Road Trip: Bay Watch

Mark Saltzgaber shows how chains survive in the affluent, competitive Bay area.

By David Farkas, Senior Editor -- Chain Leader, 9/1/2005

San Francisco is probably America’s most over-seated large city, with a restaurant for every 200 people, according to the California State Board of Equalization. Such brutal competition nonetheless makes the City by the Bay one of the most pleasurable places to dine and produces menus and wine lists most restaurateurs can only dream about.

By stunning contrast, there’s just one restaurant for every 496 people living in the eight counties surrounding San Francisco—an often hot and humid region of sprawling suburbs.

To delve into this unique juxtaposition, restaurant consultant Mark Saltzgaber, who has lived in San Francisco for 13 years, took me on a tour of the Bay area. The former venture capitalist is in the thick of it, after all. He’s a board member of and investor in Pasta Pomodoro, a 32-unit Bay area chain. “I’ll put skin in the game. That’s key for me,” he declares.

And, he says, he regularly takes calls from CEOs, CFOs and equity firms seeking counsel on recaps, IPOs and acquisitions. His friend Michael Mindel, vice president of marketing for Il Fornaio America Corp., jokes he can’t talk to anyone in the business who hasn’t had lunch with Saltzgaber the week before.

Although none of the chains we visit disclose financials, Saltzgaber claims some are sparking interest from financial and strategic buyers. For instance, Wendy’s International bought a stake in Pasta Pomodoro in 2002. Still, he warns, California is expensive and business-unfriendly. There’s no tip credit, and workers’ compensation and real estate are costly. “The perception is, you do higher volumes here so you can offset the higher cost of business,” he adds.

Worlds Apart
“Whenever I think about chains in the Bay area, I don’t think about San Francisco,” Saltzgaber says as we bomb south, following Interstate 101, a route that leads us directly into San Jose. “It’s a different world outside San Francisco.”

Inside, the indifference of locals and the excellence of ethnic cuisines has kept most casual-dining chains from making headway. There are notable exceptions: The Cheesecake Factory, atop the Macy’s building in Union Square, is the highest-volume restaurant in San Francisco. Still, Saltzgaber says, chuckling, “I’ve lived here a long time, and I don’t know anyone who who’s ever been there.”

As we rattle down the 101, Saltzgaber mentions the explosion of retail businesses on the Peninsula, the thumb-like promontory just below San Francisco with “excellent demographics.” Household incomes are rising as we drive south, beginning at $60,000 in San Bruno and swelling to six figures by the time we reach Menlo Park.

But there is a downside. “You don’t see any sprawl on the peninsula, no new housing developments,” Saltzgaber says. That’s because mountains and protected areas to the west and the San Francisco Bay to the east have constrained new construction.

As a result, main streets have become “de facto malls.”

Shop-lined University Avenue in Palo Alto, a city of 61,000 people, for example, looks quaint—almost. There’s a Cheesecake Factory that’s two storefronts wide with a façade taller and more ornate than any other on the street. Inside, however, the layout is considerably smaller than traditional units. It’s doing quite well, according to a Sysco driver unloading his truck. “I drop off 200 cases there on Wednesday,” he says, noting that a nearby burger joint called Taxi’s has taken a hit since the restaurant opened.

“You ought to ask Mike Mindel how Il Fornaio does against them,” Saltzgaber suggests, referring to the executive who’ll be joining us later for dinner. There’s a branch of the upscale Italian dinner-house chain a couple blocks away.

By noon, we arrive at the 4,500-square-foot Pasta Pomodoro in Santana Row, an upscale lifestyle center in San Jose that recreates a European street tableaux. There are wrought-iron benches, restaurant patios and, above some of the stores, apartments.

Demographic Destiny
But it isn’t Santana Row’s trendiness that gets Saltzgaber going. “The density of people is what’s very exciting,” he says, peeking into his file folder. “There are 220,000 people within 3 miles! Pasta Pomodoro looks for 100,000.” The median income within these 3 miles is $80,000. According to a recent study by the U.S. Census Bureau, San Jose proper boasts the country’s highest median income: $70,240.

Over a lunch of mussels, grilled vegetables and salad, Saltzgaber tells the story of Adriano Paganini, a veteran chef from Italy who founded the concept in 1990. He opened the first “Pasta P” in a storefront on Chester Street in San Francisco. Eleven more units followed—nine in the city—before a venture-capital firm funded the company in April 2000. No surprise: Unit volumes in the Bay area outposts were averaging $1.4 million.

The chain, with a check average of $13, has since expanded south, to Orange County, and east, to Arizona, where sales haven’t been especially strong. “People don’t appreciate how hard it is to go to new markets,” Saltzgaber laments. “We didn’t pick the right real estate in Arizona.”

Minus the right site, concepts struggle to achieve promised returns, which should range from 20 percent to 25 percent or more. “Twenty percent is bare-bones return level,” he says. To attract serious interest, comparable sales should consistently grow at 3 percent or more and leave room for annual price increases of 2 percent—roughly in line with inflation, which is up only 2.5 percent year-to-date.

On the way back to the car, we spot a Chili’s Grill & Bar on a corner off the mall. Saltzgaber is surprised to see the older concept in Santana Row. He understands the attraction for Chili’s; the demographics are incredible. “But to be the endcap anchor at Santana Row is a little strange,” he notes, concluding it must have been a real estate deal too good for Chili’s management to pass up.

The Left Bank is a better fit. The six-unit chain is run by chef Roland Passat and businessman Edward Levine, who opened the first of the Bay area French-style bistros in 1994 in Larkspur, Calif. With an average unit volume of $4.5 million, the 7,000-square-foot, Santana Row restaurant features large posters, mirrors and a sweeping staircase that leads to a banquet room. Lest anyone think suburban casual-dining restaurants are inevitably alike, there’s also a tile floor, zinc-topped bar and raw bar.

Old School, New School
After a 45-minute ride, we come across an old-school box in Walnut Creek’s lifestyle center-like downtown. Inside Stanford’s Restaurant & Bar, a nine-unit, Portland, Ore.-based chain, a dark green and wood decor create a somber mood. The hostess disappears upon hearing we just want to look around the near-empty eatery.

A block away, however, California Pizza Kitchen is a stark contrast; it’s full at 2 p.m. We don’t stay long. The general manager, spotting our photographer, brusquely announces the company’s no-pictures-without-permission policy.

“If you could script customers, these are the people you want. They are two-income households, and they are time-constrained,” Saltzgaber explains, adding he recommends planting a first Bay area restaurant in Walnut Creek. The city’s population is 63,000 and median household income was $63,238 as of 2000, according to the city’s Web site.

The first East Bay Baja Fresh opened in Walnut Creek, though Saltzgaber would not have recommended it. He thinks the site in a tiny strip mall is too far from the busy intersection of Mt. Diablo Street and Main Street. A former Baja Fresh executive, who spoke on the condition of anonymity, insisted the store is in “a great location,” adding the company took the site because Chipotle Mexican Grill had taken the better one in the center of town.

Not far away, in Concord, 29 miles northeast of San Francisco, locals are showing up for early dinner at Claim Jumper. It’s the 34-unit chain’s only Bay area spot, somewhat of a surprise given the region’s demographics. “It’s a gold mine,” Saltzgaber announces once we’re inside the huge, 8-year-old eatery. The private company’s unit volumes are estimated to range as high as $9 million. Saltzgaber points to the structure’s thick wooden pillars and overhead beams. “It’s built to last and dated in a tasteful way,” he adds.

On the way out, Saltzgaber hints he’s aware of management’s plans; no surprise since he “tracks” a dozen chains while working for “several [equity] groups.” But he nonetheless refuses to answer specific questions.

Funky Frisco
It’s after 5 p.m., and Saltzgaber is worried about making a 7 p.m. dinner reservation at an Il Fornaio unit in Levi Plaza, in downtown San Francisco. He wants to make one more stop in the city first: Chester Street. It’s a funky and trendy thoroughfare that brims with unusual shops, restaurants and coffeehouses.

Saltzgaber thinks it’s an important area to visit because it’s an ideal place to test new concepts. There’s plenty of competition, disposable income and curious palates. Both Pasta Pomodoro and World Wrapps opened their first units here, coincidentally, in the same spot. A newcomer, Pacific Catch, now occupies the storefront. Six-unit Pluto’s got its start right around the corner before taking its upscale comfort-food format to the suburbs.

We tumble into Il Fornaio a half-hour late. Mindel is waiting outside, eager to see his old friend. The son of founder Larry Mindel, he graciously has dinner waiting.

Saltzgaber reminds me to ask about the impact of the Palo Alto Cheesecake Factory on Il Fornaio, a once public company taken private in 2000. Mindel admits sales dropped as his customers tried out the concept. “We felt our customer went one or two times,” he explains. “Our comps went back to positive in 60 days.”

As Saltzgaber says, there’s still room for everybody.