Spicing Up the Food Scene

Ethnic eatery chains are the hot commodity in the corporate restaurant biz. Who cares if all the dishes aren't exactly authentic?

By Eric Wahlgren

When Chinese restaurant chain PF Chang's (PFCB ) went public in 1998, skeptics thought the concept risked ending up little more than a flash in the wok. So far the Phoenix-based outfit has proven them wrong.

Sure, most U.S. cities have at least one popular Chinese restaurant. But selling ethnic food on a national scale hasn't been easy in a country historically used to blander dishes with names everyone can pronounce. Darden Restaurants (DRI ), the name behind the successful Olive Garden and Red Lobster chains, shuttered its China Coast eateries in the mid-1990s. In the past, plenty of Mexican food chains have also come and gone.

But PF Chang's, which now operates 118 more-upscale "bistro" restaurants and more than 50 quicker-service Pei Wei outlets, hasn't merely survived: It's hotter than kung pao shrimp. O.K., so 2005 sales growth may be slowing to the 20% range, from the last four years of 30% or so. But that's something close to a miracle in the notoriously competitive restaurant biz. "Before they came along, no one had been successful at doing a casual-dining Chinese restaurant," says Eric Wold, an analyst with Merriman Curhan Ford & Co. in Austin, Tex.


  Much of PF Chang's success comes from its operations practices, analysts say. Restaurant managers are partial owners in the eateries they run. This helps reduce turnover -- the bane of the industry -- allowing the company to deliver the key factor in a restaurant's success: a consistent customer experience in food and service, says Sharon Zackfia, an analyst with William Blair & Co. in Chicago, who rates PF Chang's stock outperform.

What also helps, says PF Chang Chief Executive Richard Federico, is that his places offer extras not found at many mom-and-pop Chinese restaurants: upscale decor, dessert menus, cappuccino, and a 50-bottle wine list. "PF Chang's has offered an alternative without compromising product quality," he says.

PF Chang's has something else going for it: a bit of diversity. When Americans are eating out these days, they're increasingly going ethnic, industry watchers say. Last year, 6.1% of all dinners ordered in U.S. restaurants included an Asian dish, vs. 4.4% in 1989, according to NPD Group, a Port Washington (N.Y.) research firm (see BW Online, 6/6/05, "Who's Behind The Ethnic Eateries?").


  That's off the 7.6% peak in 2002, but the drop may result in part from the growing popularity of another ethnic food: Mexican. The appetite for south-of-the-border fare has surged, with 10.1% of all dinners including a Mexican dish last year, vs. 6.2% in 1989. "It's hard to quantify to what extent American palates are becoming more diverse," Zackfia says. "But the success of PF Chang's would suggest that Americans are becoming more diverse in their tastes."

That growing diversity could mean a tasty future for ethnic-themed restaurants, analysts say. By 2050 both the Asian and Hispanic populations in the U.S. are expected to triple, with Asians making up 8% of the population, vs. 4% last year, according to the Population Reference Bureau. Hispanics, meantime, are expected to represent 24% of the U.S. population, vs. 13% in 2004. "A lot of [the potential for success] of ethnic food will have to do with changing demographics," says John Beisler, senior restaurant analyst with Monarch Research in New York City.

The country's major food players seem to be banking heavily on Mexican food. Many of the fast-food biggies have bought stakes in Mexican or Tex-Mex chains. In the past few years, McDonald's (MCD ) invested in Denver-based burrito-joint chain Chipotle, while rival Wendy's (WEN ) acquired Baja Fresh, based in Thousand Oaks, Calif. Carl's Jr.'s CKE Restaurants (CKR ) got into Carpinteria (Calif.)-based La Salsa, and Jack in the Box (JBX ), one of the last to get in, bought Wheat Ridge (Colo.)-based Qdoba in 2004. Some of the biggest fast-food chains own stakes in "fast-casual" ethnic outlets, though they're not eager to publicize the link. "You are going to see even more Mexican chains in the future," says Rob Borucki, editor of Fastfoodsource.com, an information site for fast-food lovers.


  Sales of tacos, burritos, quesadillas, and other Mexican fare are soaring. Mexican food sales at limited-service restaurants jumped 8.7% in 2004, according to Technomic, a Chicago research outfit. That's nearly twice the growth of U.S. restaurant sales overall for the year. Taco Bell, the largest fast-food Mexican restaurant, has been helping prop up the performance of parent YUM! Brands (YUM ), which also runs KFC and Pizza Hut. Sales at Taco Bell restaurants open at least one year -- a key measure of performance -- have been positive for the past two years, unlike other brands, Beisler says: "They are definitely the strongest performer of the three." But he adds that Taco Bell has also been helped by YUM! Brand's operations, which are particularly strong there.

Mindful that ethnic food is spicing up the nation's restaurant scene, even restaurants traditionally specializing in so-called American cuisine are scrambling to add items to avoid missing out. Take Cheesecake Factory (CAKE ), one of the more popular restaurants in the fast-casual segment. The menu at the Calabasas (Calif.) chain's restaurants reads like something from the U.N.'s cafeteria. There's spicy cashew chicken, Jamaican black pepper shrimp, miso salmon, fresh fish tacos, and spicy Thai steak salad, to tick off just a few items.

"It has been an evolution," says Zackfia, but it's clear that the chain, like others, is reaching out. It comes as no surprise that one of the Cheesecake Factory's pitches is "something for everyone."


  Americans do seem to be getting more adventurous in their eating habits. As a sign of PF Chang's success, Federico says, the chain has been able to open outlets in such locales as Baton Rouge, Wichita, and El Paso. "As little as two or three years ago, we wouldn't think of these areas as a popular location," he says adding that the concept "really has much longer legs."

Of course, PF Chang's and its peers in other ethnic food markets are perhaps not always serving the most authentic cuisine. One criticism Federico has heard, for instance, is that the chicken and lettuce wraps -- among his chain's most popular dish -- would be made with squab, not chicken, in China. "We'll accept that," says Federico, who is of Italian descent. And apparently, so do plenty of customers. After all, the success of many American businesses has involved finding something appealing and tweaking it to work for the masses.

The next big trend in ethnic chains? PF Chang's is betting on Japanese. Zackfia suspects the chain's third restaurant concept "is likely to have a sushi focus." But the company is mum on the details, saying only that it will launch sometime next year. "We think we're going to be on the front end of the next wave in the Asian segment," says Federico. And if American diners' continue to look for new flavors, the company may be riding that wave for some time.

Wahlgren is a writer for BusinessWeek Online in San Francisco

Edited by Beth Belton

    Before it's here, it's on the Bloomberg Terminal.