Independent Restaurants competitive underdog against chains and franchises - American Independent Business Alliance AMIBA

Oct. 23, 2005

Chain reaction: Upscale national restaurants serve up tough competition for local independents

By Christopher Tritto
St. Louis Business Journal

Upscale national chain restaurants are taking a bite out of business at locally owned and operated independent eateries.

Within the past three years, Maggiano's Little Italy, P.F. Chang's China Bistro, The Cheesecake Factory, Brio Tuscan Grille, Carrabba's Italian Grill and Fleming's Prime Steakhouse all have entered the local market.

"The chains are coming through and sweeping up a lot of people for a faster, less expensive way to eat," said Tom Balk, executive chef at 609 U Restaurant & Lounge in the Loop. "Their menus are like the yellow pages or an encyclopedia. They're huge and consistent, and you don't have to think."

Big restaurant chains, reinforced by bigger budgets, are scooping up prime locations, firing up extravagant advertising and marketing campaigns and negotiating sweet discounts with suppliers that their locally owned neighbors can't touch.

"It's a huge concern of ours," said Bethany Budde, owner of SqWires Restaurant and Market in Lafayette Square. "They don't look and feel as much like a chain restaurant. An Applebee's doesn't feel like an independent. These ones do. It absolutely has an impact."

Maggiano's St. Louis location is targeting $6 million in revenue in its first year, said General Manager Jeff Wuerstl. By comparison, the typical mid-priced independent restaurant will pull in revenue of about $1 million to $3 million a year. Maggiano's, which opened Sept. 8, is attracting a customer base of between 650 and 1,100 people a day and expects a lot of traffic through the holiday season due to its proximity to stores at The Boulevard Saint Louis and the Saint Louis Galleria mall.

"We're already exceeding the expectations I had, and doing better than corporate expected us to do," said Wuerstl, who moved here from a Maggiano's in Denver to open the new location. " St. Louis was an untapped market. If this does as well as we anticipate, we could put another one or two restaurants in the market a few years from now."

Each P.F. Chang's brings in $5 million to $6 million a year, said Mike Allenson, principal with Technomic Inc., a Chicago-based foodservice consulting firm. The chain, which opened in Chesterfield in 2002, added a second area location at The Boulevard this year. The Cheesecake Factory, which opened at the Galleria in 2002 and is adding a Chesterfield location, takes in more than $10 million a year per restaurant on average.

By comparison, Cunetto House of Pasta on the Hill in St. Louis brings in about $2 million in revenue a year, said owner Frank Cunetto. Wild Horse Grill in Chesterfield has revenue of about $1.5 million, according to owner Jim Valenta. And revenue at Annie Gunn's in Chesterfield is "north of $5 million," said owner Thom Sehnert.

The national chains can afford to spend much more on marketing and advertising than their independent competitors. P.F. Chang's, for example, spent $3.7 million on systemwide advertising in 2004.

"I can't touch their marketing," Michael Del Pietro said of the national chains. Del Pietro is owner of Luciano's Trattoria in Clayton and head of the Culinart Group of restaurants -- the Del Pietro family's group of restaurants, including Del Pietro's Ristorante, Kilkenny's Pub and Culinart Group Catering. "They can run commercials during prime time during a baseball game without blinking an eye."

As upscale chains saturate larger markets, they are heading to second-tier cities such as St. Louis to continue their expansion. Backed by the financial resources of large corporations, they have the clout and money to acquire some of the best available real estate and build attractive buildings and interiors.

Brinker International Inc. of Dallas is one example. The company owns, operates and franchises such popular restaurants as Maggiano's, Romano's Macaroni Grill, and Chili's Grill & Bar. Brinker has 1,588 restaurants in 49 states, Washington, D.C., and 23 other countries. It reported net income of $160 million on $3.9 billion in revenue in its 2005 fiscal year.

Brinker has made an average capital investment of $7.64 million to open its 33 Maggiano's restaurants across the country.

P.F. Chang's spends an average of $3.9 million per restaurant for its land leases, buildings, furniture and equipment. The Scottsdale, Ariz.-based public company reported net income of $26.1 million on $707 million in revenue last year, according to its annual report.

Teaming up

But independent restaurant owners aren't taking the high-end competition lying down. Many are working hard to differentiate themselves from chains.

About four dozen have banded together through St. Louis Originals, which is the local chapter of The Council of Independent Restaurants of America (CIRA). The association's goal is to encourage diners to select locally owned, independent restaurants over chains. Originals has more than doubled its membership to 45 local independents since it was formed in 2003. To become a member, an independently owned eatery must pay $750 in dues. Returning members pay $500 in cash dues and contribute another $500 in restaurant gift certificates, which are pooled and traded to other companies in exchange for advertising, marketing materials and CIRA membership.

The Originals launched a new Web site about a month ago. The group sells gift certificates good at any member restaurant and recently introduced a rewards program that provides $10 toward a meal at a participating restaurant for every $150 spent at an Originals establishment. The group also is organizing a buying group that it hopes will give it leverage to buy more competitively priced health and property insurance.

Individual restaurants also are striving to differentiate themselves and provide more for customers. Some, such as Monarch, Portabella, Cardwell's at the Plaza and Harvest, have reconfigured portions of their dining spaces to maximize private parties and attract businesses and organizations looking for a place to hold a luncheon or dinner meeting.

"If the chains do anything, they make you work harder and smarter to serve the customer," said Sehnert, who added that Annie Gunn's is having its best year yet. "Customers have a lot of choices, and we know that."

Competitive restaurant owners are aware that one of their best assets is their personal touch. Owners and chefs at top restaurants such as Annie Gunn's, Cunetto House of Pasta and Luciano's know their loyal customers by name and are regularly visible at their restaurants. They emphasize their role in the community and the relationships they share with clientele.

"Our profits stay in the St. Louis area," Cunetto said. "We go to the same schools and churches. We get to know our customers."

Restaurants can't cut the quality of their products or services, but they can make sure no mistakes are being made, start shopping for suppliers and try to eliminate waste, said Pat Bergauer, eastern regional director of the Missouri Restaurant Association.

"For independents, things are going to become more competitive," Technomic's Allenson said. "They'll have to continue to do a better job with their operations and make sure they're as cost-efficient as they can be and that their service is up to snuff."

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