Overdiversification: set priorities, cut to your core concepts

Overdiversification: set priorities, cut to your core concepts – Special Report: Lessons Learned

Jack Hayes

Lea Culver, president of Culver Franchising Inc., which owns 168-unit Culver’s, is uneasy about a brand-diversification decision he soon will be making for the Prairie du Sac, Wis.-based chain.

Haunting Culver is the question of expanding his newly developed Blue Spoon Creamery Cafe. Will going ahead for the sake of giving franchisees another brand option be a wise decision, or will it divert his focus from the core brand?

“Honestly, I don’t have a strong belief in brand diversification, yet Blue Spoon is a good concept; it could be a way for many of our franchisees to grow without cannibalizing,” he explained. “It may or may not be the right thing.”

Recent industry experience with brand diversification is fueling Culver’s indecision.

Less than two years after launching an ambitious diversification, chain conglomerate Carlson Restaurants Worldwide made an about-face last year.

The parent of T.G.I. Friday’s had acquired Star Canyon and launched an emerging-brands division that included such attention-getting concepts as Aquanox, Mignon, Samba Room, Taqueria Canonita and Timpano’s Italian Chophouse.

But Carlson decided to divest those newer properties and focus on its bread-and-butter brand plus only one other concept — the recently acquired Pick-Up Stix, an Asian quick-service chain based in Southern California.

Although not for the same reason, the strategic brand overhaul at Carlson followed a pattern set by debt-encumbered Avado Brands Inc., which acted to raise capital and reduce overhead last year by divesting its 32-unit McCormick & Schmick’s seafood dinnerhouse chain. Avado also withdrew from two European partnerships, with Belgo Group PLC and Pizza Express PLC, and resolved to put its 14-unit Canyon Cafe brand on the market.

A year earlier, Maryville, Tenn.-based Ruby Tuesday confirmed its intention to concentrate solely on the core Ruby Tuesday dinnerhouse brand by selling its 42-unit American Cafe and 26-unit Tia’s Tex-Mex brands to a group headed by American Cafe president James Carmichael. Since then, Ruby Tuesday has grown its flagship chain from 460 units to nearly 570 locations.

“Ruby Tuesday has tremendous potential and growth opportunities for at least another 1,000 restaurants,” chairman and chief executive Sandy Beall said in explaining the divestment.

“We’re a good example of a company that’s chosen lack of diversification as the core strategy,” added Richard Johnson, Ruby Tuesday’s senior vice president of brand development. “We just believe what’s right for us is a single-brand focus, and that brand is Ruby Tuesday exclusively.”

Johnson explained that the company’s operating strategy is a commitment to minimizing risk and maximizing investment.

“Over the last several years it’s worked for us with consecutive performance,” Johnson added. “Ruby Tuesday is 30 years old and has proven its market worth. It plays well everywhere. And every time we make an investment in this brand, we feel we’re increasing chances for a good return.”

For yet another reason, formerly Maynard, Mass.-based NE Restaurant Co., which recently renamed itself Bertucci’s Corp., divested 40 Chili’s and seven On the Border Mexican Grill & Cantina units across New England within two years of acquiring the Bertucci’s Brick Oven Pizzeria brand.

“When we bought Bertucci’s [in 1998], it was with a plan to become a national brand operator,” said Rick Barbrick, Bertucci’s chief operating officer. “With Chili’s and On the Border we were territory-restricted. It made perfect sense to focus on a concept we owned and controlled. We think it was the absolute right decision for us.”

Initially opting to withdraw from underperforming Bertucci’s markets such as Chicago and the Southeast to focus on nearby core markets, Barbrick’s group has since refitted the 74-unit Bertucci’s brand and restarted expansion.

Yet, within recent months the industry’s two largest quick-service entities, McDonald’s Corp. and Tricon Global Restaurants, have rallied in the opposite direction. McDonald’s announced major diversification deals whereby it would form a joint venture with fast-casual pasta chain Fazoli’s, owned by Lexington, Ky.-based Seed Restaurant Group, and partner with the London-based sandwich chain Pret A Manger. Tricon, meanwhile, would buy the 1,115-unit A&W Restaurants and 1,220-unit Long John Silver’s brands from Lexington-based Yorkshire Global Restaurants.

For McDonald’s, brand diversification has been a growing focus. In recent years the company also acquired 700-unit Boston Market, 156-unit Donatos Pizza and 104-unit Chipotle Mexican Grill.

Tricon’s brand-diversification initiative until recently had been focused on dual-branding its core KFC, Taco Bell and Pizza Hut concepts. But former owner PepsiCo Inc.’s earlier attempts also to develop the Hot ‘n Now, Chevys and California Pizza Kitchen brands eventually were scuttled or left to new owners of those chains.

As industry experts point out, there are vital lessons to be learned from such varying brand-diversification initiatives. Foremost is that acquisition or divestment decisions must be aligned with organizational and operating strategies. The positive lessons learned about diversification at one company may be a formula for collapse at another.

“There’s no one correct concept portfolio or diversification strategy for everybody,” said Dennis Lombardi, executive vice president of Technomic, the Chicago-based foodservice consulting company. “Whether your portfolio has two brands, 20 brands or 200 brands, there is no specific set of circumstances that applies equally to all.”

“You can’t make a blanket generalization,” added industry consultant and KnappTrack casual-dining-survey publisher Malcolm Knapp. “It’s a company issue,” he argued, citing the decision by Applebee’s International to enter and then withdraw from the Mexican dinnerhouse segment a few years ago.

After Applebee’s acquired Rio Bravo Mexican Cantina to provide an expansion vehicle for franchisees, the company found important operational and marketing differences between the Applebee’s and Rio Bravo brands. One difference was Applebee’s neighborhood concept targeting smaller markets with smaller buildings as opposed to Rio Bravo’s high-volume “main and main” brand, Knapp said.

Knapp stressed that Applebee’s should not be faulted for a failed diversification attempt. However, if the company were to try it again, he speculated, it probably would be with a brand that more closely fits the skill sets of its partners.

On the other hand, after struggling with its Carrabba’s Italian Grill diversification pilot, Outback Steakhouse Inc. did a successful reconcepting and is back on an aggressive growth path with the Carrabba’s brand, expecting it to grow into a billion-dollar-a-year entity, according to Knapp.

Applebee’s leaders “learned they could expand the brand they had, which has become the largest in casual dining, and they’ve found ways to extend its longevity,” said Knapp. “Applebee’s is more robust than ever — a highly franchised system capable of developing 100 to 120 units a year.”

In the 1980s, long before General Mills spun off an expansive dinnerhouse portfolio that included Red Lobster, Olive Garden and China Coast to form Darden Restaurants Inc., the food conglomerate had acquired a vast stable of concepts, all of which were eventually sold, Knapp recalled.

“But that doesn’t mean their diversification was a failure either, only that they didn’t do well initially,” Knapp said. To General Mills it made sense to leverage its operating system and strengths. GM executives integrated the research and consumer tracking capabilities of a strong packaged goods company, Knapp noted.

“That has paid off well for Darden,” Knapp observed. “They said, ‘We’re casual dining, and we intend to be the best and biggest,’ and everything has evolved from that. They’re diversifying internally now and doing strongly with Bahama Breeze and Smokey Bones BBQ.”

If measured as a research-and-development expense, restaurant-industry brand development and diversification ranks below that in other consumer industries, according to Knapp. Furthermore, Knapp explained, failure should be an expected occasional outcome of any dedicated research-and-development effort.

“If you have a company that can’t make anything work, then you can raise some questions,” he said, adding that it would be arrogant “to insist that you only accept success.”

Lombardi points out that Tricon’s enthusiasm for bundling a number of brands under one roof and McDonald’s preference for operating a stable of distinct, interdependent chains represent but two of several routes on the long road called brand diversification.

Some operators believe the acceleration of McDonald’s brand-diversification strategy marks the company’s recognition that it can no longer rely on menu expansion to grow market share. The underlying premise is that as menus diversify, food quality suffers; instead of gaining customers, the brand begins losing them.

“Watching McDonald’s over the years, it’s been evident that diversification in their mind meant growing the menu, but the menu became so large that people began to perceive the food as mediocre,” said Paul Cunningham, who chairs the Wisconsin Restaurant Association and runs Schreiner’s, a $3.5 million casual-dining operation in Fond du Lac.

Although strategies may differ, there’s one prevailing common denominator among many of the industry’s largest multibranded operators: They represent companies wit mature brands — and sometimes flattening revenue streams — that are eager to diversify their sales streams with new dayparts and concepts.

Chuck Rowley, chief development officer of Tricon, acknowledged that the recent acquisitions of Long John Silver’s quick-service seafood and A&W’s burgers/hot dogs/root beer signatures will allow the company to enter new dayparts.

As opposed to the classic image of all-day patronage at food courts in malls or airports, Rowley said one of the lessons Tricon has learned is that its restaurants can be modified to integrate sister brands so they can compete throughout the day.

He said that within the 19,000-unit Tricon-owned restaurant stable, there are more than 1,700 locations where brands have been bundled under the same roof. And with Long John Silver’s and A&W being added to the mix, more are coming.

“You won’t see five brands in the same restaurant, but you could see dual-branded, maybe three-branded units,” Rowley said. “We believe our major strategy going forward is multibranding. For us it is an innovation to leverage our more than 19,000 assets, many of them underutilized and under capacity. It’s a great way to expand sales.”

By referring to the company’s brands as underutilized, Rowley explained that he is citing the limited opportunities individual Tricon brands currently have to expand their business at different times of the day.

“If you look at our competitors — McDonald’s, Wendy’s, Burger King — their units do about $1.3 million, some as much as $1.6 million, because their menus are broad enough to carry them through breakfast, lunch and some evening sales,” he observed. “Our [per-store averages] for KFC and Taco Bell are about $900,000, and Pizza Hut is considerably lower, despite the strength of our brands with consumers.

“They know KFC as chicken, Taco Bell as Mexican and Pizza Hut for pizza,” Rowley continued. “But what we are learning — and there are 1,700 examples out there now — is that by combining proteins and menus you expand your dayparts, and PSAs at those units are up 25 to 40 percent.”

Indeed, Rowley credits a bit of the 41-percent increase in Tricon’s first-quarter net income of $124 million this year to increased customer traffic lured by the company’s brand-bundling tactics.

Best of all, unlike a classic food court where the customer has to visit three different counters for different items, the new configurations in Tricon units will allow guests to sample a broader range of the company’s menu products at one counter.

But one of the lessons in running a stable of diversified brands is that sometimes it is possible to have too many for management to properly guide and develop.

Too many concepts can dilute management’s focus and execution, said Dennis Riese, president of the New York-based Riese Organization, a diversified franchised operator in fast food and table service and a creator of some proprietary brands.

“You know, it’s funny, the Rieses use to be criticized for being too diversified,” Riese argued, recalling a time some 20 to 30 years ago when his father and uncle — the founders of the 62-year-old company — were “obsessed” with franchising restaurants.

In fact, while others may dispute the claim, the Riese Organization contends that it invented tandem branding, or food courts, which it spread throughout midtown Manhattan as early as the 1970s.

At its height in the early-to-mid-1980s, the company operated some 300 restaurants, representing about 30 franchised brands — often to the disdain and consternation of franchisors that complained about their brand identities getting second-rate attention from the Rieses.

Today the Riese Organization operates about 100 outlets of more than a dozen franchises and a handful of proprietary stores.

“You can have too many brands in your portfolio,” Riese declared. “When I rejoined the company in the early 1990s, I had the distinct sense that we were not running any of them particularly well because we had so many.”

Whether or not having too many brands accounted for Carlson Restaurants’ decision to shut down and sell off its short-lived emerging-brands division and plow resources back into T.G.I. Friday’s, one lesson all older companies need to master is knowing when to retreat.

Although he would not comment specifically about Carlson’s decision to jettison its six-brand group of casual dinnerhouse startups, Technomic’s Lombardi noted that when concept diversification becomes distracting and capital-intensive, it’s a good sign to pull back.

Executives at Carlson and Friday’s did not return phone calls.

“It almost becomes like driving a car with a tire with low air,” Lombardi depicted. “When you fix the flat, it sometimes means getting rid of the tire. Either way, it has to be fixed.”

Danny Meyer of Union Square Hospitality Group, a five-unit New York City operator normally associated with acclaimed fine-dining restaurants, recently launched Blue Smoke/Jazz Standard, a barbecue supper club. It has received mixed reviews.

For Meyer, diversification into a totally new genre was a good way to develop talent and open a new concept in a market where the economy and the public’s taste are unclear about fine dining.

Meyer said one of the lessons he learned in diversifying his stable is not to believe reviewers, whether positive or negative.

“Every restaurant we opened got unflattering reviews in its early days,” Meyer recalled. “Union Square Cafe got one star. Tabla got zero stars. But in time they all came through.

“I know these guys are trying to find a chink in the armor, and at the start of a race, all horses are awkward coming out of the starting gate,” he added. “But I think it’s a bad bet to bet against us.”

During an investor conference in late February, Brinker International Inc. chairman and chief executive Ron McDougall boasted of the company’s “exciting stable of emerging brands” which include Big Bowl, Cozymel’s Coastal Mexican Grill, Eatzi’s Market & Bakery and Rockfish Seafood Grill, the latter acquired last July.

Yet McDougall and other company officials affirmed during the same conference that Brinker’s core brand, Chili’s Grill & Bar, with nearly 800 locations in 48 states and 22 countries, would continue to drive Brinker’s revenue and earnings growth over the next three years.

Complementing the expansion of Chili’s, which Brinker envisions as a 1,500-unit chain at its maturity, the company also expects continued growth from its lesser core brands, Romano’s Macaroni Grill, On the Border Mexican Grill & Cantina and Maggiano’s Little Italy.

Specifically, Brinker officials told analysts that core brands will contribute more than 91 percent of company revenue and 97 percent of profits over the next three years, during which time an estimated 420 restaurants will be opened.

Evidence of Brinker’s intensifying core-brand focus was visible recently in its second-quarter earnings report, revealing the debut of 16 company-owned Chili’s in comparison with six Chili’s during the same 2001 fiscal period. The most recent second quarter also saw six Romano’s and Maggiano’s units opened vs. only two units during the same three-month period of 2001.

“I definitely agree brand diversification is driven by company strategy,” said Royce Ring, former senior vice president for emerging brands at Carlson and currently co-founder and partner in Dallas-based Three R Group. “The decision to move ahead plays on company strengths; the operating platform has to be in order.”

The decision by Lebanon, Tenn.-based CBRL Group Inc., parent of Cracker Barrel Old Country Store and Logan’s Roadhouse, to divest its Carmine Giardini Gourmet Market brand at the end of fiscal 2001 seems in agreement with the nonalignment theory.

While Cracker Barrel and Logan’s operate in different market segments — family vs. themed casual dining — they nevertheless do have, as the company put it recently, “similar investment criteria and economic and operating characteristics.”

By contrast, the Carmine Giardini brand, a combination gourmet market and full-service Italian restaurant, was ultimately seen as “not material” to the overall operating strategy, the company said.

If a company has core strengths in franchising and a system in place, then a decision to diversify into a brand capable of being rolled out is worth considering, since the franchising system can be leveraged directly into the new brand, Ring advised.

“Anything a company does in terms of development and launch of a new brand has to be supported by the core systems and culture,” he said. “And yet at the guest-experience level, the new brand also has to be insulated from the core brand. There are a lot of disciplines that transfer easily, but where the consumer enters the picture, the brand has to have its own identity.”

Ring’s point is that companies aiming for more guest occasions – “share of stomach” — in a given market will have a better chance with more brands.

“Tricon’s and McDonald’s diversification make perfect sense in this light,” Ring explained. “Since 9/11 Americans have become very price-conscious, yet they still want the good experience and the good food, so this plays into the hands of companies that diversify wisely. It’s a way to get a larger share of the pie.”

As noted, diversification can also bring debt liability to a company, particularly if an acquired brand encompasses multiple locations requiring significant investment in real estate. An unexpected softening in the economy could leave a debt-diversified company financially vulnerable if same-store revenues and earnings took a negative slide.

That was the case with Avado Brands, formerly a thriving Applebee’s franchisee operating as Apple South. Between the middle and late 1990s Avado launched a twofold strategy that included acquisition of the Applebee’s brand as well as concept diversification.

While growing its Applebee’s base, Avado acquired a small neighborhood Italian concept called Gianni’s and began expanding it, first under the Gianni’s name and then as Tomato Rumba’s. Both efforts proved unsuccessful.

Avado, meanwhile, turned its attention to other casual-dining brands, including such current or former holdings as Hops Restaurant Bar & Brewery, McCormick & Schmick’s, Don Pablo’s Mexican Kitchen, and Canyon Cafe.

COPYRIGHT 2002 Reproduced with permission of the copyright holder. Further reproduction or distribution is prohibited without permission.

COPYRIGHT 2002 Gale Group