While researching the coming Rising Tide Letter, I realized there was a new trend brewing. Starbucks already capitalized on it, though the company over-expanded. Let me ask you a question. If somebody led you in blindfolded and then unmasked you, could you tell if you were in a Starbucks (SBUX) or a Benningan’s ?

Of course you could.

But if they led you blindfolded into another restaurant, could you tell immediately whether you were in a Bennigan’s, Ruby Tuesday (RT), Chili’s, Friday’s, Applebee’s… or some other? Before you read a menu or looked at the staff uniforms?

Probably not. Unless they led you into a restaurant in your own neighborhood that you visited often.

Bennigan’s is in bankruptcy, Friendly’s was a turnaround that got bought out, Steak ‘n Shake (SNS) is going down, Ruby Tuesday is cutting back.

And even as “sales” are rising for some restaurants, better double-check the numbers. According to industry watcher Technomic, the top 20 restaurant chains increased their locations by 45% in the past five years, while sales only rose 31%. So a good many of those improving sales numbers came from chains that expanded weaker and weaker businesses… right to the brink of failure.

As for the restaurants, what’s to choose? The menus and prices change periodically. And each has a different exact décor—but somehow they all look alike, smell alike and sound alike.

They are tired ideas. Each perfectly fits its stronghold—the suburban strip mall or parking lot facing a busy highway circa 1980. They are all the same as they were then. We needed a few of these chains. But there were too many. They wore this idea out. And now when people are cutting down on unnecessary spending, there is nothing festive, special or necessary about eating in these me-too restaurants. That—not just the economy—is what is dragging the casual dining group down and killing some of them.

This model so overwhelmed America 30 years ago that it is hard to imagine how one would decorate and set up a new restaurant chain that would be noticeably different and successful.

But someone will. Just as the 1950’s steak houses gave way to the 1980s casual American-Irish-comfort-everything concept, another model will come along.

Until then, I am watching stories like the bankruptcy of Bennigan’s and Steak and Ale (along with the turnaround for Talbot’s) and turnaround promises from others with great skepticism.

Forbes once listed the three traits for a good turnaround as a (1) sales jump, (2) cost-cutting, and (3) a new product.

Talbot’s (TLB) had a new product and it was a total mistake. Failing restaurants try changing menus and prices all the time without success. It has to be a new salable product. Something customers want to buy. And one that the business can sell at a profit in great numbers.

Cost cutting by itself is a losing plan. Companies do not get rich by selling off working assets. Period. They may even dilute their ability to carry on their business after stripping assets out. A good cost cutting plan has to pare off true fat and be carried out according to a strategy that leads somewhere. A case of this was when Office Depot (ODP) discovered it did not reap many extra sales on its excessive variety and limited some package sizes or colors while keeping the best selling version of items always in stock. It also closed stores that were within a prescribed distance of another office supply store. That is what a cost-cutting strategy should look like.

As for a sales jump? Well, by that time the turnaround has turned.

Source: Speaking of Turnarounds - Why I Don’t Like Restaurant Stories Now