Gift cards get a loud, 'Bah, humbug'

Gift cards have consistently been a holiday blockbuster for the restaurant industry. But that streak’ll end if several public watchdogs have their way. They’re warning shoppers to forego the no-brainer gifts because the chain or restaurant accepting the card could go bankrupt after the holly wreaths and mistletoe come down.

Those Scrooges include Richard Blumenthal, the attorney general of Connecticut. He’s cited in a Hartford Courant column by George Gombossy as flatly advising consumers to bypass the cards because “many more restaurants” will throw in the napkin. Indeed, Blumenthal said he’s speaking with the Connecticut Restaurant Association about forming what amounts to an insurance pool. Restaurants offering gift cards would all contribute small amounts to the fund, which would be used to make good on gift cards issued by operations that go under. Consumers could tap the kitty for a refund, then use the cash on places still in business.

Blumenthal is clearly using some broad strokes to tar the industry. Is a well-capitalized chain steakhouse really as likely to go under as Salty Ed’s Fry House and Bait Emporium? Yet he’s reportedly saying gift cards from all restaurants should be shunned like an I.O.U. from Michael Jackson. No wonder Gombossy titled his column, “Use Gift Certificates Now, And Don't Give Any.”

But Gombossy and Blumenthal are hardly alone in suggesting Aunt Lil give you an argyle sweater instead of that $100 piece of plastic for Ruby Tuesday. An article in yesterday’s Los Angeles Times was headlined, “Consumer Alert: Are your gift cards safe?” It cited a warning from the Tower Group consulting firm that shoppers could lose $75 million charged on gift cards because the issuing store or restaurant goes bankrupt.

The story doesn’t point out that $75 million is a tiny, tiny portion of what will be charged just on restaurant chains’ gift cards. The figure for all restaurants, never mind retailers, runs into the billions. The National Retail Federation has pegged the total for both channels at more than $26 billion. Such a small potential loss means only a tiny percentage of card-issuing restaurants are believed to be at risk. Yet the article—and possible the Tower research—fail to provide that context.

Instead, the story notes that consumers reportedly held $20 million in gift cards when Sharper Image went bankrupt. It also reports that Bombay Co. paid cardholders 25 cents for every dollar that was left on their cards when the retailer soaped over the plate glass windows of 388 stores in August.

Both that article and the Courant column appeared before “Taps” was sounded for Circuit City, the big-box electronic retailer that presumably sold a lot of gift cards.

Yeah, there’s a danger to buying cards. But the industry needs to remind consumers that it’s routine for one restaurant chain to honor the coupons of another, even when both are still in business. It may become even more of a convention if additional concepts flat-line. When Bennigan’s company-run restaurants went bust, Texas Roadhouse offered to provide a free entrée to consumers who had gift cards from the chain. The patrons presumably could’ve also used the cards at franchise establishments, which stayed open.

For six or seven years running, gift cards have been the restaurant-industry equivalent of finding a new sports car parked in the driveway on Christmas morning. It would be a shame to see that Maserati repo’d because consumers were frightened away from a holiday staple that giver, getter and seller all appreciate and value.

Reality bites

A long-time acquaintance confided tonight that his restaurant company will soon have to cut its staff because of the economic situation. The operation is of a size, he explained, where he’ll have to let go friends and what he termed members of his family. He didn’t need to tell me how upset he is by the prospect.

Welcome to the restaurant industry post-meltdown. Tonight we kicked off our annual MUFSO conference with a slam-bang cocktail party featuring the specialties of Washington, D.C.’s top restaurants. The conversations were as varied as the drink orders. But sooner or later they tended to flit back to the issue of the moment: How bad is this economic situation, and when might the industry feel some relief?

There was hardly a uniform opinion on the when, though the consensus seemed to be that we’re many months away from relief—at best. And as for the depth of the downturn, the universal assessment could be summed up as a shrug. The one point of agreement: The situation is unprecedented. And I heard that from persons whose tenure ranged upwards to 24, 35 and even 50-plus years.

Undisputed was the notion the economy is in standstill mode until the public gains some confidence that relief is foreseeable. The hope for resolution has been tossed aside. Executives spoke wishfully of a change in the trend lines, never mind a solution.

Yet, virtually everyone stressed, the cycle will turn. It may be a different industry that enjoys the rebound—and certainly a smaller one, most agreed. It’s the pain many will feel between now and then that seemed to be the concern of attendees.

Lunch with Wendy's honcho, Friday's sauce on the side

Several of us had lunch yesterday with Roland Smith, the new CEO of Wendy’s, who’s shouldering that responsibility while continuing to lead the Nelson Peltz-affiliated corporation that previously ran only Arby’s. Besides providing a guilt-free chance to indulge in a Double and a Frosty—hey, it was research—the sit-down at a midtown Wendy’s yielded a few guarded indications of what the chain’s new owner may do with its $2.3-billion prize. But even better was a reality check the unit’s franchisee gave us after Smith left, not so much about Wendy’s, but about general industry conditions and his other concept, T.G.I. Friday’s.

Here’re the highlights of what Smith had to say about Wendy’s and its new parent, Wendy’s/Arby’s Group Inc.:

• Co-branding is definitely in the works for the company's two chains, particularly in high-rent locations like the midtown location where we ate. Smith said the pairing of the concepts—separate kitchens, but paired menus sporting the signature items of each brand—would be especially synergistic overseas.

• The acquisition of other restaurant brands is definitely a possibility for Wendy’s/Arby’s. Smith of course wouldn’t be specific about the possibilities, but he said the company favors concepts that are viewed as quality providers. not bargain peddlers.

• Although the two concepts will be run as separate brands, without any sharing of "trade secrets" like menu products, personnel could be transplanted from one to the other as need and availability arise, Smith said.

• The emphasis for Wendy’s near-term will be on boosting profits. Smith remarked that Arby’s unit-level margins are among the best in the business. Wendy’s was once up there as well, he said, but the profitability of company units slipped, with margins now falling below what franchisees have been able to maintain. Not that licensees are content with their incomes, either, he suggested. Asked for the top three present-day concerns of Wendy’s franchisees, Smith counted them off on his fingers: “Profit, profit, and profit.”

• Wendy’s and Arby’s may indeed cross-franchise, so an operator of one chain could open units of the other if the situation would be appropriate.

As we were leaving, we were asked about our meal by someone who was obviously a person of authority, but just as clearly not a part of Smith’s posse. Turns out he was the franchisee, Brad Honigfeld, CEO of multi-brand The Briad Group.

Honigfeld said he was optimistic about Smith and the change in ownership, and praised in particular the selections of David Karam as Wendy’s new president and Steve Farrar as the new COO.

He voiced more concern about his Friday’s restaurants, noting that Briad is that chain’s largest franchisee. Stores in Arizona are running 25 percent below what they were a year ago, he lamented.

Bakery-café concepts like Panera are stealing the lunchtime customers of casual chains, Honigfeld explained, and the battle for dinner patrons is just brutal. He dismissed discounting as the way to go, suggesting instead that the established players in casual dining need to re-invent themselves.

Perhaps not coincidentally, he revealed that Briad has just signed on to become a franchisee of Corner Bakery, a competitor of Panera.

Honigfeld also noted that his Wendy’s units in the New York area have been doing well, but that Briad’s restaurants on the West Coast suffered a “significant” decline last month. He called it a sign of things to come, which I took to mean the chilling effect could roll eastward.

Quaking icons

The earthquake in Los Angeles hit 5.4 on the Richter scale, but it was a shiver compared with the aftershock from yesterday’s collapse of a casual-dining icon. The public was reminded in story after story that the flat-liner was the company that built the venerable Bennigan’s and Steak and Ale chains. But the industry knew S&A Restaurant Corp. on a far more emotional level. For many of casual dining’s best and brightest, the company was the finishing school where they learned the business. The bankruptcy filing must’ve been like seeing your first home razed.

If the foodservice industry had the equivalent of a Cooperstown, the list of S&A alumni could serve as the roster of charter nominees: Chris Sullivan, Bob Basham, Tim Gannon (all of Outback fame), Doug Brooks (Brinker International), Dick Frank (Chuck E. Cheese’s), Dick Rivera, Hal Smith, Wally Doolin, Rick Berman, Lane Cardwell.

I used to joke that the MUFSO conference was just an S&A reunion in disguise. If an attendee was in a senior post at a casual-dining chain, chances were extremely high that he started at the operation that Norman Brinker conceived in the ‘60s as the obvious trade-up for baby boomers as they outgrew fast food. And for years it grew with their spending power and desire to dine out, becoming an industry force and prompting more imitation than the first reality-TV series.

But the company became part of a huge corporation and suffered the usual fate of losing its verve and agility. Upstarts roared past it, leaving the one-time innovator in a time warp.

More recent regimes did their best to revive the concepts, but the numbers suggest it was a pitched struggle. Systemwide sales for Bennigan’s, the spryer of the two concepts, slipped by about $13 million last year, and the chain contracted by about 10 stores, according to NRN research.

The times ultimately proved too daunting for the brands’ owner, prompting it to file for bankruptcy of the Chapter 7 variety. But franchisees believe they can make a go of it. The scuttlebutt is that they’ll try to provide the unification and support that once came from S&A. The model seems to be Ground Round, whose franchisees similarly found themselves orphaned when their franchisor suddenly threw in the napkin.

Now, of course, everyone is wondering what restaurant chain might be next. In media ranging from overseas newspapers to National Public Radio, the bankruptcy was cited as a weathervane for the economy, a milestone on the road to ruin. The surprise development is being portrayed as a leading indicator.

A fair-sized group of casual dining veterans probably knows better. They’re likely aware that many of S&A’s problems were a function of age and decisions made—or not made—decades ago.

For them, it was likely a seismic shift of another sort, and far more saddening than worrisome.