought in. Sales were down in 2008 and 2009, Mitchell says, but bounced back last year, which has the company leader feeling confident. 

When it comes to seafood, “You’re better off in the fast-casual or fine-dining sectors than casual dining,” says Mitchell, who says the ninth Ocean Prime will open in Atlanta this summer with plans of opening three units a year going forward. 

“The largest challenge to that is the capital outlay,” says Mitchell, estimating that each unit costs about $4.5 million to put together. “There’s always more opportunity than available capital.” 

More restaurants means more jobs and more seafood to be sold. Putting people back to work is great, but labor costs, too, are plagued with uncertainty like rising minimum wage, providing potential 
barriers to growth. 

 

Premium fuel 

Uncertainty, it seems, is still pervasive, from the boardroom to the dining room. 

Chicago-based foodservice consulting firm Technomic in late January released “Market Intelligence Report: Seafood,” which revealed that 23 percent of consumers it surveyed said their seafood consumption declined during the Gulf of Mexico oil spill; 19 percent of those surveyed said they were still eating less fish four months later. 

“While these changes may not be permanent, they have lasted beyond the media’s coverage of the spill and are a testament to the strength of that imagery,” says Mary Chapman, product innovation director at Technomic

Still, there are plenty of reasons to be feeling positive about a menu full of seafood. The NRA’s “What’s Hot” survey of more than 1,500 professional chefs, released in December, listed the 10 hottest trends on restaurant menus, three of which were seafood-related. Locally sourced meats and seafood were ranked No. 1; sustainability third; and sustainable seafood seventh. “Sustainability and nutrition are becoming key themes in our nation’s nearly 1 million restaurants,” says NRA’s Riehle. 

Seafood, in comparison to other proteins, is way out in front of the sustainability conversation, and is top-of-mind with consumers when it comes to seeking out healthier options. According to the Technomic report, consumers perceive fish and seafood to be “inherently healthy.”  

“I think that’s a huge competitive advantage [for seafood restaurants],” says Lee of Rockfish. “We have a niche that is craved. And people don’t come to a seafood restaurant just because it’s mealtime.” 

“When you’re thinking food as fuel, you think of something else,” echoes McGraw of Ignite. “If people want to have a good seafood experience and a nice plate of food, that’s where we’re prepared to fight.” 

“I think it’s right for the seafood industry to pin its hopes on restaurants,” says Mitchell. “Grocery stores are not getting the same quality and handling it the same way as we do in restaurants. If we can outpace those folks, there’s no reason that restaurants can’t be the mainstay for seafood sales in the United States.” 

 

Associate Editor James Wright can be e-mailed at jwright@divcom.com
 

March 2011 - SeaFood Business 

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