Table Stakes

As the casual-dining industry suffers one of its worst downturns, CFOs are in the kitchen and feeling the heat.

KeyBanc’s Ludington notes that chains are rolling out “theoretical food-cost systems,” software that enables individual restaurants to compare customer traffic and order volumes going back several years. Brinker, for one, has “a pretty sophisticated [information systems] model,” allows Sonsteby. “Every day we can tell what all of our restaurants sold for lunch and dinner yesterday versus last year, down to the check-level detail — how many chicken sandwiches, how many burgers.”

Brinker managers can also explore “check interdependencies” — which items on Chili’s menu are likely to be ordered in tandem, like fajitas and margaritas — and product mix (the overall combination of items ordered). “There is a lot of science to constructing a menu,” says Sonsteby. “You have to make sure you have certain items that have a good ‘return to net.’” (The average check per Chili’s guest last year was $12.93.)

Menu science and cost-cutting aside, you have to maintain optimism above all, adds Sonsteby — even if most of the news about the restaurant industry and the economy is bad news. Despite the consumer pullback, “I think people see [dining out] as more of a necessity than a luxury, particularly at our price points,” he says. “I keep telling people that this is when careers get made, this is when companies get made. A lot of folks have their heads down; they’re worried about making it to tomorrow. I say, keep your heads up and look forward, try to see what’s over the horizon. It’s a great opportunity here.”

Edward Teach is articles editor of CFO.

On the Financing Menu, Limited Choices

While one rap against casual dining chains is that they all look alike, financing an extreme makeover won’t be easy. “The capital markets right now are essentially closed to even a lot of investment-grade companies,” says Chuck Sonsteby, CFO of Brinker International. “And anyone in the high-yield space can’t get money from anyone.” Financing for new restaurants, typically offered by midmarket lenders such as GE Capital Markets, Wells Fargo, and Bank of America, has slowed to a trickle, say analysts.

Money for refinancing debt is just as scarce. Restaurant chains that leveraged up when credit was easy could find the going especially tough in coming months. By some estimates as many as 10,000 restaurants of all kinds could close in the next 12 to 18 months, says Brad Ludington, a restaurant analyst at KeyBanc Capital Markets. Ron Paul, president of Technomic, forecasts 1,000 closures in the casual-dining sector in the 12 months following June 30, 2008. Bankruptcies in 2008 are running at least twice the rate for last year, he adds.

Uno Chicago Grill, a 206-restaurant chain controlled by private-equity firm Centre Partners, raised eyebrows in August for deferring a $7.1 million interest payment through a 30-day grace period while it attempted to renegotiate its $142 million in senior secured debt. The recapitalization fell through and Uno paid up, but Standard & Poor’s downgraded the company’s credit rating to D. Today it stands at CCC with a negative outlook, but CFO Louie Psallidas insists the chain is in no danger of going bankrupt. “Everyone in our space is being downgraded and watched carefully,” he says. “It doesn’t change anything we do on a day-to-day basis.” New Uno franchisees will seek financing from local community banks, he adds: “We don’t need a bond rating to access capital.”

As restaurants become insolvent, Chapter 7 liquidations like Bennigan’s may become more common, thanks to the disappearance of debtor-in-possession financing. “There’s been a change in debtor-in-possession financing markets,” comments Sonsteby. “It used to be people would enter into bankruptcy one day and emerge the next with lender financing that allowed them to reject the bad leases and move down the road. But debtor-in-possession financing is really not available anymore.”

All may not be bleak, points out John Hamburger, president of the Restaurant Finance Monitor newsletter. “Restaurants are financed in many different ways,” he says. “Developers finance them, and there’s a fairly decent sale-leaseback market. And there are still some private-equity funds sniffing around the business.”

Restaurant credit was tightening long before the financial crisis erupted, Hamburger says. “You can’t blame the credit slowdown on the crisis; you have to blame it on the fundamentals.” — E.T.

The Natl. Restaurant Association's Performance Index fell below 100 for the 13th straight month.

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