Independent Restaurants Fight Growing Chains

The restaurant scene in Cleveland is getting a bit too crowded for chef Sergio Abramof's liking.

This fall alone, at least 10 new eating and drinking establishments have started up in the area, as one new shopping center opened and another upscale retail center expanded.

But it's not just the number of new restaurants that's bothering Abramof, owner of Sergio's in University Circle, a Brazilian restaurant that seats around 50. It's also the type of dining establishment — national chains.

Big chains like the Cheesecake Factory, the California Pizza Kitchen and Chipotle Mexican Grill all opened their doors with the the new Legacy Village retail center at the end of October. And Abramof says his small restaurant has already felt the hit.

"We clearly felt a drop of 20 percent during that week of opening," he laments.

Concerned about the future of independent restaurants amid an onslaught of new chains, Abramof quickly formed a Cleveland-based chapter of the Council of Independent Restaurants of America, or CIRA, a Lousiville, Ky.-based national organization that helps independents compete against larger chain restaurants.

Abramof is hoping the group will help him and other independently-run restaurants better compete for consumers' attention in a crowded market.

"We have been painfully aware of what's been happening in other industries such as the drugstores, the hardware stores and the coffee shops," says Abramof. "Many have just become extinct and they're all replaced by chains. It seems like if the restaurants don't do anything about it, we're next."

Casual Chains Gain Consumers' Cash

Chain restaurants hardly outnumber independently-run establishments — more than seven out of 10 eating-and-drinking places are single-unit, or independent operations, according to the National Restaurant Association.

But analysts say the growing popularity of chains, especially in the "fast-casual" or "upscale-casual" segment — sit-down restaurants that offer that offer reasonably-priced meals in large spaces often decorated in a theme to go along with the type of cuisine served — are catching on in popularity and giving fierce competition to mid-priced independent restaurants.

"Anything mid-scale and below; they have a very serious problem competing with chains because of the brand recognition and consistency of chains," says Bradford T. Hudson, professor of management and marketing at Boston University's School of Hospitality Administration. "Independents just don't have that."

The numbers bear it out. The top 100 restaurant companies' share of the $278.9 billion restaurant industry, as tracked by Chicago-based food service industry research firm Technomic, rose slightly in 2002 to 51.3 percent in 2002. Meanwhile, independents and small chains' share dropped half a point to 43.5 percent. The second top 100 companies' share also decreased slightly to 5.2 percent of the market.

And though fast-casual chains don't have the number of outlets that fast-food behemoths like McDonald's or Burger King have, they are among the fastest-growing segment of the restaurant industry.

Thirty-nine publicly traded casual dining chains tracked by Technomic saw an average of 12 percent increase in revenues, outpacing mid-scale restaurants' 3 percent growth. Among the more successful casual dining operators include P.F. Chang's China Bistro, which saw 32.4 percent revenue growth last year.

"They're the fastest growing sub-segment of the market, but they're still very small," says Technomic president Ron Paul.

Independents' Culture War

Independent restaurateurs complain that it's difficult to compete with the enormous budgets of many chain restaurants, which can spend much more for marketing and large spaces in prime locations. The new Cheesecake Factory that recently opened in Cleveland, for example, is 12,600 square feet and seats 360 patrons.

In addition, large chains can also get better prices for supplies because they buy more from many of the nation's large food services suppliers than smaller restaurants.

"We figure every time a major chain opens, anywhere from three to six independent restaurants are going to fold within 12 to 18 months," says CIRA Executive Vice President Phillip Cook.

CIRA, which has 16 local chapters across the country (each called the "Originals") and another six chapters in the process of forming, encourages local independent restaurants to work together to pool their marketing and purchasing resources.

For example, many CIRA chapter restaurants will promote each other by giving their patrons the business cards of other independently run CIRA restaurants. When charities call one CIRA restaurant to ask for a donation of a gift certificate for an event, the member may suggest an even larger gift certificate good for use in any of the city's independent restaurants.

Many CIRA branches are also forming purchasing groups so that they're able to negotiate better prices with suppliers. Don Luria, proprietor of the Café Terra Cotta in Tucson, Ariz., and incoming president of CIRA, says, for example, he saved $100,000 in purchasing costs when the Tucson Originals first formed their buying group in 1999.

Perhaps more important to CIRA members is the cultural aspect of preserving independent restaurants and their strong ties to the community. Independent restaurateurs say they fear a market where every city has the same national chain restaurants, overshadowing offerings of local cuisine.

"They kind of represent safety, where we think we represent excitement and differences and uniqueness," says Luria.

Chains Defend Their Territory

For their part, many upscale chains argue they not only offer consumers variety, but also contribute to the local economy and to local charities.

The California Pizza Kitchen, for example, donated 100 percent of its pizza sales for one day recently to a Cleveland charity called Shoes and Clothes for Kids. The charity provides new shoes, clothing and items for infants and youths of income-eligible families.

The Cheesecake Factory also participates in charity events that benefit the local communities where they're located.

"We hire a minimum of 250 local residents that have jobs for as long as they want them — there's no other restaurant in any city that can say that," says Howard Gordon, senior vice president for business development and marketing for the Cheesecake Factory. "Plus, because of the volume that we do, the amount of taxes that get paid to the city are amazing."

Gordon also adds the company updates its menu twice a year, and is always looking for new items to add.

"We work probably at least five days a week, all year long on research and development," he says. "We're always ahead of the curve when it comes to creating new dishes and keeping up with trends in the industry."

Is There Room for Both?

Despite the controversy over the rapid growth of casual chains, many market watchers say there's room for all kinds of restaurants to grow.

The National Restaurant Association expects more than 53 percent of consumers' food dollar to go to the restaurant industry by 2010, compared to 47 percent currently.

"The amounts are so large, that there is still substantial growth potential for both venues regardless of how competitive each one is," says Hudson Riehle, senior vice president of research for the National Restaurant Association.

And analysts point out if a restaurant is doing a good job, diners will flock to it no matter what its marketing budget, size or location.

"If you differentiate yourself on good service you'll beat the chains all day long," says Stephen Carlomusto, associate professor in food management at Johnson & Wales University in Providence, R.I.

Even independent restaurant owners say their goal is not to eliminate chains altogether, admitting that many are very good at what they do: Providing consistent, dependable service and food at a reasonable price.

"The message is not chain bashing," says Cook. "It's, 'Please support your local restaurants.' "