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Mercury Rising

SMOKIN' GROWTH: This barbecue concept is a primary growth vehicle for Darden Restaurants.

CHINESE HIP: P.F. Chang's does not look like the Chinese restaurants most of us grew up with.

MAKING DOUGH: Panera Bread is a darling of restaurant analysts because of its strong prospects for growth.

FRESH: Everything Chipotle serves is made in front of the customer.

There are many strategies for making money in the restaurant industry, but when it comes to the growth chains, those that enjoy the most success are usually the ones that treat the business as a long-distance race and not a sprint. A slow, steady burn rules the day for those with a smart concept to begin with. We talked to Bob Derrington, an equity research analyst at Morgan Keegan & Company, and Andy Barish, an analyst for Banc of America Securities, to find out which brands they believe have set a smart course for building a concept with legs. Here are 10 powerhouse chains (in no particular order) they say are well on their way to becoming household names.

After Outback Steakhouse established a strong foothold in the steakhouse segment, it began looking for new areas where it could prosper. It recognized that casual, upscale seafood had plenty of potential, and the company formed an alliance five years ago with Chris Parker and Tim Curci, founders of Bonefish (Parker died last year in a boating accident).

Bonefish, which doubled its units from 2003 to 2004, nearly did it again last year, pushing their unit count to 63. The Tampa-based chain's 2004 sales were north of $195 million, representing an impressive average unit volume of $3.2 million.

While the seafood arena was occupied by such players as Red Lobster, Long John Silver and Joe's Crab Shack, the decision by Outback to enter the more upscale regions of the segment has paid off. Its $24-plus check averages have not scared off consumers who are more affluent and less affected by the economy and rising gas prices.

Its focus on fresh items, a solid wine list and great appetizers have made Bonefish a rising star in the casual, upscale dining segment, which has performed well the last few years. Others in the segment doing well including Capital Grille and Morton's.

Who would have thought 20 years ago that you could build an entire
restaurant concept around a chicken wing menu? Buffalo Wild Wings, that's who.

Smokey Bones BBQ & Grill
This six-year-old Darden Restaurants concept showed so much promise in 2002, that RESTAURANT HOSPITALITY named it the Richard Melman Concepts of Tomorrow Award winner that year. It has not let us down, nor has it let down Darden, which was looking for a primary growth vehicle.

Last year Smoney Bones posted sales in excess of $174 million, an increase of 90 percent over the previous year. Unit counts grew impressively as well, with a jump from 30 stores to more than 80 last year.

Darden's accomplishment with Smokey Bones is impressive because regional barbecue preferences make this segment notoriously difficult to crack. But the company hedged its bet by combining the barbecue theme with a more universal sports theme. The sports theme has also allowed the company to introduce a variety of other nonbarbecue menu items such as burgers and salads to broaden the concept's appeal. All of this explains why the concept generates average unit sales of $3.2 million.

Despite these moves, average unit sales still reflect regional variations, with some units pulling in annual sales of $2.5 million, while others are performing at levels in excess of $4 million (the latter are primarily in non-barbecue regions). But hey, $2.5 million is nothing to sneeze at when you're competing in barbecue strongholds.

Johnny Carino's
Breaking into the Italian segment is no easy chore, not when it's dominated by impressive players such as Olive Garden, Macaroni Grill and Carrabba's. But Austin, TX-based Johnny Carino's has made considerable gains in the last few years. Its sales last year—$275 million plus—represent an increase of more than 63 percent from the previous year. The analysts agree that Johnny Carino's has become a player in the segment because of high quality food with price points ($12 check averages) that come in slightly lower than the king of the segment, Olive Garden.

Occupying the lower end of the casual Italian segment, this primarily red-sauce concept owned by Fired Up has grown rapidly through franchise development. Its unit count at the end of last year approached 135, with average unit sales of $2.5 million. That, my friends, is a lot of spicy meatballs.

Buffalo Wild Wings Grill & Bar
If you had told anyone 20 years ago that you could make a restaurant concept fly on the strength of chicken wings, they would have laughed at you. Now the ones laughing (all the way to the bank) are the folks at Buffalo Wild Wings. Here's a concept that grew its unit volume last year by 25 percent. With more than 300 units, and unit sales growth of 40 percent, Buffalo Wild Wings is indeed flying.

Sales last year at the Minneapolis-based concept were well above $500 million, with a large chunk of that produced by an impressive franchise system. Its combination of reasonable price point, casual finger foods and a comfortable neighborhood setting have given Buffalo Wild Wings a momentum that has refused to quit, even during a sluggish economy.

Average unit sales approach the $2 million mark, reflecting the chain's decision to reposition itself from merely a beer-and-wing sports bar to a familyfriendly neighborhood gathering spot. While Bonefish has proven there's room for growth on the higher ends of upscale casual, Buffalo Wild Wings has more than held its own on the lower end of sit-down casual. Not bad for a concept that was born on the campus of Ohio State University.

P. F. Chang's China Bistro
If the idea of a wing-based concept was risky, you can imagine what the bankers must have thought when presented with the idea of an upscale Chinese restaurant. But therein lies its genius. Any fears or questions one might have had about the mom and pop, white-carton Chinese restaurant down the street (real or imagined) were removed by P.F. Chang's, a darling of the restaurant analysts.

Last year, the chain's sales jumped about 19 percent, which put it in the $630 million range. Average unit sales in 2004 at its 115 units are estimated to be just south of a whopping $6 million.

Clearly, this is not your daddy's Chinese restaurant. In fact, P.F. Chang's resembles and acts more like an American bistro than an Asian restaurant. An impressive wine list, forks instead of chopsticks (if you want) and American-style desserts have established a comfort zone lacking in more traditional Asian restaurants. No, it's not authentic, but those financial results are the real deal.

Moe's Southwest Grill
One of the hottest, most competitive dining segments in the land is fast-casual Mexican, and Moe's Southwest Grill is more than holding its own. With so many strong players competing in this arena, including Chipotle, Baja Fresh, Rubio's and Qdoba, there may be an eventual shakeout (remember the yogurt chain wars of the '80s and the bagel wars of the '90s?). Expect Moe's, a five-year-old concept owned by Raving Brands, to be standing when the dust clears.

At the end of last year, Moe's Southwest Grill was operating 200 restaurants, which represents a 90 percent increase over the previous years. Sales were also quite impressive at $121 million, a 75 percent increase over 2003. With check averages around $7, average unit sales are nearly $1 million.

In the competitive Mexican fast-casual segment, Moe's has differentiated itself with high-quality food, which it serves in an irreverent atmosphere that appeals to a younger crowed. It also helps that it has staked its claim primarily in the East and in the suburbs, while many of its competitors are primarily fighting it out in urban areas in Western states.

Panera Bread
When it comes to the fast-casual segment, Missouribased Panera has proven itself to be a heavyweight. System-wide sales last year were in excess of $1.2 billion, up 27 percent over the previous year. At the end of 2004 it had 741 units, an increase of 23 percent over the previous year.

Panera's strength is built upon serving high-quality sandwiches at attractive price points in a stylish, neighborhood setting. Over the last several years it has improved its menu with a number of superior items, including hormone-free, antibiotic-free chicken, sending a message to its customers that it cares deeply about what it serves. It has also diversified its business by adding catering and delivery, which have helped boost its average unit sales to $1.9 million. Checks average in the $7 range, with lunch representing 50 percent of its sales.

In the wake of a growing trend for better sandwiches, Panera has proven that it is the class of the field. In fact, c.e.o. Ron Shaich was awarded the IFMA Gold Plate Award earlier this year for his efforts with the chain. Expect Panera to remain one of the fastestgrowing concepts over the next five years.

Panera Bread has proven that if you make a better sandwhich
and serve it in a stylish setting, customers will come in droves.

Pei Wei Asian Diner
The folks at P.F. Chang's demonstrated they know how to cover their bet by entering a considerably more casual Asian concept—Pei Wei—into the fastcasual segment. Unlike the extremely competitive and crowded Mexican fast-casual segment, Asian fast casual is wide open, and Pei Wei is making a move to become the segment leader.

Pei Wei had only 16 units in 2002, but more than doubled them in 2003 to 33. Last year, its total unit count came in at 53, accounting for sales of $77 million. When you can grow unit counts by 60 percent and system sales by 75 percent, you're doing something right.

What Pei Wei does particularly right is food. Though you can eat here for much less than ($8-$9 check averages) its older sibling, many say its madeto-order menu items rival the food at P.F. Chang's. The newer brand's success follows the same formula Chang's employs—offer delicious Chinese food in a safe, contemporary environment. Good food and a safe setting explain why unit sales average $2 million.

As we've mentioned, Mexican fast-casual is one of the more cut-throat segments in the industry, and here you have the undisputed leader, Chipotle. The editors of RESTAURANT HOSPITALITY were so impressed with this Denver-based concept we gave it the Richard Melman Concepts of Tomorrow Award last year.

The concept was created by a top-notch chef, Steve Ells, who eventually made a deal with McDonald's to back its expansion. That has proven to be a considerable one-two punch. Chipotle grew to 322 units in 2004, which accounted for sales last year of $427 million. That's a growth rate of about 34 percent.

Besides the financial muscle behind it, Chipotle's success can be attributed to its philosophy about fresh. Everything is made on the premises in front of the customer. No microwaves, no cans. This is the benchmark by which others measure themselves. With check averages of about $8.50 and average unit sale of $1.2 million, Chipotle has become an industry powerhouse.

Texas Roadhouse
America's infatuation with steaks is seemingly tireless, and this Lousville, KY-based concept has thrived in the steakhouse game a long time. In 2003 Texas Roadhouse had 162 full-service restaurants in 32 states with sales of $507 million. By the end of last year, the steakhouse concept had upped the ante to 193 units with sales of $660 million.

With a check average of only $14, Texas Roadhouse serves hand-cut,
aged steaks that are much better than anyone should expect.

Its specially seasoned and aged steaks, which are hand-cut daily on premises and cooked over open gas-fired grills, are of a quality much higher than you'd expect for a place with a $14 check average. And the concept's average unit sales of $3.7 million are a strong indication of how popular this concept is.

Both anylists believe Texas Roadhouse, which now has 200 or so units, is well-executed and well-positioned to continue driving strong same-store sales in most economic environments. A growth rate of more than 20 percent in the year ahead and a potential for 600 units are not unrealistic.

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