POWERHOUSE GROWTH CHAINS August 2002

Michael Sanson

In an industry that’s all about growth, we present to you Restaurant Hospitality’s list of America’s 50 fastest-growing chains. Our partners—the equity research analysts at Morgan Keegan & Company—sharpened their pencils to determine which concepts had shifted into high gear in the past year. So take a look at the list and see if your operation has the juice to make next year’s Top 50.

POWERHOUSE GROWTH CHAINS

In October, Restaurant Hospitality will hold its annual Concepts of Tomorrow Conference. The event is designed to help up-and-coming restaurant concepts grow into established, profitable chains. As editors, we’re thrilled to watch restaurant operations like Buca di Beppo (19th on this year’s list) grow from a handful of units to nearly 70 units in rapid fashion. The RH Top 50 Powerhouse chains list represents the country’s top performers that, like Buca, have the infrastructure and vision to grow both steadily and brilliantly.

We made some criteria changes this year. In the past, our list included quick-service chains. This year and in the future it will not. We’re not interested in learning that a QSR concept like, say, a Cinnabon, has added another 50 units to the hundreds they already have. What we find interesting are full-service concepts and fast-casual concepts that are daring to be different while reflecting the changing face and demographics of America. For this reason, we’ve dropped our yearly sales level from $50 million to $20 million. This allows younger concepts into the picture.

The real excitement on the American restaurant scene is projected on this list. For example, in just a few short years, Darden’s Smokey Bones Sports Bar & BBQ has grown at an incredible 251% rate, putting it at the top of our list. The ultimate test, however, is whether Smokey Bones or any other concept has the legs to be around for years to come. There are no guarantees of course, but the players on this list have, at the very least, done the groundwork to remain successful for years. The achievements of The Top 50 are clearly linked to their ability to mirror demographic changes in society, says Bob Derrington, senior vice president of research for Morgan Keegan.

"Demographic changes are the blueprint for the future of the restaurant industry," he says. "As America has matured, the types of restaurants consumers are attracted to have changed. Those changes are seen on the Top 50 list."

Derrington points out that in the 1960s fast food reigned. In the 1970s midscale family restaurants grew in popularity. In the 1980s and 1990s casual dining took over. In the new millennium, where families are time-strapped and looking for portable food items that are of better quality, fast-casual restaurants are building muscle.

"As we look at these 50 fastest-growing chains, they are a direct reflection of America’s increasingly sophisticated palate. Twenty-one of the 50 offer fuller-flavored, spicy food," he says. "You’re also seeing far more ethnic influences than you would have seen a decade ago. Americans are no longer interested in bland, unexciting fare."

The "spice factor" is clearly evident towards the top of the list, with Smokey Bones (#1), Chipotle (#3), Wingstop (#6) Baja Fresh Mexican Grill (#8) and Bahama Breeze (#9) all offering plenty of zing on their menues.

Alcohol is back. Derrington said RH’s Top 50 also reveals that alcohol is back in vogue. In 14 of the 50 concepts listed, alcohol is a vital part of their offerings. The aging demographic of the population, which has more time to relax, may be partially responsible for the rise of alcohol-related concepts, he says.

"Let’s be clear here. People aren’t necessarily drinking more. But they are drinking better and many concepts have developed excellent beverage programs to attract customers."

Derrington points to concepts such as Fleming’s Steak House, Carrabba’s, Old Chicago, Stonewood Tavern & Grill, Ale House, Beef O’Brady’s Family Sports Pub and Bahama Breeze as examples of operations with beverage programs designed to complement the concept.

"Because concepts are offering more flavorful food, beverages must rise to the occasion. Look at a concept like Bahama Breeze with its Caribbean theme. It offers a wide variety of interesting and colorful drinks that complement the theme. That certainly explains why one out of every four dollars Bahama Breeze makes is in alcohol sales."

The rise of alcohol can also be attributed to the rise of neighborhood concepts, which are essentially bars first and restaurants second. Many of them are casual, sports-themed operations designed as a place where friends and family meet, and not necessarily for the food. The rise of the neighborhood concept, such as Ale House, Wing Stop, Beef O’Brady’s and Buffalo Wild Wings, may have some connection to the fallout of 9/11, which led many to stay close to home and reconnect with friends and family.

Of course, there have always been plenty of neighborhood concepts, says Derrington, but most of them were mom and pop independents. Chains have recognized the opportunity and have been able to move into the segment by offering a consistent experience while generating unit economics.

Steakhouses remain strong. The popularity of steakhouses went through the roof years ago, and many have been predicting their decline in recent years. That just isn’t happening, says Derrington. Of the 50 top growth chains, 13 of them—including Fleming’s Prime Steakhouse (#5), Shula’s Steakhouse (#17), Capital Grille (#26), Saltgrass Steakhouse (#29), Sullivan’s Steakhouse (#35), LongHorn Steakhouse (#46) and Del Frisco’s Double Eagle Steak House (#49)—specialize in center-of-the-plate beef, and their check averages range from as little as $8.99 to $70 plus.

"Many critics said the steakhouse segment would fade because aging baby boomers would move toward healthier fare. But the segment remains vibrant," he says. "When you think about it, man has feasted on steak longer than just about anything else."

Fast casual enters the picture. This year marks the clear and unmistakable arrival of the fast-casual segment. Of the 50 top concepts, nine of them are fast-casual. Five of them—Chipotle Mexican Grill, Noodles & Company, Wing Stop, Baha Fresh Mexican Grill and Panera Bread—are in the top 10.

Again, demograhics are fueling the growth.

"Baby boomers are older, and they’re tired of fast food," says Derrington. "But they’re also busy as hell and don’t often have the time for a long, sit-down meal. Fast casual offers better quality food and attractive price points in a comfortable setting. What more do you need to say?"

Derrington’s not surprised that Smokey Bones has claimed the number one spot on RH’s list of growth chains. It’s combination of great-tasting barbecue, a vibrant sports theme and strong alcohol component offers a blend of options that many other restaurants can’t match. He’s quick to point out that the concept also does a much better job of attracting women than other sports-type concepts.

"The management team at Darden is one of the most capable in the industry," he says. "When they take aim at a segment they think is underpenetrated, they rarely miss."

Any surprises? Derrington says he’s more amazed than surprised that The Cheesecake Factory is still running strong. "They’ve been at it for years and they continue to grow their business at a rate of 25 percent a year and maintain a mind-blowing $11 million average in unit sales. It’s remarkable."

The word "remarkable" can be used to describe all the concepts on our Top 50 List. Take a bow, this year’s class of powerhouse growth chains.