Ready for a Rebound

THE TIMES MIGHT BE UNCERTAIN, BUT CUSTOMERS ARE CERTAIN THEY WANT STEAKS.
BY BOB KRUMMERT

Ready for a Rebound

We know, we know. You probably spent most of the 1990s kicking yourself because you hadn’t gone into the upscale steakhouse business. After all, where was the downside back then? The barriers to entry were low, the concept itself was relatively simple to execute, and it was supremely profitable for those who did it well. Business was so good that some chains rolled out a second or even a third steakhouse concept so they could get a bigger piece of the pie. The saturation point, if there even was one, was never reached.

But, today, you’re probably glad you never took that leap. Times are so tough that even the blue-chip operators in this once-impregnable segment hit the wall—hard—late last year.

"We’re facing the worst demand situation in 10 years," says Fred Thimm, president/c.o.o. of 26-unit The Palm upscale steakhouse chain. Morton’s of Chicago says revenues will be off 16 percent in the fourth quarter of 2001—that chain’s first decline in quarterly comp sales since 1991. Further back up the supply chain, cattle ranchers claim they’re losing $100 a head because not enough people are ordering steaks.

Everybody knows why the bottom dropped out. The triple-whammy combination of a slumping economy, the lingering trauma of 9/11 and the war on terrorism in Afghanistan has done a number on the customers’ mindsets, not to mention their budgets. Experts tell us patrons want to stay closer to home and are ordering less-expensive comfort food when they do go out. It’s a good situation for some segments, but sobering news if your place peddles porterhouses for $38 a pop and expects to get $7.50 for a side dish of hash browns or creamed spinach.

As for business travel, forget it. Banc of America Securities restaurant analyst Andrew Barish forecasts that same-store sales at restaurants that rely on the expense account crowd—read: upscale steakhouses—will drop between five and ten percent as a result of all this turmoil. That’s enough to vaporize a lot of profit margins and have some operators looking at red ink.

Yet not every high-end steakhouse in every market is feeling the pain. For some, business has already returned to normal, while others are are taking the plunge and opening new units.

Jumping For The Jackpot
Think what it was like to be the people at Jump Higher, L.L.C., the restaurant management group that runs all the Michael Jordan-brand operations, among them the well-reviewed Michael Jordan The Steakhouse located in Grand Central Station in New York City. They picked a date in late September to open a second Michael Jordan The Steakhouse, just in time for the worst market conditions in a decade. The new one’s at the glitzed-up Mohegan Sun casino-resort in Uncasville, Conn.

So do many people still go out gambling and will they spring for an expensive steak when they do?

"We have 180 seats in the steakhouse," says executive chef James O’Donnell, "and we’re doing great on weekends. That means 500-700 covers on a weekend night, with plenty of big parties." And during the week? "We did around 200 a night midweek when we first opened in late September, but it’s more like 125-150 a night now," he adds."

And what do these customers order?

"The Mohegan Sun version of Michael Jordan’s is different from the one in Grand Central Station," says the chef. "That one does a great job with prime Midwestern beef, but here we dress up each steak a special way. It’s not a fully composed plate. But it’s not just a plain slab of meat, either."

O’Donnell is a guy who can definitely dress a dish up, having previously run the kitchens at the Los Angeles House of Blues’ The Porch Restaurant and the hip Rum Jungle at the Mandalay Bay Casino in Las Vegas. But do steakhouse patrons want these gussied-up steaks?

"People can order ‘naked steaks’—plain, unadorned meat—and we offer that option on the menu. But only five to ten percent of our guests choose to do so," says O’Donnell. Instead, they’re opting for something like a Prime Bone-In Ribeye with a Chili Rub, Horseradish Crust and Red Onion Marmalade.

The restaurant definitely got off with a bang, opening the same week co-owner Michael Jordan announced his return to the NBA. It didn’t hurt business, either, when Jordan’s Washington Bullets played an exhibition game against the Boston Celtics in Mohegan Sun’s new 10,000-seat arena. It’s located in the same Project Sunburst portion of the complex that houses Michael Jordan The Steakhouse along with operations like Jasper White’s Summer Shack and Todd English’s Tuscany.

Know Your Customers
But MJ and his partners aren’t the only ones opening steakhouses in a lousy economy. The Palm is, too, with the latest being in Troy, Mich., a suburb of Detroit.

"We’re confident about Troy," says Palm Management boss Fred Thimm. "Detroit is a high-density affluent market that is underserved by world-class dining. Interestingly, we have more than 400 members of our 837 Club in this area, even though we’ve had no restaurant there until now."

If you’ve ever wondered if those relationship-marketing programs like the 837 Club—the Palm’s frequent dining version of this type of program—are worth it, Thimm’s got an answer for you. They aren’t quick fixes, but they’re mighty handy when times turn tough.

"Our program is a long-term effort," Thimm says. "You can’t cherry-pick a good idea in slow times; you have to do it all the time.

"Our goal is to use these effort to create customer frequency and loyalty, to build the Palm brand. And you can’t beat brand loyalty in a down situation like we’re having now."

How down a situation are we talking about? Thimm’s got some interesting answers.

"We’re out of negative territory now," he says. "It wasn’t a great year in the first place, and 9/11 was an unmitigated disaster from a restaurant’s point of view."

But not necessarily a disaster for every market. Thimm points out that sales at Palm units in big business travel/convention cities like Chicago, Boston and Las Vegas took a 20 percent hit percent in October. "They’re coming back now, more like 7-8 percent off against last year," he adds. However, it’s been smooth sailing in other key Palm markets. "Places like Houston, Dallas and Denver, there’s not so much of a recession and they’re not so business-travel dependent."

Leveraging The Legacy
You’d think that if any operation could ride out an economic downturn, it would be Bern’s Steak House in Tampa. It’s one of a handful of restaurants that can be classified as a national icon and, along with Peter Luger’s, is arguably the most famous steakhouse in the country. It’s safe to say that anyone who has eaten at Bern’s retains a vivid memory of both the food and the experience, and is willing to go back any time.

But they weren’t coming back quite so fast after 9/11.

"We saw a huge impact on sales after those attacks," says Jeannie Pierola, chef/partner at Bern’s. "Some of those initial weeks were down 30 percent. It wasn’t until mid-November that we began to see sales figures that were higher than last year."

And now? "We’re not cutting back, and neither are the customers. We’re right in the middle of what I call ‘luxury season’—peak availability for both stone crabs and white truffles—and sales of these items are tremendous. They only place we’re seeing a big falloff is in wine sales. Guests who used to order a $75 bottle of wine now look for something that’s $35 and under instead."

So a short dip in sales volume and then back to business as usual? Not quite. The steakhouse segment is too competitive for that.

You’d think that a place with Bern’s rep would be immune to challenges. After all, this is a restaurant that demanded a maniacal level of product quality well before most big-ticket chefs thought to build their network of boutique farmers and artisan purveyors. At Bern’s, vegetables come from the restaurant’s organic farm, fish swim fresh in a 2,500 gallon live tank until an order comes, green coffee beans are hand-sorted and roasted on site, the beef is dry-aged, and they even sprout their own cress seeds for the salads. You’d think the place would be impregnable, but plenty of other steakhouses have piled into the Tampa Bay market nevertheless.

It’s home to Outback Steakhouse, for one. "They are tremendous operators," says Pierola, "but they’re in a different strata than we are." More direct competitors are place like Ruth’s Chris, Morton’s, Fleming’s Prime and The Palm. Bern’s differs from these big-ticket places in that its price for a steak includes plenty of extras, while the competitors go the a la carte route. "They get $7 or $8 dollars for asparagus, but I give you the vegetables," Pierola points out. "For what you pay for a steak at these other places, Bern’s gives you a whole meal."

Look for Bern’s to roll out some dynamite a la carte options when it debuts its new menus this winter.

Back To Basics
Here’s how Smith & Wollensky head Alan Stillman recently summed up his company’s strategy.

"With regard to our future expansion, we are conserving our resources and moving ahead cautiously as we evaluate our sales recovery and monitor economic conditions."

In other words, he’s got his fingers crossed that things will pick up soon. Don’t worry, Alan. It looks like business in the steakhouse segment will be back to normal faster than anyone thinks.