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Outback Steakhouse
"Mainstream Food, With a Twist"
By Bob Andelman
(Originally written in May 1992 for Business Week.)
Chris Sullivan figured that despite a growing fascination
with all things Australian, few Americans could name Crocodile
Dundee's favorite dish.
He guessed right. His Outback Steakhouses sound Aussie and
are even decorated with maps of the land down under and cuddly
stuffed kangaroos and koalas, but that 20-ounce porterhouse steak
is pure USDA. Those overgrown "Bloomin' Onions" - spicy
fried onions splayed like fresh flowers - are grown in Idaho,
not Queensland. And waiters do not greet patrons with a balmy,
"G'day, mate."
"The concept - the ribs, the shrimp on the barbie - are
they Australian? No," says Chairman and CEO Sullivan. He
admits there isn't a single recipe from Oz in his kitchens. "It's
Australian the way we talk about it. It's mainstream food, with
a twist."
Nobody's complaining, though. Systemwide sales rose from $34
million in 1990 (23 restaurants) to $91 million in 1991 (49 restaurants).
First quarter sales in 1992 increased 158%, boosted in part by
the opening of six new units. A June 1991 IPO was one of the
year's many hot issues and despite some analyst complains that
the stock is overvalued, the steakhouse continues to sizzle.
On the plus side of the ledger, Outback has little debt, using
cash to expand. Individual store sales range from $1.9 million
to $4.2 million. Not one is losing money.
Sullivan and co-founder Bob Basham certainly know the business.
They were part of a generation of restaurateurs to steer the
casual dining industry - Steak & Ale, Bennigan's and Chili's
- through its infancy. "Chris and Bob are two of the best
restaurateurs in the country," according to Hal Smith, currently
president and chief operating officer at Chi-Chi's but formerly
Sullivan and Basham's boss at Steak & Ale/Bennigan's. "They've
got a simple concept, easy to execute: quality food, value and
real good people running it. With that formula, it's hard to
miss."
One of the biggest surprises in Outback's success is that
people will wait in line up to 90 minutes to order beefy steaks
at a time when the nation is supposedly turning to healthier
foodstuffs. Malcolm Knapp, a New York-based consultant to the
food service industry, says people still eat beef - when they
go out. "The beef they are getting at home is cheaper, lean
and, frankly, it doesn't taste as good," says Knapp. "So
when they go out, they really want a good steak. This is a treat."
Ron Paul, president of Technomic, Inc. in Chicago, agrees: "It's
a very contemporary concept."
Despite a cost of sales of 38.6%, value is what makes the
concept work. The company saves money by converting inexpensive
space in strip centers instead of building stand-alone stores
like Bennigan's or Chili's. And the restaurants - which serve
only dinner - are sparsely decorated. "Their 'box' is not
a high investment so they deliver a lot of value to the plate,"
says Knapp. Average bill is $15 per person.
Michael Mueller, managing director of Montgomery Securities
in San Francisco, raves about the average investment cost of
$1.3 million to open an Outback compared to the average sales
per unit of $2.85 million. The 2.1:1 sales to investment ratio
"is off the charts," he says. "Outstanding. The
return it generates is very high. Do I think the company will
continue to have high earnings? Yes."
Outback is rolling out new restaurants as fast as possible
in hot markets because similar concepts are on the way. Still,
the long waits outside many Outback restaurants make some uneasy;
once diners make it inside, is the value and quality of the meal
high enough to warrant a return visit and another interminable
wait?
Tom Feltenstein, a West Palm Beach consultant to the food
service industry, is not a big fan of Outback. "It doesn't
have that 'come back' feeling," he says. "There's big
lines. The food is good, not great. The service is good, not
spectacular. It's dark; it wasn't really fun. I don't understand
why people are waiting 40 minutes to an hour."
Now may not be the time to buy Outback stock, at least not
for the short run. "To buy at their current multiplier would
be kind of silly," says Knapp. Paul sees them as good for
the distance, however. "Their long-term advantage may be
their experience in running a chain. I think that's one reason
the market thinks so highly of them."
The three principals, Sullivan, Basham (president and COO)
and Tim Gannon (Vice President-Operations), reduced their control
from 50% to 40% in January - prior to the company's second public
offering - when Sullivan and Basham each sold 195,000 shares.
"It was an opportunity to get some money out of all the
work we had done for four years," says Basham. He and Sullivan
each still hold two million shares.
But Basham says the company is virtually debt-free, having
paid off existing corporate debt with the first stock offering
in '91. The rest of the money raised was spent on expansion.
One of the innovations that may give Outback longevity is
its management system. Every Outback general manager - whether
a restaurant is company-owned, joint-ventured or franchised -
must buy a 10% stake in their restaurant at a cost of $25,000.
The G.M.s - whose names appear above the front door - must also
sign a five-year service contract guaranteeing they'll stick
around. "The $25,000 is a significant amount of money to
these people - the biggest investment most of them have ever
made," says Basham. "We wanted stability. The G.M.s
have a whole lot of interest in taking care of business."
That assures Outback of consistency.
A few things have changed since Outback opened its first restaurant
in Tampa four years ago. Average store size and seating capacity
are up 20% to 6,000 square feet and 46 tables, respectively.
New equipment has been added to kitchens to keep up with volume.
Virtually every food item has been reformulated since appearing
on the original menu.
Expansion plans center not just on spreading to as many cities
east of the Mississippi as possible but conquering existing markets
with multiple locations that take advantage of media efficiencies.
New markets in '92 will include company-owned and franchised
outlets in Louisiana, Tennessee, Alabama, Detroit and Philadelphia.
end
©2000,
All rights reserved. No portion may be reproduced without the
express written permission of the author.
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