Experienced operators, analysts and investors within the restaurant industry know that turning around a damaged concept is difficult. A broken “culture” is difficult to rebuild. An active restaurant attracts the best talent for both qualitative (working conditions, team comraderie, etc.) and quantitative (monetary) reasons. A deteriorating situation becomes a self fulfilling prophesy as customers  with discretionary income stretched and lots of dining alternatives perceive the lack of spirit, become less likely to return and it becomes that much more difficult to recruit operating staff.  Back at headquarters, the newly hired turnaround specialist (CEO, President or COO) has the best of intentions, but leadership at the top has to be supported by the operating pyramid below, and too many of the productive operating habits have either departed or been forgotten. By this time there are so many predictable lapses that, at best, rebuilding consistent performance takes time and money.

Covering over 50 publicly held restaurant companies as we do, we are reasonably aware of those that are generally in a turnaround mode. Sometimes the stock moves ahead of the fundamentals, perhaps because new management arrives, expresses great long term optimism and perhaps reports on some short term progress. We are not going to name names here, because our “anecdotal” experience described below could be an isolated incident and is not necessarily a failure of the individuals currently involved. Let’s just call it a “teaching moment”.

On Monday evening I visited a location operated by a company whose stock we have been tempted to buy. As described above, new management has arrived, announced some early positive trends, and the stock, while down over 50% from the high of several years ago, has more than doubled from its low less than a year ago. I’ve been tempted to buy the stock because management seems credible and the stock is still statistically inexpensive.

I arrived at around 7:30, just after the dinner rush at this full service restaurant. Not many customers at that point but there must have been a reasonable amount of activity because many of the booths were still littered from the meal period, and the “hostess”, who greeted me after a minute or so at the podium, said she could only seat me at a table, rather than a  booth. She led me to a table adjacent to the bar and left me with a menu. There were a few customers at the bar, with just a couple of booths still occupied at that point. It took perhaps five minutes (seemed longer) for a server to arrive. She was well intentioned and pleasant, took my order for a Diet Coke and an undisclosed entrée’, recently “new and improved”. The drink (unfortunately) did not arrive until the entrée, but both were on the table within perhaps 12-15 minutes. The entrée’, including side items, was “as advertised”, rather good I thought.

Aside for the slow greeting as I arrived, the littered booths, and the wait for a server to arrive at my table, so far the dining experience, while not ideal, was close to acceptable. However, the biggest tangible disappointment, the dessert,  was yet to come:

This is what I ordered:

The picture below shows what I received:  The cake was almost frozen, obviously refrigerated for a long time and that’s why I used the spoon, as shown, to slice off the front portion of cake. The strawberry sauce, drizzled on the picture above, was not so attractive in the cup shown below. Uncharacteristically, I had no trouble resisting the remainder.

CONCLUSION:  This type of situation could happen anywhere and often does, just not too often in the best restaurant chains. I liked their new “signature” product and the friendly well intentioned server, not so much the absence of a greeter as I walked in, the littered booths or the disappointing dessert. As you will expect, I will visit some more locations before I invest in the stock. I have purposely left out further details, in the interest of not singling out the chain that just happened to remind me, and now our readers, of the challenges within a multi-unit restaurant turnaround. I would happily complete the story with management if they give me a call at 646 270 3127.

Roger Lipton