Independence Days

Even many of the most-successful independent restaurants feel the squeeze from chain competition.

By Kristine Buchthal, Senior Editor -- Restaurants & Institutions, 4/1/2006

With combined 2005 sales of $1.34 billion, this year’s Top 100 Independent Restaurants hardly seem embattled. Yet many of these operations, which can be counted among the most successful U.S. restaurants, say they feel the chill of increased competition from midscale and upscale chains opening around them.

In Las Vegas, New York City, San Francisco and other major markets, high-end downtown destination restaurants thrive, and hot new venues continue to open. But the closings of Lutèce in New York City and Chicago’s 107-year-old The Berghoff Restaurant prove that even well-respected landmark operations can succumb to changing times, tastes and demographics.

Center-city restaurants also are fighting the continued development of suburban dining options. Some do battle by opening suburban locations, as Chicago’s Gibsons Bar Steakhouse and Harry Caray’s Restaurant have done.

Many of this year’s Top 100 locations are parts of de facto chains, portfolios of restaurants operated by multiconcept operators such as New York City’s B.R. Guest Restaurants and China Grill Management, Chicago’s Lettuce Entertain You Enterprises and Washington, D.C.’s Clyde’s Restaurant Group. This affords them some of the marketing muscle that chains can flex, such as frequent-diner programs, but there is no question it remains challenging to be an independent restaurant.

“The panic button has been pressed,” says Don Luria, president of the Tucson-based Council of Independent Restaurants of America (CIRA), an association of nonchain restaurateurs with chapters in 17 cities. Luria says chains’ share of total U.S. restaurant sales last year topped 50% for the first time. CIRA projects that independents will account for only 47% or 48% this year.

Throughout the nation, independent operators say that 2005 was a tough year for competition, as popular chains such as The Cheesecake Factory and McCormick & Schmick’s debuted in their markets.

“Two Bonefish Grills opened in Baltimore in the past year,” says John Knorr, chief operating officer for Phillips Seafood Restaurants. Phillips Harborplace restaurant posted sales of $13.2 million in 2005, down from $13.6 million in 2004. “That’s just another seafood customer going to a restaurant other than mine. People aren’t going to downtown restaurants because there are all these choices right in their neighborhoods.”

Knorr says that his restaurant also must compete with Rockfish Seafood Grill Restaurant, Roy’s Restaurant and McCormick & Schmick’s.

Other independent operators are experiencing a similar increase in competition. The Clubhouse...Where You Belong in Oak Brook, Ill., saw sales drop from $11.9 million in 2004 to $10.9 million last year after The Cheesecake Factory and two other competitors opened locations nearby, says Todd Gunderson, managing partner at The Clubhouse.

Industry analysts say it’s no surprise that independents are being squeezed by upscale casual-dining chains. They point to the recent success of chains such as Ruth’s Chris Steak House, Smith & Wollensky and Morton’s, The Steakhouse, as evidence of a consumer trend to eating in chain outlets.

“The chains have become the hip, new places to go,” says Jonathan Waite, restaurant-industry equity analyst for KeyBanc Capital Markets in Los Angeles.

Waite says that more upscale segments are becoming chain-dominated, similar to how casual dining flooded with chains in the ’90s.

“If you’re in that $15 to $20 entrée range, you might find more competition than you’ve ever had before,” Waite says. He explains that consumers often choose chains because they perceive them to be better value for the same quality food. “Consumers have higher tastes, but they also are price-sensitive.”

Adapting to the Competition
Independent restaurants have found that they can attract more customers by modifying menus to suit consumers’ changing tastes.

Mike Ditka’s Restaurant grew sales to $9.9 million in 2005 from $9.5 million in 2004 by adding a late-night menu and entertainment to its upstairs bar. The menu—which includes a plate of four spicy miniburgers, a crab-cake sandwich and pot-roast nachos—helped attract a younger crowd to the restaurant in a highly competitive environment, says Tom Kenny, executive chef and partner at Ditka’s. The restaurant is just around the corner from two of the nation’s top-grossing independents, Gibsons Bar Steakhouse and Hugo’s Frog Bar & Fish House.

“We want it to be a party up there every night,” Kenny says.

Phillips Harborplace adapted to its opposition by borrowing a promotion from one of its competitors. Late last year, the restaurant began quarterly limited-time menu offers, a staple of Orlando-based seafood giant Red Lobster.

In the last quarter of 2005, Phillips promoted a Shrimp Sensation Menu. And in the first quarter of 2006, the restaurant is offering a crab special. Knorr says the specials give the marketing staff a theme for promoting the restaurant.

“We’re not going to do big, splashy television commercials, but when we put limited-time offers into play we immediately saw great returns from the strategy,” he adds.

Luring Locals
Even the nation’s top-grossing independent restaurant is trying to build sales. Its plan? Coax local customers to become regular guests.

Tavern on the Green in New York City’s Central Park has been a tourist destination for years. This year, it began scheduling nightly music and entertainment in its outdoor garden nightclub, aimed at bringing more New Yorkers to the restaurant.

Sunday is Comedy Night, Monday is Latin and Groove Night, and Tuesday entertainment includes two-for-one admission, DJ-spun music and 8-minute dating sessions.

“It’s not good to be dependent on travelers only,” says the operation’s controller, Eric Bukhman. “If we support our sales with locals, then our revenues have the potential to go up.”

Base Basics
Many top independent restaurants say that the most important parts of their business are their reputation and regular customer base. By maintaining personal relationships with individual diners, operators can cement their brand for good customer service, and develop a constant stream of revenue.

“Certainly a chain restaurant has the advantage in terms of overall value, corporate buying power and marketing,” says Gunderson of The Clubhouse. “Independents have the advantage of being more personal and having a higher level of hospitality.

“There’s that old saying that 80% of your business comes from 20% of your guests, and you want to focus on them.”

For all independents facing increased chain competition, one Cincinnati restaurant has a story of surviving tough times.

Montgomery Inn at the Boathouse faced a deluge of competition three years ago, says partner Dean Gregory, after he and his other co-owners realized that 112 new restaurants had opened within a five-mile radius of Montgomery Inn in the previous three years.

The operation faced tough times at first, when customers tired of the restaurant’s two-hour Saturday night wait opted for new nearby chains

When they heard how long the wait was, “more and more people were taking off,” Gregory says. “Our two-hour wait went to 45 minutes and then it went to a half-hour.

“For a while we were the only game in town, and now there are so many choices.”

But the luster is wearing off the newer restaurants, Gregory says, and more diners are returning to their old favorites. Sales at the Montgomery Inn at the Boathouse increased from $10.9 million in 2004 to $11.6 million in 2005.

“We’re starting to get back to normal again,” Gregory says. “Eventually new restaurants bring more customers to the area, but there’s that honeymoon period for the new operations that initially hurts the old guys.”

Schmoozing Sells
Facing increased competition from chains, the owners of the Montgomery Inn at the Boathouse in Cincinnati, Ohio, devised a new way to make customers feel welcome.

“About a year ago I hired a schmoozer,” says Dean Gregory, a partner with Montgomery Inn. “He’s a guy with a great personality and all he does is walk around and make sure people are taken care of.”

David Herzog, whose formal title is “host,” is a former media sales executive who was a customer at the restaurant. Gregory describes his demeanor as “the greatest personality in the world.”

Gregory says that the restaurant gets more letters about Herzog’s great customer service than any other part of the restaurant’s operations.

“My employees are always in a hurry, they don’t have time to sit and talk,” Gregory says. “They take care of the regular customers, but they don’t have time to sit around and make new customers into regular customers.”

He says he bought Herzog 500 business cards, figuring they would last him about 6 months.

“They were gone in two weeks,” Gregory says. “People love him. When people call, they don’t ask for me anymore. They ask for him.”