Ghost Kitchens, Drive-Thrus Are Part of the Secret Sauce
Barbecue restaurant chain Famous Dave's has put together a recipe for growth that has positioned the company to begin expanding its territory for the first time in seven years, even as restaurants nationwide struggle and close in the pandemic.
Two years ago, Famous Dave's, which was built on a full-service model, was on its eighth CEO in 10 years and one transaction away from selling off the last of its corporate-owned barbecue restaurants, a portfolio that included 54 locations at its height but by then had dwindled to the high teens.
Now, the Minneapolis-based company has announced a major franchise deal that increases its reach by 20% and an ambitious initiative to rebuild with off-site services such as drive-thrus and ghost kitchen operations that need no dining rooms.
It's an effort that the predates the coronavirus era, but was accelerated by it, said Famous Dave's CEO Jeff Crivello said.
"We had to react overnight, which meant that a six-month plan had to be compressed into six days," Crivello told CoStar News.
The coronavirus, and the capacity and other limits it has required, have taken a devastating toll on most of the restaurant industry, especially eateries that relied on dine-in customers. For much of the spring, in large parts of the United States only fast food operators were able to continue operating.
In spite of Famous Dave's current dependence on full-service restaurants, though the pandemic has taken a bite out of sales overall, the company has benefited from consumers' desire for comfort food, Crivello said.
That, combined with efforts to streamline and modernize its restaurants, has put it in a position to grow when others are closing and going into bankruptcy.
To go big again, Famous Dave's will first have to go small, in a manner of speaking. Only 20% of its restaurants will be full-service, and even those will not be nearly as ample as they were, Crivello said. The average footprint will drop to about 3,000 square feet from 6,500 square feet.
This time, the brand, which was almost entirely dependent on a sit-down, full-service model, plans to be reborn as a lengthening list of ghost kitchens in which there's no dining area, drive-thrus, and counter service restaurants, with an emphasis on delivery and to-go orders.
Challenges Ahead
Christopher Shaker, a partner at the financial services firm RSM International, said he was not surprised that Famous Dave's is taking this direction, though he added that the road ahead would have challenges.
"The key for Famous Dave’s, and really any operator that is trying to adapt to the new consumer preferences for food on the go, will be managing the pressure it puts on margins," Shaker wrote in an email to CoStar News.
Restaurant operators of all stripes are being forced to put investment into altering their physical space and ramping up cleaning protocols just to stay abreast of ever-changing local and state ordinances related to COVID-19. It's happening at a time when few have extra capital to spend on those changes and improvements.
Fast-food chains and other restaurant types that were not dependent on dine-in business have fared better during the pandemic. Casual dine-in chains including Cheesecake Factory have pivoted to more takeaway and delivery orders and many have noted significant sales growth in off-site sales that executives have said could carry on even after the health crisis ends.
"The sector has seen significant degradation of margins as a result of the pandemic," he added. "The ability to balance these two dynamics will separate the winners from the losers on a long term basis."
Green Shoots Amid Turmoil
The current economic and social environment, along with Famous Dave's recent history, make it all the more striking that the company is once again planning to expand into new markets and return to others that it left during its lean years.
In 2013, when Famous Dave's was at its peak, the company had 194 restaurants in 34 states and 72% were owned by franchisees.
It now has 125 locations in 31 states and three countries, including 31 company-owned and 101 franchise-operated restaurants, the lowest number on record since 2009.
That expansion process has already started and it appears to be paying off already.
Famous Dave's has converted 10 of its corporate-owned locations into counter service-only restaurants. Over the second quarter of 2020, its company-owned restaurants saw to-go sales increase 106% over the second quarter of 2019. Overall, six months into its fiscal year, its income is five times higher than at that point of 2019.
Crivello said Famous Dave's is working on a prototype for a drive-thru model. The company is scouting real estate in three possible test markets: Phoenix, Denver and the Minneapolis area. The clock starts on the experiment as soon as it finds a suitable property.
The company is also making efforts to woo old franchisees, who were "quite sour" on the company as of 2017, back into the fold and attract new ones as well, Crivello said.
To that end, Famous Dave’s signed a 25-unit development agreement with Bluestone Hospitality Group, a company led by the Los Angeles-area entrepreneur Allan Gantes, whose family already had invested in Famous Dave's.
Bluestone is also a franchisee of Burger King, On the Border, Popeye's and Hilton Hotels and owns and manages an Italian restaurant chain of its own, Johnny Carino's.
Over the next year, Bluestone plans to open both Famous Dave's ghost kitchens and a new format: a dual restaurant concepts with Johnny Carino's.
Crivello said Bluestone's new locations are expected to be spread through Texas, Idaho, Louisiana, Missouri, Kentucky, Indiana and California.
In a statement last week, Gantes said he was motivated to sign the deal because of the food itself and the fact that it travels well, a benefit in an era where dining in is not often an option.
"Couple that with the Famous Dave's leadership team who understands the importance of evolving in light of changing consumer preferences, and we saw a formula for success to enhance our existing restaurant footprint,” Gantes said in the statement. “It's a period of unprecedented change in the industry, and demand for off-premises sales has dramatically increased."