The Timeless Business of Steakhouses

the restaurant industry is one of the most romanticized and ruthless markets few Industries have suffered as much as restaurants in the past years with the pandemic inflation and soaring food costs the failure rates and thin margins that restaurants endure are Infamous with alleged profits of less than 3% and that 60 to 80% of restaurants reportedly never make it past 5 years lobbyists like the national Restaurant Association who are incentivized to reshape narratives have fought back stating that such statistics are exaggerated and that the true failure rate is much lower at 177% but the one universal truth that everyone agrees on is that the restaurant business is ruthless achieving profitability is hard returns are unforgiving upfront Capital requirements are high and scaling is difficult as restaurants go there's Italian Mexican Chinese American Japanese and so on but there is one type of restaurant that's considered to be the most lucrative and makes up over half of the top 100 highest grossing restaurants in the United States every year that is the steakhouse in America the steakhouse is as much a cultural right of passage as it is a fine dining establishment when people go to steakhouses it's for the experience as much as the food they dress up they expect quality service and the meal serves as a platform for business or celebration all steakhouses offer standard Fair like the New York strip the Porter House the filet Mion alongside mashed potatoes brussel sprouts Caesar salad and chocolate cake While most restaurants aim to specialize in certain foods or offer unique items for differentiation steakhouses thrive in Conformity their goal is to serve tried andrue Classics with good ingredients good execution good service and good Ambiance for steak houses the more predictable the menu and experience is the better compared to fast casual rest restaurants where people look to dip in and out quickly and get as much bang for their buck as possible customers go to steakhouses ready to splurge While most restaurants optimized for high volume low margin steakhouses have higher margins built in as they charge premium prices to an audience that has high willingness to pay a single steak depending on the cut can cost $50 to $100 at a steakhouse with the expectation that each Diner orders their own side dishes like mashed potatoes salad fries and asparagus are simple lowcost items that are always heavily marked up if a takeout shop charged $10 to $15 for fries or mashed potatoes alone that would raise eyebrows but at a steakhouse no one would question such a price alcohol is another high margin item that adds to the bottom line the fancier the steakhous the more they invest in their wine making it part of the decor with Sellers and displays right when diners walk in the focus on ingredients service execution and Ambiance along with a high-end Target Market Mak steakhouses inherently difficult to scale as there are few ways to automate or streamline a business that require so much human capital at the same time people don't dine on steakhouses every week which means demand can be met with a handful of steakhouses in any given area in this episode we'll cover the business of steakhouses and cover the strategies of the three of the biggest chains in the world who each have their own strategy and go after diners at very different price points Outback Steakhouse Texas Roadhouse and Ruth Chris Ruth Chris is a classic high-end Steakhouse that charges top dollar and Prides itself on its service and USDA prime beef Ruth Chris's target audience is a 35 to 65-year-old business Centric high-paying upper middle class individual or couple their menu features traditional culinary opulence priced from $35 to $100 with Prime and choice grade Cuts alongside shrimp Chops Lobster chilled Seafood towers and and desserts like bread pudding and cheesecake Ruth Chris's differentiation is its signature sizzling fashion where steaks are served on 500° plates in pools of boiling butter each location carries over 250 options for wine for customers to choose from that range from $50 to $11,000 a bottle alongside cocktail beer and liquor options when customers walk into Ruth Chris they drop on average $90 for their meal the average check for Ruth Chris has grown in the past decade from $70 to $90 not necessarily ahead of inflation but still at a healthy rate in the past 4 years on average $18 of that $90 is spent on Beverages and the remaining $72 is spent on food red wine and steak is a classic pairing and while the company no longer reports how much wine it sells historical data shows that wine made up 60% of all beverages for a 7-year period between 2010 and 2017 with 150 restaurants spread across North America and Asia Ruth Chris is the largest upscaled Steakhouse chain in the world at first glance 150 locations is not a lot to put it into perspective The Cheesecake Factory has 330 restaurants in North America alone double of what Ruth Chris has in the entire world Olive Garden has over 800 restaurants in North America IHOP and Chile each have over 1,600 restaurants in the United States while fast casual restaurants optimize for volume broad appeal and actively invest in simplifying their service or food as a higher-end establishment Ruth Chris can't scale in the same fashion in the past decade Ruth Chris has opened on average just two restaurants every year despite having such a small footprint Ruth Chris has steadily grown total revenue earning from $285 million a year in 2010 to over $400 million in 20121 over 90% of Revenue comes from sales from restaurants that it owns and operates and only 4% comes from franchise fees looking at the numbers there's been no significant effort to derive more income from franchise fees this is in stark contrast from the typical restaurant Playbook which prescribes to expand through franchises and to derive most Revenue at maturity from franchise fees this strategy is most apparent in fast food and fast casual restaurants by finding local operators to run the restaurants companies expand faster with significantly less risk and open up locations without any responsibility for day-to-day execution earlier this season we covered KFC which painted a picture of what happens in over expansion local franchises who run the restaurants end up cutting Corners in service and food quality customers suffer and the brand starts declining in popularity and appeal it is this precise risk that makes Ruth Chris take such a slow and methodical Pace when it comes to expansion in a Chase to reach and serve as many customers as possible fast food and fast casual companies will let just about anyone with the money and interest to franchise a location without too much due diligence as a higher end Steakhouse Ruth Chris believes its greatest asset to be its brand the company performs due diligence in every aspect of expansion the location space the market the region the geography and the franchisee to make sure that the service and food in these new locations are going to be at the same standards as existing ones so even if that means slower growth to Ruth Chris that is has a better outcome than the irreparable harm to Goodwill that comes with overexpansion if people have a bad experience at Ruth Chris then people will simply take their money to other upscale steakhouses and the brand will lose its reputation and pricing power that is carefully cultivated for the past 50 years like in the case of McDonald's or IHOP or KFC these companies generally want to make money from royalties and to get out of the restaurant business it's normal to see an inflection Point as a restaurant matures a rise in the number of locations that are franchised and a drop in the number of locations that are owned and operated by the company over time yet Ruth Chris to this day has not shied away from operating its own restaurants or buying back its locations from franchisees when the company thinks it can do a better job than the local operator the number of franchise Ruth Christ steakhouses have remained consistent over the past decade with es and flows that move in both directions half of Ruth Chris's steakhouses are franchised and half are run by corporate the company has never made more than $20 million a year from royalties and franchise frees have grown on average just 6% every year for the past decade on a per location basis the average Ruth Chris franchise pays up just shy of a quar of a million dollars every year in royalties as a fun comparison of just how different the extremes are When comparing fast food versus high-end restaurants the average KFC franchise just pays $60,000 a year in royalties for customer acquisition Ruth Chris's strategy is to win the 35 to 65 year-old segment of each generation the company boils down each customer visit down to one of three basic use cases the first is for special occasions where people come to celebrate the second is business for company and client dinners and the third is just cause that's when people drop in for bar food and casual drinks rather than a formal sitdown dinner during Ruth Chris's rise to Fame in the early 2000s their main customers were Boomers now that Boomers are retiring and nearing the end of their lifetime value Ruth Chris is turning its attention onto Millennials as the next generation is now entering the sweet's 35 to 65y old age range to pull in that younger audience Ruth Chris has launched his tastemaker dinners which are fixed-priced four course menus that include wine and cost $150 a person set menus are nothing new for steakhouses but perhaps this is a response to the growing popul ity around Japanese omes and tasting menus Sizzle Swizzle and swirl is another recent addition in Ruth Chris for Value oriented Millennials who don't want to drop $40 on stake from 4:00 to 6:00 p. m. on weekdays you can dine at the bar for a $9 cocktail or an $11 cheeseburger or steak sandwich when we look at the numbers on a per location basis we can uncover the unit economics of a high-end Steakhouse the average Ruth Chris Steakhouse grosses $5.

5 million a year and has grown on average 4% every year in sales for the past decade for an interesting comparison a fast food chain like KFC or McDonald's on the other hand grosses roughly $2 to $2. 5 million per location every year because there's a greater emphasis on quality ingredients food and beverage costs for steakhouses are higher than that of other restaurants a single Ruth chist Steakhouse spends on average $1. 5 million every year on ingredients which accounts for nearly 30% of their gross Sal sales in 2021 the cost of ingredients for Ruth Chris skyrocketed to a record 32% of sales due to inflation and supply chain issues the average Ruth Christ Steakhouse spent nearly $2 million on ingredients in 2021 with $875,000 of that $2 million going to beef alone over the past decade beef has become the single most expensive ingredient to Source drought in farming areas labor shortages higher fuel prices and higher costs of soybean and corn which are used to feed cattle are all keeping the price of beef up the average Ruth Christ steakhous spends $2.

3 million every year on labor and rent and a single Steakhouse employs a lot of people each Ruth Chris location has one general manager two front of house supervisors to manage the guest Experience One executive chef to run the kitchen and 60 hourly employees steakhouses particularly the fancy upscale chains like Ruth Chris have historically been so focused on the human-to-human White Glove dining experience that many of them never supported e-commerce capabilities the pandemic was a forcing function for Ruth Chris where the off- premise to go orders overnight suddenly became the majority of their business Ruth Chris transformed its Legacy static website into a dynamic online storefront where customers were able to place orders online and get Stakes delivered to their doorstep for the first time in company history e-commerce has become a necessity for steakhouses these days and Shopify is a leader in this space and the sponsor of this episode Shopify is a Commerce platform that's easy to use and offers anyone the ability to start grow and manage a business Shopify helps companies scale from first sale to full scale and allows anyone to sell online through major social platforms and in person if you're a brick-and mortar store you can use shopify's point of sale system to manage everything from inventory management to reporting beyond that their ecosystem of thirdparty apps can allow Merchants to customize their store to meet all of their needs as a platform Shopify Powers more entrepreneurs than anyone else in the world with millions of businesses in 175 countries and as a company Shopify believes in a future where Commerce has more voices and they're reducing the barriers to business ownership to make Commerce better for everyone start your business today with a free trial of Shopify go to shopify. com Modern MBA to learn more thank you to Shopify for supporting modern MBA and making this episode possible possible the company benefits in that a majority of these 60 employees worked in tip positions where they aren't paid minimum wage if you're a server at a high-end Stakehouse where the average bill is $90 a 10 to 15% tip for every table you cover can quickly exceed minimum wage this lowers labor costs and reduces turnover volatility as servers generally value working at higher-end restaurants when the average check sizes make for high tip compensation the average Ruth Christ steakhous seats 200 70 people and is roughly 8,500 sare ft while it's not reported how much specifically goes towards rent it's fair to assume that Ruth Chris's rent is not cheap by targeting wealthy upper middle class clientele Ruth Chris steakhouses are generally located in high traffic High income high-profile areas like upscale hotels convention centers tourist destinations and even in casinos factoring back in GNA overhead and all operating expenses a single Ruth Chris St house in its best years netted nearly $900,000 in operating profit in its Worst Years excluding covid a location Nets roughly $550,000 every year this means for the past decade each Ruth Christ Steakhouse has netted on average an annual operating profit of $570,000 on a percentage basis Ruth Chris's operating profit since 2001 hovers at 11% in 2019 the restaurant industry reported that the average profit margin for a single single full service restaurant sat at 6. 2% so even with higher rent greater labor requirements and premium ingredients Ruth Chris as a high-end Steakhouse still wins out with a double digit profit margin nearly twice the profit margin of the industry average Texas Roadhouse on the other hand takes all the traditions of steakhouses as bougie Posh elitus restaurants and throws that playbook out the window with the tagline legendary food legendary service Texas Roadhouse sets its different differentiation as a uniquely fast casual sitdown Steakhouse that's designed to be affordable to all the company makes no attempt to hide the fact that their broad appeal lies in their pricing quote we offer food and beverage at price points that are as low or lower than those offered by our competitor in any given Market Texas Roadhouse doesn't see to compete on quality or service but instead value at Texas Roadhouse for less than $14 you can get a 6 ooun sirloin with two sides along with an unlimited Supply of hot bread rolls and cinnamon butter for less than $30 you can order a 23 o Bon and Porter House with two sides at Texas Roadhouse the average check size is less than $20 in 2010 customers spent just $14.

63 and even with inflation and the rise in beef prices Nationwide in 2021 customers spent just $19. 68 as a fast casual concept there are likely many individuals who visit Texas Roadhouse eat by themselves eles and then leave for a higher-end steakhouse like Ruth Chris that $90 average guest check is more likely the bill for a party of at least two people and not someone dining alone while Texas Roadhouse doesn't serve wine by the bottle they do serve alcohol in other forms like margaritas and other cocktails alcohol makes up on average just 11% of food and beverage sales the quality of steak at Texas Roadhouse is not the same USDA prime grade that high-end steak houses offer some cuts on the menu are even below choice but no one is going to Texas Roadhouse to eat the best steak in town or expecting to be served like royalty Texas Roadhouse is all about low price low margin and high volume and to achieve that it's about packaging foods that would be weak individually but are Great together in a cheap casual dining experience a tolerable piece of steak is elevated when it's served with an acceptable side of mashed potatoes unlimited bread rolls and free cinnamon butter despite being a fast casual play Texas Roadhouse still incorporates a few elements from the traditional Steakhouse Playbook Texas Roadhouse is only open for dinner and it limits lunch to Fridays and weekends this allows for labor efficiency and service optimization as the company only needs to hire train and have one set of employees for a dinner shift four out of 7even days a week the company consistently insists that opening for lunch all week long would be unprofitable as people spend even less money at lunch ordering burgers and soda over steak and marar maras Texas Roadhouse has kept its foot on the gas pedal when it comes to expansion growing from 270 restaurants in 2010 to over 600 locations in 2021 the company opens on average 32 new restaurants every year when it comes to the Top Line Texas Roadhouse has been heads and shoulders above Ruth Chris for the past decade grossing over a billion dollars in 2010 and nearly 3. 5 billion in 2021 the high volume value orientation and low price point is a winning strategy even in a restaurant category that doesn't traditionally position itself as such 99% of Texas roadhouses Revenue comes from food and beverage sales from the restaurants that it owns and operates even as a fast casual concept most of its locations remain corporate owned and operated less than 20% of Texas Roadhouse locations are franchised and as a result franchise fees account for no more than 1% of its overall Revenue but having billions of dollars in Revenue Isn't So meaningful if you're not able ble to retain much of it as profit the average Texas Roadhouse restaurant grosses $3.

9 million food and beverage sales at Texas Roadhouse restaurants have grown at a measured 3% year-over-year meaning that while value brings customers in the quality and experience is understandably not that exceptional to keep people coming back in crowds what's interesting is that despite using cheaper ingredients and ordering in bigger volume food and beverage cost for a Texas Roadhouse restaurant on average in 2021 looks about the same as it is for Ruth Chris even with USDA choice and Select Cuts beef costs still make up half of the food cost for Texas Roadhouse because of their broad appeal Texas Roadhouse restaurants can fit into a variety of properties the average Texas Roadhouse comes in at 7,400 FT which is smaller than Ruth Chris's high-end chains by 1,000 square ft despite this Texas Roadhouse is able to have tighter seating arrangements so they're able to seat just as many people as Ruth Chris even though they have literally less space the restaurant design of Texas Roadhouse reinforces its fast casual atmosphere each restaurant is built in the form of a Southwest Wood lodge with murals neon signs print rugs Juke boxes and Country Music the average Texas Roadhouse spends about $1. 2 million every year on labor and $80,000 every year on rent Texas Roadhouse has netted on average a little over $300,000 per location for the past decade in 201 21 a single Texas Roadhouse location netted nearly half a million doar on a percentage basis Texas Roadhouse's operating margin has hovered at 8% on average for the past 11 years two points above the industry average for a full service restaurant but nowhere near Ruth Chris so while Texas Roadhouse has Ruth Chris beat on revenue and scale the highend profit margins of traditional Posh steakhouses are indeed still Superior to that of fast casual steakhouses Alpac steakhous is the the most well-known and the largest Steakhouse chain in the world with over a thousand locations in North America South America and Asia despite its presence and scale Alpac steakhous nowadays carries the worst reputation of any chain it's more accurate to call it a restaurant that just happens to sell steak alongside some very overpriced and mediocre American food albac steakhous was popular in the '90s for its Bloomin Onion and Australian themes but giant deep fried onions and Aussie accents just don't conjure up the same excitement and Intrigue with customers two decades later Outback steakhous sales have flip-flopped around the past 7 years stagnating at around $2 billion every year with the way that its parent Corporation blooming Brands sets up its financials it's impossible to tell just how profitable or unprofitable this low-end Steakhouse chain really is similar to Texas Roadhouse Outback Steakhouse targets the low end the average check of Outback Steakhouse hovers at $24 alcohol has contributed less over the years and accounts for just 8% of all food and beverage sales at Outback a single Outback Steakhouse grosses on average roughly $3. 1 million a year with a consistent criticism and growing unpopularity seems to be catching up with this once iconic Steakhouse since 2016 Outback Steakhouse has been shuttering doors closing down 12 locations every year just like KFC its only bright spot is in its International performance Korean for some reason have welcomed the American brand with great enthusiasm as South Korea is the only place in the world where food and beverage sales for Outback Stak house is growing sales in South Korea have grown at double digits every year for the past four years and new locations continue to open up around the country the clustering of steakhouses around the lowend and high-end have opened up room for new brands Fogo deson is an emerging Brazilian steakhouse chain best known for its fire roasted beef fixed price menu and service Buffet model instead of settling for a cheap $20 sirloin at a Texas Roadhouse or Outback Steakhouse or a $100 Porter House at a fancy sitdown place like Ruth Chris Fogo deson believes that there's room between the two in the middle of the market for a steakhouse in the $50 to $60 range and that's not a Bad Bet to make as food continues to change around the world as customers become more sophisticated and seek more unique flavors on the outside traditional steakhouses look like Grand prestigious businesses who are deeply entrenched in their local communities and enjoy High margins from charging hundreds of dollars for Meats wine and ambiant but when we look inside the human capital that gives high-end steakhouses their pricing power and Prestige also makes them inherently difficult to scale Ruth Chris's 11% operating margin is strong from the conventional food and labor cost standpoint of traditional restaurants but in the grand scheme of all big restaurants high-end steakhouses don't come close to even the higher overall oper operating margins that franchise heavy establishments enjoy like McDonald's or KFC who all reap in Greater profits for far less work and at less operational risk when we evaluate on a pure Cash basis very few restaurants can come close to the annual income that Ruth Chris grosses at $5.

5 million per location every year while McDonald's or KFC doesn't come close in terms of gross sales per restaurant what they lack in earnings they make up twice over in scale the comparison gets interesting when we add in Chipotle as a fast casual comparable Chipotle doesn't rely on franchising which means that every Chipotle you go to for your burrito bowl is owned and operated by corporate a Chipotle location earns roughly the same amount as a McDonald's or KFC between $2 to $2. 5 million every year as a volume play Chipotle's overall operating margins are much lower as their earnings upside is restricted to the traditional restaurant operating Playbook with food and labor costs without franchises but they still net higher than the industry average at 6.