Five
Eating As an Emotional Experience: Panera, The Cheesecake Factory, Trader Joe’s
Americans love to eat and always have, but the eating habits and preferences of middle-market eaters are changing. People are trading up from the traditional quick-service restaurant (QSR) such as Burger King, where a sandwich costs $3 or less, to a whole new category of restaurants called “fast casual,” such as Panera Bread and Chipotle, where a sandwich costs $6 or more. When Americans visit a full-service restaurant (with table service and an average check of $15 or more), they are trading up to places that serve untraditional “imported” fare in a themed environment, such as The Cheesecake Factory and P. F. Chang’s. And when they shop for ingredients for a home-cooked meal, they are increasingly stopping by a specialty grocery, such as Trader Joe’s, to pick up exotic ingredients they can’t find at the conventional supermarket.
Wherever they go for their food, middle-market consumers think of eating as more than an exercise in satisfying a hunger or filling up. Fifty-five percent of the respondents to our survey told us they rocket in the food category—they are willing to pay a premium for food that tastes better, looks more appealing, is served in a pleasing environment, and engages them emotionally. These consumers seek adventure and surprise in the aisles of a specialty food boutique. They drive out of their way for a latte. They wait in line for an hour or more to share coconut-and-lime shrimp with friends at their favorite sit-down “fusion” cuisine restaurant. They’re hungry for an experience as much as for the food itself, and when a company delivers it, price is not an issue.
Increasingly, middle-market consumers prefer to eat away from home. Most Americans feel they have less time to shop than ever before, and because they have been exposed to better and more diverse cooking in their travels and through the media, they feel less secure in their own cooking skills. As a result, spending on away-from-home food service has risen dramatically in the last thirty years, from 37 percent of total food spending in 1972 to more than 50 percent in 2002. In our survey, a sit-down meal away from home was the second most popular category for trading up.
The growth in single-person households has been a major driver in the rise of away-from-home eating, because singles don’t want to bother with cooking for themselves. Forty percent of American households are either single-parent (a mom or dad with one or more kids at home) or single households (a person living alone). “Why should I try to cook for one?” said Phyllis, a sixty-eight-year-old widow. “My time has value. When you add up the shopping time, cooking time, and cleanup time, how can I justify it? When my husband was alive, he did the cooking. He liked it, but I never did. Besides, I don’t have to cook—there are twenty-five places to eat within five miles of my home. They have wider variety, better quality, and they’re faster than anything I could do at home.”
Eating out touches on all four emotional spaces. According to our survey, eating out is primarily about Taking Care of Me—it makes people feel “pampered,” “happy,” “comforted,” “less stressed out,” and “uplifted.” It is also about Individual Style—respondents told us that a good restaurant experience makes them feel “accomplished” and like a person “of style and taste.” In our interviews, many people talked about eating out as a Questing experience—“I love trying new tastes and combinations,” they told us. It is also about Connecting with important people in their lives. Many consumers tell us they spend the largest percentage of their discretionary cash on going out to eat with friends, family, colleagues, and lovers. Eating out provides a chance to talk and connect without having to focus on food preparation or worry about a companion’s evaluation of one’s cooking. For parents, it is a break from the routine and work of cooking. The kids can choose different items, and if the meal is unsatisfactory, they can send it back to the kitchen. At home, rejecting mom’s prepared meal may mean an alternative as basic as a can of soup or a bowl of cereal.
The more Americans eat away from home, the more sophisticated their tastes in food become. They crave new alternatives to fast food and seek innovative food experiences. And restaurants respond with more complex dishes, more frequent menu changes, regular specials, and more elaborate menu descriptions of the food and its origins: The sea bass is Chilean; the beef is from Kobe, Japan; the cheese is three-year-old Parmigiano-Reggiano from Parma, Italy.
Americans do still eat at home, of course, but they don’t spend a great deal of time or expend much effort in doing so. The average two-parent family with kids has only one sit-down meal together each week. Even then, consumers say they want the meal to be “quick and easy”—about 40 percent of consumers say they spend less than ten minutes on preparation when they cook a meal! They typically use fewer than eight ingredients, serve fewer side dishes than they did five years ago, and are increasingly making single-dish meals, such as chili or stir-fry. They are, however, incorporating bolder flavors and more diverse textures in their home-cooked meals—creating dishes with the tastes of Cuba, Argentina, Indonesia, Malaysia, India, and Thailand, as well as the more traditional Mexican, Chinese, and Italian fare.
The Rise of the Fast Casual Restaurant
Although we have seen a significant rise in dining out over the past three decades, the trend began just after World War II. From then until about 1990, much of the away-from-home food spending was on fast food—burgers and fries, pizza, Chinese and Mexican takeout. McDonald’s took early leadership and defined the QSR offering— meals at a guaranteed speed, with consistent quality, and at a low price. When Ray Kroc, a former Mixmaster salesman, acquired the chain from the McDonald brothers, he built it out at a breathtaking rate. Today, McDonald’s operates 12,500 stores across the United States, and achieves an average $1.6 million in annual sales per store. The chain still holds the lion’s share of the QSR market, and each McDonald’s store outsells rival Burger King outlets by 50 percent. And the McDonald’s french fry—made of Idaho Russet Bur-bank potatoes and cooked for three minutes and thirty seconds in a proprietary mixture of hot oils, sugar, and salt—is considered the best in the industry.
In recent years, though, the QSR business has stagnated. The growth of the large chains—McDonald’s, Burger King, Pizza Hut, and Taco Bell—has slowed. The market is saturated with outlets, thanks to easy availability of financing for a new burger joint or pizza parlor and the relative ease of opening and managing one. Consumer demand is flat, and competitors are engaged in a price war. American consumers still make more than fifty million visits to QSRs each day, but more and more they are bored by fast food, feel little loyalty to the restaurants, and are looking for a different kind of eating experience.
This was confirmed by research we did for a restaurant chain. We accompanied many families on what we call “shop-along” research—getting in the car with them on a weekday evening as they set off to choose a restaurant for dinner. We found that the decision-making process is haphazard at best; determining factors include traffic conditions, previous experience with the restaurants they pass, how much money they have in their pockets, how close they are to their credit-card spending limits, how many days until the next payday, and, very often, the preferences expressed by the loudest and most persistent voice in the car.
Even so, the family will often drive past the Taco Bell and Burger King and seek out a fast casual restaurant, where a meal costs under $15 per person and can be ordered, delivered, and eaten in less than forty-five minutes. In comparison to the standardized food offerings of the quick-service chains, the fast casual restaurant makes sandwiches and meals to order, using fresh, sometimes seasonal and even locally produced, ingredients of better quality than those of the QSRs. It also pays more attention to the physical environment— including the decor, lighting, seating, and traffic flow—to create a more comfortable and attractive setting that is consistent with the superior taste profile of the food.
Two companies, Panera Bread and Chipotle, have emerged as the fast casual leaders, but there are many others—including Atlanta Bread Company and Pret A Manger (a play on the idiom pret-à-porter and meaning, roughly, “ready to eat”)—that are getting attention and growing in sales. There are also many start-ups in this segment, but the competition is intense, and failure rates are high. Consumers are very willing to try a new place, but they commit to and revisit only the ones that deliver on the ladder of benefits.
Fast casual appeals most strongly to four types of households: affluent singles, affluent empty nesters, dual-income households without kids, and dual-income households with kids. Of these, the households that frequent fast casual establishments the most are those that are populated with working women—women who don’t have time to shop for, prepare, and clean up after a meal. They rise at 5 A.M. to get the family ready for school and work. They work all day themselves. As the dinner hour approaches, they often turn to an “agent of convenience”—a restaurant that will help them save time while providing a meal of greater taste and interest than they could prepare themselves.
Another piece of research we did for a major food supplier who wanted to encourage consumers to do more cooking at home showed that only 10 percent of working women with children at home had a dinner menu in mind by 4 P.M. on a typical workday; that’s scarcely enough time to plan a menu, buy the ingredients, and cook the meal. “After working all day, especially when I haven’t already taken something out of the freezer that morning to prepare for dinner, I want a quick, healthy alternative to fast food,” says Kathy, a thirty-two-year-old mother of two. “It’s not that I want to be served. It’s all about time. I only get about one and a half hours to spend with the kids every night. I’d rather spend it helping them with homework, or just hanging out, rather than preparing a meal. Besides, I want them to have a better meal than I have the energy to cook. And I want them to try new things and experience new foods.”
In addition to these changes on the demand side—including the rise in the number of working women, increased time pressures, higher household incomes, and the need for emotional engagement— the rise of fast casual has been fueled by important supply-side factors. Food delivery systems have improved dramatically in the past two decades, so there is a greater variety of quality ingredients available from all over the world. New technologies and cooking processes have enabled restaurants to deliver more complex dishes, with richer flavors and more consistent quality, without the need for highly skilled labor. And real estate developers have been enthusiastic about partnering with fast casual chains to help them expand rapidly—an ambitious chain can create one hundred new restaurants each year. As a result, the fast casual segment is growing at 15 percent per year, while the $111 billion QSR segment and the $140 billion full-service segment are both flat.
Panera Bread: An Eating Experience Built around Bread
As with New Luxury businesses in every category, the creation of a successful fast casual enterprise depends on the emergence of an entrepreneur who has the vision, creativity, experience, taste, and skill to create a business that can transform the category—and Ronald Shaich, CEO of Panera Bread, is such an innovator. Panera is a bakery-café whose ethos centers around freshly baked bread, and whose stores offer custom-made sandwiches on a variety of breads, served in a well-designed and inviting environment.
The Panera Bread on Chestnut Ridge Road in Woodcliff Lake, New Jersey—located in a strip mall along with a Pottery Barn, a Victoria’s Secret, a Banana Republic, and an Apple computer store— is typical. At 12:30 P.M. on a warm August day, there is lots of noisy chatter from the customers, mostly twenty- and thirty-something office workers and suburban shoppers. Although the store is crowded, people move quickly through the line, ordering sandwiches, salads, soups, coffee, and desserts. All the tables are filled,
Ronald Shaich is cofounder, chairman, and CEO of Panera Bread.
and the lunchers are engaged in animated conversation. Most of them finish every bite of their meal and then linger for a while to chat and relax. A few customers, full trays in hand, wait impatiently for a table to clear. As soon as a party leaves, Panera crew members swiftly clean the table and return the chairs to order. The store has the pleasant smells of freshly baked bread and freshly brewed coffee.
The Panera Bread experience has its roots in the Saint Louis Bread Company, a bakery restaurant founded in 1987 that built a strong reputation and a loyal following in St. Louis, where it operated nineteen stores in the early 1990s. Saint Louis Bread Company was famous for its signature bread: a sourdough made from a San Francisco recipe that had been lovingly transported east by company founder Ken Rosenthal. In 1993, Rosenthal sold his company to Au Bon Pain for $24 million.
Ronald Shaich, CEO of Au Bon Pain, studied his two brands carefully. He knew that Au Bon Pain occupied a niche in its urban markets. Each store operated in a high-traffic location and was designed to maximize customer throughput, but the service was impersonal, and the eating environment was uninteresting. Consumers visited Au Bon Pain to get a quick sandwich, often to take out.
Shaich found a different story unfolding at the Saint Louis Bread Company stores. They offered an authentic and respectful alternative for people who were looking for good food in a special atmosphere, and consumer reaction had been so positive that they had expanded their sales beyond the traditional breakfast and lunch periods into new areas that Shaich eventually dubbed “chill out” and “daytime talking” spaces. On one store visit, Shaich observed a group of businesspeople from a nearby corporation huddled in a corner. “We don’t have a good place to talk at the office,” they told him. At another table, a teacher sat alone, drinking coffee and writing a lesson plan. At another, a worker was reading the sports pages and listening to his Walkman. “I just needed a place to chill,” he told Shaich. “I don’t want to go home. And I don’t want to go back to work.”
Shaich concluded that Saint Louis Bread Company offered what he called a “gateway into the suburban marketplace”—because many in-town workers who ate there lived in the suburbs—that could enable the chain to expand quickly. He believed that the Saint Louis Bread Company had greater potential for success than did Au Bon Pain and that it could become a nationally dominant fast casual brand.
“It was clear to me,” Shaich told us, “that fast food had become a highly commodified product. Fast food restaurants are essentially self-serve gasoline stations for the human body. But we understood that there was an extraordinary demand in this country for something different. Forty percent of the people in our society were rejecting fast food. They still ate it, but they didn’t feel connected to it. So we sat down and wrote a vision for Panera. We said, ‘It isn’t enough to talk about food. You’ve got to do it right.’ In this overhyped, oversold, overmarketed world, consumers don’t trust anything. I was at a cart in Rockefeller Center, and there was a big sign that said, ‘Gourmet Sandwiches.’ Can there be gourmet sandwiches on a cart at Rockefeller Center? How about the Mobil station that serves ‘Gourmet Coffee.’ Isn’t that an oxymoron?”
Shaich knew that his vision would require management focus and substantial resources, both financial and human, to become a national success. In 1998, he proposed to his board of directors that they rename the company Panera Bread, sell off all the Au Bon Pain units, and put all their efforts into building the new company into a national leader with one hundred stores. It was a bet-the-company idea, and it took the board until May 1999—seven months of debate—to approve it. But the bet paid off handsomely. By the end of 2002, Panera had grown to 505 stores in thirty-two states, with sales of about $750 million and a market capitalization of over $1 billion. The company expects to reach $1 billion in retail sales by the end of 2003. In 2003, Panera was ranked the best sandwich/bakery chain by Restaurants and Institutions magazine, besting 95 competitors in seven categories of customer satisfaction.
“Panera’s vision hasn’t changed in ten years,” says Shaich. “People ask me all the time, ‘Wouldn’t you do it now a little differently?’ I tell them, ‘Absolutely not.’ ”
Just as at the Saint Louis Bread Company, bread remains the platform for the Panera Bread concept; the company’s motto is simple and primal: “Fresh bread makes friends.” According to Shaich, bread is “how we root ourselves in the consumer’s mind.” The company employs a “master artisan baker” whose job is to focus on standards of artistry and quality, research and development of new bread products, and training. The dough for the signature sourdough bread is prepared at a central commissary to ensure consistent quality and is delivered fresh, not frozen, to stores each day. At the store, the bread is baked in a specially designed oven with a stone deck that produces both heat and steam. The result is a bread that has a crispy crust and a moist interior. Bread that is not sold during business hours is given to charity at day’s end. The ingredients are fresh and the best available. The soup offerings vary from day to day, and there are many seasonal specialties—visible proof of freshness. A sign that reads “No preservatives” is prominently posted in every store. The company has begun a program to make a wider variety of the artisan breads available in every store. Panera Bread wants to offer the best bread in the country—and make it available in great quantities. That is a sign of New Luxury: artisanal quality at middle-market quantity.
Panera’s organization is structured to support the mission— everything is designed around the importance of bread, rather than for speed of production, customer throughput, or convenience. Panera Bread has more in common with a full-service, casual dining chain such as The Cheesecake Factory or Olive Garden than with a QSR. The employees at a fast-food restaurant typically report to the store manager, who inevitably focuses more on production than on the customer. At Panera, the bakers report to the corporate baking supervisor, who is responsible only for the baking process, not the store experience.
Panera Bread has achieved its success by delivering on the New Luxury ladder of benefits. The technical differences are many. There are fifteen sandwiches on the menu, including three grilled panini and seven signature sandwiches with combinations that can be made quickly—including an oven-roasted roast-beef sandwich with smoked cheddar, lettuce, tomato, red onion, and creamy horseradish sauce served on an Asiago cheese minibaguette. Five soups and six salads are also available daily. The Tuscan chicken sandwich at Panera is composed of slices of hot white-meat chicken, with two slices of tomato, fresh basil, melted mozzarella, and a mild chipotle mayonnaise—but the baker will make it with whatever ingredients the customer requests. The sandwich is served on fresh slices of onion-and-rosemary focaccia bread that have been toasted on the grill. These technical differences—in ingredients, available combinations, and selection—deliver functional benefits: The sandwiches taste fresher and more complex, and they are more healthful than offerings from QSRs and other fast casual chains.
Panera Bread also delivers emotional benefits in all four spaces. It is a place where consumers feel they can Take Care of Me—a small self-reward in a nice sandwich. “When I go to Panera,” says Mary, a twenty-eight-year-old administrative assistant living in New Jersey, “I feel like I am in a little bit of Italy for twenty-five minutes. I get fresh food prepared just the way I want it. I can have something different every time I go.” Because the atmosphere is pleasant and relaxing, a meal becomes a Connecting experience. “The crowd here has more people that I would be interested in talking to,” Mary adds. “We have something in common.” For many, Panera is also about expressing Individual Style. Julia, a twenty-eight-year-old information technology manager at a university, says, “When I first ate at Panera, my thought was, ‘finally a place that’s worthy of me.’ ” And for others, Panera delivers a form of Questing—a place to try new tastes. “The bread is incredible,” says Tony, a sixty-five-year-old retired public administrator. “I sneak over every morning for their bakery and coffee.” These are not comments you would hear about a Burger King.
As a result, Panera creates apostles. Julia, for example, is more than willing to spend $7 on lunch because, as she says, “It’s worth it. True, sometimes I think, ‘Whoa! That lunch cost a lot more than four dollars,’ but then I remind myself that I’m not getting four-dollar food!” To create apostles, Panera—like New Luxury players in every category—has created a detailed story for its consumers and for its store associates. They are able to articulate what makes Panera special and unique, talk about why it was founded and its mission (beyond profitability), and what the individual store manager (known as an owner) is particularly passionate about. Sometimes the story also defines an oppositional positioning—exactly what the restaurant is not and why. All successful fast casual chains have a set of creative building blocks to tell their story, including print materials, Web sites, activities, and events; these blocks can be used in a variety of ways, but they deliver consistent messages.
Panera Bread stores produce healthy profits, and the company is experiencing strong growth. The average check is $6.19, and that delivers earnings before interest and tax (EBIT) of 11 to 14 percent. At a QSR, the average check is $4.34, with an EBIT of 7 percent. The raw materials cost more at Panera—20 percent higher per meal than at a QSR—but the revenue is 40 percent higher. The average Panera store delivers $1.75 million in sales, half of which comes from lunch—nearly 10 percent more than the average McDonald’s and almost three times as much as the average Starbucks. It costs about $800,000 to build out a typical 4,500-square-foot Panera that seats 110 customers—fewer than a Burger King store that produces half the sales volume. As a result, Panera has more than 400 stores and aims to have 1,500 within five years. The company is a top performer in the Standard & Poor’s Small Cap 600.
As with other categories, the success of Panera Bread and its close rivals in defining the fast casual segment has produced a rush of competition. In its efforts to diversify its base, provide more upscale offerings, and leverage its considerable operating skills, Mc-Donald’s has taken an ownership position in two fast casual chains, Pret A Manger and Chipotle.
Pret A Manger, which began in the United Kingdom, offers high-quality prepared sandwiches—thirty to forty different kinds, wrapped, and displayed in coolers. The restaurant offers speed, with an average checkout time of ninety seconds, and freshness. The menu is constantly changing—if an item doesn’t sell, it isn’t offered again. Pret A Manger has expanded from its London base, where it has a dense network of stores, to locations in New York and Hong Kong.
McDonald’s other fast casual acquisition, Chipotle, was founded by Steve Ells, who, like Ronald Shaich, wanted to create a simple, fresh alternative to fast food. He trained at the Culinary Institute of America, then decided to apply his skills to creating a new style of Mexican peasant food. Ells modeled the menu and store on the Mexican “taquerias” in the Mission district of San Francisco. A taqueria is a step up from street food—a small storefront offering a very limited menu, manned by the owner-operator making custom tortillas behind a stand. Ells calls his concept “a gourmet experience you can enjoy in fifteen minutes.”
The first Chipotle Mexican Grill was an 800-square-foot restaurant near the University of Denver campus, and it achieved $1 million in sales in its first year. Today, Chipotle is known for its giant flour burritos and tortillas, stuffed with a choice of black beans, grilled peppers, grilled onions, rice, salsa, cheese, sour cream, beef, pork, or chicken. The simple, focused menu allows the company to concentrate on perfecting its operations and using only the highest-quality ingredients—fresh lime juice, cilantro, roasted chiles, fresh avocado. The company has doubled its sales volume each year since 1998, when McDonald’s acquired its stake.
“Chipotle’s philosophy is summed up in its name—a chipotle pepper is a jalapeño pepper that has been smoked and dried, elevating it from something ordinary to something extraordinary,” says Mats Lederhausen, president of McDonald’s Development Group, the business unit responsible for Chipotle and Pret A Manger. “That’s what Chipotle has done for fast Mexican food. They use the finest ingredients, such as free-range pork from Niman Ranch, and gourmet cooking techniques, so that their burritos and tacos go beyond fresh to be food with integrity.”
Chipotle has 230 restaurants in twenty-three US cities, and Mc-Donald’s believes it can grow it to more than 2,000 restaurants in the United States. Chipotle appeals most to higher-income young adults aged twenty-five to forty-four who are dining alone or with friends and coworkers.
“The large portions, atmosphere, and quirky advertising help foster Chipotle fanatics—more than half the customers eat there four times or more per week. This past Halloween, sixteen thousand customers around the country were willing to dress like burritos to get the food they craved for free. And an episode of MTV ’s The Osbournesfeatured Ozzy’s weeklong diet of nothing but Chipotle burritos,” says Lederhausen.
Pret A Manger is different. It’s fast—as fast as a customer can choose from the handmade sandwiches in the grab-and-go case— but the offerings are more aspirational, have higher integrity and a fresher feel than traditional sandwich places. “At Pret, sandwich making is an art. Customers will find oriental tuna, crayfish and rocket; and hummus and red pepper; as well as a selection of sushi, espresso drinks, and decadent desserts,” Lederhausen told us. “Pret revolutionized the sandwich market in the United Kingdom, where we have 124 shops. We believe there is great potential around the world. Pret has thirteen shops in New York, five in Hong Kong, and five in Japan. Pret’s slogan is ‘passionate about food,’ and the sandwich chefs strive to adapt offerings to each country’s local tastes, while minimizing the use of chemicals, additives, and preservatives.”
Lederhausen maintains that both Chipotle and Pret A Manger have the potential to significantly help the parent company grow and improve profitability.
The Cheesecake Factory: Around the World in a Meal
A step up in price above the fast casual restaurants takes the trading up away-from-home diner to one of the fast-growing sit-down restaurants built around a theme—such as an unusual fusion of different cuisines, a special décor, or a unique philosophy of eating. This casual sit-down restaurant—with a dinner check of $15 and up—is the favored dining spot for upper-middle-market Americans, including affluent singles, affluent empty nesters, and especially dual-income couples with no kids. DINKs have plenty of money to spend, are generally short on time as a result of their work schedules, have no children to attend to or spend money on, and have a yearning for education, travel, and adventure.
The Cheesecake Factory is one of the fastest growing of the casual sit-down restaurants—a $500 million chain with a 27 percent compound annual growth rate from 1996 to 2001. Others include P. F. Chang’s, Outback Steakhouse, and Carrabba’s Italian Grill. The Cheesecake Factory has succeeded by ignoring the conventional industry wisdom that says a restaurant should simplify its operations by limiting the number of menu offerings and changes and realize purchasing economies by rationalizing the number and types of ingredients required. Instead, Cheesecake lists two hundred items on a typical menu—including forty different kinds of cheesecake.
David Overton, the CEO of The Cheesecake Factory, is a typical New Luxury entrepreneur—he loves everything about his product. “This business works because I am on a continuous food adventure. I want to bring the world to my customers.” His customers seem more than happy to accompany him on his global culinary journeys. “I come here once a week with my girlfriends,” said Madeleine, a thirty-two-year-old Chicago single. “It’s fun. It’s loud. We get three or four appetizers, three or four entrees, and a couple of slices of cheesecake. We start our meal in Thailand, go to the Caribbean for the main course, and then end up in Wisconsin for dessert. And it doesn’t break the bank.”
The business began in 1949, in a very small way, when David Overton’s mother, Evelyn, made a cheesecake for her husband’s boss. The boss loved it and asked Evelyn for more cakes that he could give as gifts, and soon she had a basement business—and it continued for twenty years. David, after spending time as a drummer for various musicians, including Jimi Hendrix, joined his parents to open their first restaurant in Los Angeles, in 1978. It offered an eclectic menu with large portions and the cheesecake as its signature. The Overtons opened a second restaurant in 1983 and had five by 1991. In 1992 they went public and began to grow more quickly, adding stores in Chicago, Houston, Boston, and Boca Raton, Florida. In 1999, the company opened the Grand Lux Café, a twenty-four-hour restaurant at the Venetian Resort Hotel Casino in Las Vegas and did a whopping $18 million in sales its first year.
Overton is a hands-on leader who is passionate about his company. “I love to eat and it shows,” he says as he pats his substantial belly. “Each of my restaurants reflects me and my tastes.” Overton attends each of The Cheesecake Factory’s store openings and supervises the major menu overhaul the company does every six months. In making menu choices, he allows himself to be guided by his instincts for what his customers will want. “No item makes the menu until I certify it offers comeback quality,” he says. Gerald Deitchle, Cheesecake’s CFO, says, “Sometimes the numbers don’t explain everything. The numbers are not the business—they are symbols of the business.”
A Cheesecake Factory restaurant is a destination, an experience; and strangely enough, an important part of the experience is the wait. Consumers in line at the Cheesecake restaurant on Michigan Avenue in Chicago talk enthusiastically about the chain’s technical and functional differences—the breadth of variety, wonderful tastes, consistent quality, and big portion size. For example, the “mile high” meatloaf sandwich, at $9.50, includes meat, potatoes, and onion rings, and although not actually a mile high, does loom up an impressive ten inches. Appetites at Cheesecake are big. One party of three consumes a double order of burgers called “roadside slide,” an appetizer of firecracker salmon rolls, and entrées of Chinolatina chicken, shepherd’s pie, and Jamaican black-pepper shrimp, tamping it all down with a slice of chocolate tuxedo cream cheesecake and two slices of tiramisu cheesecake.
The average Cheesecake Factory delivers a mammoth $11 million per store on sales of $1,000 per foot. That’s more than three times the average for a fast casual chain and the highest space productivity in the restaurant industry. The average per-person check is $15.70, 50 percent higher than the category average. Compare Cheesecake economics to those of another fast casual chain, Applebee’s. The average Cheesecake store delivers a 34 percent higher check average, 98 percent higher per-check earnings before interest, depreciation, taxes, and amortization (EBIDTA), 350 percent more visits per store, and seven times the EBITDA per store.
For its apostles—and there are many—a visit to The Cheesecake Factory is mostly about Connecting and Questing. Cheesecake’s relentless innovation cycle—a full menu revision every six months—continuously provides consumers new ways to explore the world of food in an atmosphere rooted in hometown America.
Trader Joe’s: Questing in the Supermarket Aisle
Although America’s eating trend is to away-from-home meals, there is another small, but fast-growing, segment of middle-market consumers who do their food Questing in a very different way. These consumers say their favorite shopping experience is at the specialty market, gourmet shop, or organic food store. Shopping in these stores makes them feel “knowledgeable,” “intelligent,” “adventurous,” and “inquisitive.”
Joe Coulombe did not have the benefit of such research when he founded his first Trader Joe’s store in Pasadena, California, in 1967. His mission was to make difficult-to-find gourmet items more accessible to American consumers. “I started Trader Joe’s on the premise that the number of educated people would grow, and that is what has happened,” he says. “I wanted to appeal to the well educated, and people who were traveling more. Nobody was taking care of them.” As the ranks of these consumers grew, he reasoned, so would his business opportunity.
Today, Trader Joe’s operates 177 stores and takes in an estimated $2 billion in revenues. It is a specialty food empire built with virtually no broadcast advertising (save the occasional radio spot) and everyday low pricing (but rarely a sale). Analysts and competitors estimate store productivity at $1,000 per square foot—two to three times the industry average. Although Coulombe sold Trader Joe’s in 1979 to the Albrecht family for $6 million and turned over the CEO reins in 1989, the company still follows his business practices.
Coulombe had a clear vision of his target consumers: well educated, well traveled, and underpaid. They were working professionals such as schoolteachers, engineers, and doctors—budget-conscious consumers with sophisticated palates. Or, as one spokesperson put it, “the unemployed Ph.D.” With this customer in mind, Coulombe set about engineering what would become his signature, iconoclastic grocery concept. To evoke the romance of travel that would appeal to his target, he derived the name Trader Joe’s from the book Trader Horn, which chronicles the adventures of Alfred Aloysius “Trader” Horn, a nineteenth-century ivory trader in Central Africa. Coulombe began by traveling the world in search of boutique wines, then added gourmet foods, because he believed that wines must be tasted and evaluated in connection with food. Knowing that his customers would value education—that they would read labels and seek information about the products they chose—he selected clever and whimsical names for his private-label items, such as Trader Joe’s “Prelude to a Quiche.” He also created Fearless Flyer, a newsletter designed to be “a marriage of Consumer Reports and MAD magazine,” with content that could never be communicated in a thirty-second television spot. Fearless Flyer offers stories on the origins and distinctions of new and featured products, and information on what enabled the low price—replete with Victorian illustrations and puns that are as likely to be in French, Italian, Latin, or Chinese as in English. (Example: One seal says to another, “So I said to myself— Crabé Diem—Go ahead and seize that fresh-packed crab!”)
Trader Joe’s is an intriguing New Luxury player because it offers low prices, while most New Luxury goods are offered at a premium to their conventional counterparts. However, Trader Joe’s real competitors are not Wegmans and Kroger, but rather the mom-and-pop groceries, gourmet shops, and organic food stores. Trader Joe’s stores, at ten thousand square feet, are much larger than these competitors and generate much higher volume.
In addition, Trader Joe’s is essentially a private-label store— about 85 percent of its items are private label, and many are unique, with no national-brand counterpart. This makes it difficult to compare Trader Joe’s prices with those of other specialty shops or conventional supermarkets. What makes the chain a New Luxury player is that it maintains higher margins than the industry average and has higher volume than its true competitors. Trader Joe’s proves that New Luxury doesn’t always have to be more expensive than conventional goods. Sometimes it can involve higher quality and taste, and more interesting products cascading to the middle market.
Trader Joe’s maintains high margins by carefully managing its costs. It locates its stores outside central shopping districts, where rents are lower. A typical Trader Joe’s carries a carefully edited assortment of about two thousand stock-keeping units, or SKUs— roughly 5 percent of the selection in a conventional grocery. Products are sourced by buyers who travel the world in search of “interesting products at an exceptional value.” Once products are sourced, Trader Joe’s purchases them directly from its suppliers, thus eliminating wholesalers. The company participates in designing packaging that saves space and cost, and it makes large purchases to achieve scale; it always pays in cash, so there are no carrying charges. Rather than stock many sizes of the same or closely related products, only the most popular sizes of a product are carried—or alternatively, sizes are selected to optimize cost. And, rather than commit valuable shelf space to loss leaders, the company constantly removes the poor performers. When costs change, so do the prices. In this way, Trader Joe’s is able to preserve margins.
Finally, Coulombe insisted that the company be “outstanding” in whatever it sold; if someone else could do it better or cheaper, Trader Joe’s would not offer it. As a result, the chain does not sell cigarettes and carries only a few national brands, and a store manager can tailor her assortment to local-market tastes, rather than follow a corporate planogram.
Very important to Trader Joe’s customers, values strongly inform the company’s decisions about product development and assortment. Frozen chickens are “floor-raised” (not in cages), without the use of antibiotics or hormones. Since 1987, only fish and shellfish that have not been treated with sodium tripolyphosphate or sulfites—chemicals used to retain water before freezing—have made the cut. And when customers began campaigning against genetically modified ingredients in 2001, the company responded with a promise that all new products would be certified free of genetically engineered ingredients, and it set a goal to reformulate existing products within one year toward the same end. (This goal proved more difficult to achieve.)
The store experience has been carefully designed to support and express the sense of adventure contained in the product. The Hawaiian-shirted “crew members” are visible, friendly, and well versed on the products. We visited the Trader Joe’s in Glenview, Illinois, on a Sunday afternoon, and we found a crew member cooking up hamburgers for all to sample, and tasting stations offered sips of San Pellegrino Limonata, a sparkling beverage from Italy, nibbles of biscotti (double chocolate with almonds and hazelnuts), and bits of Trader Joe’s Organic White Corn Chips. “We do lots of demos to give people an opportunity to taste and feel—we try to do demos seven days a week,” the store manager explained. “People here are more hesitant to try new things than in California, where I’m from, but we’re changing that—it’s our goal.”
The strategy is working. A twenty-nine-year-old librarian visiting the Glenview store for the first time commented, “At first it was a little overwhelming, but it was fun. I was just amazed at some of the prices—they have a lot of things that I would be interested in trying once at a price that made me willing to try it. I bought lots of things I’ve never tried before—Kashi cereals, natural peanut butter, refrigerated pulled barbecue pork, artichoke ravioli, frozen fish, frozen peaches.”
Trader Joe’s delivers on all three benefit layers. Technically, the chain delivers unique, healthful, and interesting products. Functionally, the store delivers value and an interesting, unusual shopping experience. Most important, customers talk about the experience as one of adventure, discovery, and fun. “It’s surprising and incongruous,” remarked Linda, a fifty-four-year-old social worker who has been visiting the Wayne, New Jersey, store about once a month for the past three years. “You’re not sure what you’re going to find— there are unusual things—you look around and find surprises.”
The Trader Joe’s operating model has paid off richly: Company overhead is reportedly a lean 2 percent of sales, about 50 percent less than the typical grocery chain. And although the closely held company does not discuss profitability, former CEO John Shields once remarked that the company was able to expand eastward in 1996 without any outside funding because the Trader Joe’s West Coast stores were a “cash cow,” adding that the approximately fifty stores that resulted from this expansion were also “very profitable.” In an environment where grocery retailer margins are typically 1 to 2 percent, Trader Joe’s has invented a novel way to profit from Americans’ propensity to trade up to higher levels of quality and taste.
The Winning Practices of New Luxury Food Suppliers
1. Never underestimate the customer. The conventional wisdom in the retail grocery and QSR industries is that customers are too busy, too lazy, or too uninterested to go out of their way to shop for food or travel any distance for a better bite to eat. Customers of Trader Joe’s and Panera Bread have proved that when offered a higher-quality and emotionally engaging alternative to the norm, they will go out of their way for the experience, and they’ll happily pay a premium for it.
2. Shatter the price-volume demand curve. The growth of the fast casual segment suggests that there is plenty of volume to be had at high prices—so long as the benefit ladder stays intact. While the away-from-home-eating demand curve is still in the early phases of being redrawn, Panera Bread—whose premiums are 100 percent and higher relative to fast-food alternatives—is well on its way to rendering the traditional price-volume trade-off largely irrelevant.
3. Create a ladder of genuine benefits. Among its peers, The Cheesecake Factory wins on taste, menu variety, and portion size. These functional advantages are based on real differences on the technical level, including foods made from scratch on the premises— from high-quality and fresh ingredients—rather than outsourced, two major menu changes per year, and an environment characterized by an upscale and contemporary design. These benefit layers support the emotional Wow! factor for which tourists and regulars alike will obligingly queue up for one to two hours.
4. Escalate innovation, elevate quality, deliver a flawless experience. Panera Bread employs its master artisan baker to ensure the quality of its bread and develop new offerings. It also employs a “senior vice president of consumer experience.” Through these employees’ efforts, Panera has introduced new tastes (artisan breads, pesto mayonnaise, garlic-roasted portobello mushrooms), new forms (panini), and imported ingredients to the standard lunch fare. And Panera gives customers a stream of new products that can deliver “adventure in minutes.” What’s more, it does so in an environment with pizzazz—replete with classical music, natural lighting, leather couches, and real silverware and china. Suddenly, $6 for a sandwich seems like a bargain.
5. Extend the price range and positioning of the brand. Rather than rest on its laurels, The Cheesecake Factory is expanding its franchise to include the upscale Grand Lux Café, a full-service restaurant whose price range extends further than that of The Cheesecake Factory. (Appetizers range from $4.95 to $10.95, versus $3.75 to $9.95 at Cheesecake; entrées range from $6.50 to $28.95, versus $6.50 to $24.95; and desserts range from $4.95 to $6.95, versus $3.95 to $6.95.) The first location, a twenty-four-hour restaurant at the Venetian Resort Hotel Casino in Las Vegas, debuted in 1999 and quickly became the company’s largest restaurant. Grand Lux’s first-year sales topped $18 million, nearly twice the already impressive per-restaurant average of the company’s flagship concept. A second location opened in Beverly Hills in 2001, and a third in Chicago in 2002.
6. Customize your value chain to deliver on the benefit ladder. Joe Coulombe developed his business in this order: First, he defined his customer’s functional and emotional needs. Second, he envisioned the concept that would meet them. And third, he devised a unique value chain that would enable him to deliver on those aspects critical to delivering on the benefits. He defied conventional practice in grocery retail—and built a lean, profitable enterprise that contradicted most aspects of prevailing industry wisdom.
7. Use influence marketing—seed your success through brand apostles. Tony, the retired public administrator, told us, “I tell anyone and everyone about Panera. Now we’ve got our son and daughter-in-law hooked.” Carol, the administrative assistant, claims that she loves taking first-timers to Panera Bread. Word of mouth enabled Trader Joe’s to build a $2 billion retail franchise despite the out-of-the-way store locations and lack of broadcast advertising.
8. Continually attack the category like an outsider. Like Robert Mondavi in the wine industry, Panera Bread CEO Ronald Shaich was not an outsider to the category he transformed—he had cofounded Au Bon Pain in 1981 and led its acquisition of the Saint Louis Bread Company in 1993. Yet he used his position as an insider to understand the opportunities presented by the shortcomings of the status quo. He saw Panera Bread as a clean slate that would enable him to devote himself entirely to building on his vision of an emotionally engaging brand that offered “specialness” at a premium. He resisted the urge to hang onto Au Bon Pain—a business that had been successful but, he decided, lacked a concept big enough to generate exceptional growth.
On the Menu for the Future
The appetite for New Luxury eating is far from satisfied. The need for new, well-managed, moderately priced food for the single household family on-the-go will grow. The winners will be authoritative and expert in their ingredients, finished goods, and product and service delivery systems. But even today’s winners have no assurance of success in the future, because food is a fashion business—tastes wander, and consumer fads come and go.
The grocery retail business, too, is ripe for a New Luxury transformation—waiting for an entrepreneur who can break the current trade-offs between variety and price, convenience and specialness. Those who trade up in groceries tell us that they split their shopping between several types of food providers—milk, bread, and eggs from the conventional retailers; produce, meat, and specialty items from retailers such as Trader Joe’s and independent ethnic markets. Conventional players are experimenting with new formats to tap into the trading-up opportunity (for example, H-E-B’s European style Central Market). Yet it remains to be seen who will be the first innovator to crack the code of how to serve customers in the market to Take Care of Me, Quest, Connect, and reflect Individual Style as they pick up a gallon of milk and a box of diapers.