Chain Leader

Lane Cardwell

Deep in the Hart of Texas
August 6, 2008

"The stars at night are big and bright, deep in the heart of Texas."

That's all of the home-state song verse that I will subject you to, but I couldn't resist. Texas Roadhouse, with CEO G.J. Hart, released their second quarter earnings, and held a conference call to discuss their results last week. Don't make me point out the connection to the song. Suffice it to say that Texas Roadhouse had a solid quarter in a tough environment, and continues to make life tough for neighboring concepts in the casual dining segment.

I have become an avid reader of the conference call transcripts of many of the better run restaurant concepts in the industry. Why? You can get a masters degree in restauranting just by paying attention to what others are doing with their businesses, and how they are handling cost, sales, and development pressures. I thought that the conference call that Mr. Hart and his CFO held with Wall Street analysts was a great example of a company being on top of its game.

I have been a fan of Texas Roadhouse for a long time. You have to admire a concept that causes competitors to cite their presence in a trade area as a primary reason for their units being down in sales. Chili's, TGI Friday's, Ruby Tuesday's, Outback Steakhouse, Longhorn Steakhouse, and so on; no one wants to see the "Coming Soon" sign on a site with the Texas Roadhouse logo on it. It's enough to make a grown GM cry.

What makes Texas Roadhouse such a potent competitor? Strong value, strong operations, strong food culture, strong prototype design, strong employee culture, and a strong GM bonus program. Did I mention that I was a fan? I thought I did. Texas Roadhouse is a steak concept with the elements of a Chili's and Friday's menu to round out the affordability and frequency. Its $4 million unit volumes with a dinner-only format (except weekend lunch) attest to its popularity.

They merchandise their hand-cut steaks with a butcher case in the front that every guest passes going in and out of the restaurant. They are the only concept that I am aware of that puts food on the table as they seat you. A basket of hot rolls is carried to the table by the hostess. Not even Mexican restaurants get chips and hot sauce in front of you more quickly than that.

You read about Steak & Ale and Bennigan's closing? So did Texas Roadhouse. On their website they offer to exchange any gift cards that customers are holding from those two concepts for a free entree certificate. Now that is capitalizing on a competitive situation and acting quickly.

So what was there to learn from the conference call? Little things like pricing strategy, commodity hedging, menu value engineering, the company philosophy on cost cutting, advertising tactics, and returns on new units. In addition to that they covered some important things, too.

Here are a few things that I thought were interesting from the call:

• "As far as pricing for the rest of the year is concerned, right now we have about 2.5% pricing on our menu. We do continue to see negative mix shift of 1% to 1.5%, mainly entrée driven at this point, as we can see guests trading down to lower priced items. On top of this, the success of our value-oriented entrée items is having about 0.7% negative impact on check."
• "And in terms of what that pricing might look like, I would suspect with continued wage inflation and with that kind of inflation on food, you'd be looking at needing somewhere between 3% and 5% to stay even."
• "We added a couple of more value-oriented items to the menu. Our baby blossom, which is a smaller version of our popular cactus blossom appetizer, has been doing very well. It is much more conducive for sharing with two or three people and at $2.50 less is a great value. We also added a third slab of rib entrée that includes two sides for under $10. We now have 19 entrees excluding burgers and sandwiches priced under $10."
• "We also added a couple of combo items with our pulled pork -- a pulled pork and chicken combo and a pulled pork and rib combo. These give us a couple of combos on the lower end in the $11 to $13 range. While it is early, these new menu items have been well-received by our guests and we believe they really help us communicate our value position."
• "We are still encouraging our operators to invest in their business as opposed to cutting costs for the sake of better margins in the short-term. Given our partnership structure, our operators are in this for the long haul."
• "So from an operational perspective, we are maintaining the course and looking at this difficult time as an absolute opportunity to further distance ourselves from our competition, as they may begin to cut food quality and service in the name of efficiencies. We strongly believe that this will result in increased market share, as common sense tells us that when guests have a bad food or service experience in this environment, there's very little chance that they will be returning."

You get the idea. A good company with a good management team can teach you a lot about their business, and your business, as they try to keep Wall Street educated. You may agree with their thinking. You may disagree. Just don't be uninformed about what others are doing, or Texas may not be the only thing that you are deep in.
 
 

Posted by Lane Cardwell on August 6, 2008 | Comments (5)