How The Cheesecake Factory Can Return to Casual-Dining Royalty
In August 2017, The Cheesecake Factory started to show some kinks in its armor. After 29 consecutive quarters of positive gains, the brand’s same-store sales declined 0.5 percent in Q2, year-over-year. In the ensuing quarter, comps dipped 2.3 percent, including an estimated 0.8 percent impact from hurricanes Harvey, Irma, and Maria. Then, to close the year in Q4, comps stayed in the red at 0.9 percent decline, as its “sales trend started to stabilize,” David Overton, chairman and chief executive officer, said at the time.
To understand how strong The Cheesecake Factory has been in this category on a yearly basis, here’s a look at same-store fiscal results dating back to 2011.
- 2017: 0.4 percent
- 2016: 3.8 percent
- 2015: 4.1 percent
- 2014: 2.6 percent
- 2013: 3.3 percent
- 2012: 4.2 percent
- 2011: 4 percent
Here’s the Knapp-Track Index during that span, which measures comparable results, to contrast.
- 2017: -2.2 percent
- 2016: -0.4 percent
- 2015: 0.8 percent
- 2013: -0.9 percent
- 2012: 2 percent
- 2011: 1 percent
So what broke through the Kevlar? There are many factors at play for the chain, which has 199 company-owned Cheesecake units in the U.S. (there are also 13 Grand Lux Cafes and two RockSugar Southeast Asian Kitchens) and will report first quarter 2018 results on April 25. While The Cheesecake Factory remains a destination restaurant, which provides some cushion to America’s mall retail crisis, the brand is not impervious to the declining foot traffic affecting big-box operators around the nation. Matthew Clark, the brand’s executive vice president and chief financial officer, said in a conference call following Q4 that “85 to 90 percent of our guests are coming to us as a destination and I think there is definitely the headwind in the malls, and when we quantified that before we think it’s 50 to 100 basis points,” he said. “And so really, rather than trying to drive it through marketing we believe that looking at other ways to drive convenience for those guests who just might not want to come to the mall through delivery or making their to-go experience through online ordering—we think that's a more effective way in conjunction with the social media platforms than just sort of traditional marketing.”
But really, the mall piece is just a fraction of the jigsaw.
At the company’s investor presentation, executives laid out their strategy to propel The Cheesecake Factory back into positive territory, which includes leveraging average-unit volumes in excess of $10 million and an upcoming fast-casual model with a 2018 launch date.
Here were some highlights:
Firstly, let’s breakdown The Cheesecake Factory’s footprint outside of the U.S.
- Lebanon: 1
- Bahrain: 1
- Saudi Arabia: 1
- Kuwait: 3
- Qatar: 3
- Mexico City: 2
- Guadalajara: 1
- Beijing: 1
- Shangai: 1
- Hong Kong: 1
- Toronto: 1
International growth, through licensing, is an area The Cheesecake Factory enjoys significant runway. In 2018, the company said it expects to debut as many as 4–5 new international openings in existing territories.
The brand cracked the Canada market last November with an opening in Toronto. It also cut the tape on its first location in Bahrain and the third in Qatar in Q4, making it four licensed openings in 2017. The Dubai mall location remains the second busiest restaurant in the entire company.
At the Toronto store, Overton said more than 400 people were waiting in line on opening day, with wait times north of four hours and more than an hour just to purchase slices of cheesecake to-go.
In 2018, The Cheesecake Factory opened in Beijing and said its solid opening there “should be a good barometer for the potential in mainland, China.”
The company added there is an opportunity for 300 domestic and 8–10 Canadian locations over time. The units target 7,500–10,000 square feet, with cash-on-cash return of 20–25 percent and EBITDA around 18 percent. The Cheesecake Factory will focus on premier locations—high street, lifestyle centers, and A-plus malls—as always.
Many casual chains around the industry are shrinking menus in hopes of simplifying operations. Don’t expect The Cheesecake Factory to follow suit. It will continue presenting 250 menu items made fresh, from scratch, with two menu updates expected per year.
David Gordon, the chain’s president, said the brand is working on a “meaningful digital and social media campaign” to highlight its high-quality ingredients and preparation techniques. Or in other terms, to make sure The Cheesecake Factory is doing everything it can in-house to get the recognition it deserves. How? Video influencer marketing and other PR continue to generate engagement and guest education, he said. The Cheesecake Factory has also supported off-premise business with creative on-brand campaigns.
One example: On December 6, the chain planned to send 10,000 complimentary slices of cheesecake to guests via delivery, but overwhelming demand led to an increased offer. This drove the strongest week of delivery sales in The Cheesecake Factory’s history. Gordon said he expects the visibility to return long-term as well thanks to boosted off-premise awareness.
The Cheesecake Factory rolled out a menu with some lower price points in the middle of last year. Gordon spoke about the effect. “It really seemed to be meaningful for them. So the marketing we have done this year whether it's our made fresh messaging, we have some videos that we've rolled out, we'd about 4 billion media impressions in 2017. We think that messaging is slowly getting out there and then executing on that obviously within the four walls of the restaurant is going to be key.”
The brand did face some negative menu mix, but saw the kickback as a short-term one. “I also think most of that is attributable to the value we put on the menu through the special card. And we view that as a positive. It's just because we had such good adoption of it and longer-term that will be a benefit,” Clark added.
The “Cheesecake” Magic
Is there another casual chain with AUVs north of $10 million pushing 16 percent of sales through dessert? The Cheesecake Factory produces more than 70 cheesecakes and other baked desserts, something it says enables creativity and quality control. And like the aforementioned delivery promotion proved, this is one of the few chains in America where guests will pay for third-party delivery just to order a slice of cheesecake.
Speaking of AUVs, The Cheesecake Factory has generated impressive gains through moderate average checks. Broken down against competitors here’s what we’re looking at.
- The Cheesecake Factory: $10.6M
- Maggiano’s Little Italy: $8.3M
- Yard House: $8.1M
- BJ’s: $5.6M
- Texas Roadhouse: $5M
- Olive Garden: $4.7M
- Outback: $3.4M
- LongHorn: $3.3M
- Bonefish: $3M
- Carrabba’s: $2.9M
And average checks:
- Yard House: $32
- Maggiano’s: $28
- Bonefish: $25
- Outback: $22
- The Cheesecake Factory: $22
- Carrabba’s: $21
- LongHorn: $21
- Olive Garden: $18
- Texas Roadhouse: $17
- BJ’s: $15
A digital path
Take-out business boosted to 12 percent of sales in 2017 and delivery through a third-party provider went live in about 90 percent of locations. Online ordering was expected to be available by the end of March in all domestic units. The Cheesecake Factory also deployed point-of-sale integration with its main delivery provider, “which is driving operational improvements and efficiencies in the restaurants while enhancing the guest deliver experience,” Gordon said.
The Cheesecake Factory has grown this side of its business effectively. In 2016, off-premise accounted for about 11 percent, which bears the question: What role is delivery playing? “It's the beginning of this delivery journey and we're going to continue to execute at the highest level because we know it's where the guest demand is,” Gordon said.
“I think delivery is making up the biggest piece of the growth area. I think to-go in general is a growth opportunity for us,” Clark added. “And so we will continue to look at ensuring we have, as David said, great execution, and we're currently rolling out our own online ordering platform that will be available in all of our restaurants by the end of this quarter.”
The company is also using technology to manage costs, it said. There’s a market-based labor analytics platform, as well as a kitchen management system, automated production call, and digital dashboards.
Social media remains a big driver for The Cheesecake Factory. There are more than 5 million fans on Facebook, 375,000 on Twitter, and 620,000 on Instagram.
That brand value is something The Cheesecake Factory is taking to the shelves. The Cheesecake Factory At Home recently started selling the chain’s famed brown bread in three formats in Southeast grocery stores. Nationwide distribution through major retailers is coming, the company said.
Currently you can buy whole cheesecakes, mixes, coffee creamer, chocolates, and cookie and cupcake mixes outside the restaurant.
Fast casual, finally
In the 4Q review, Overton spoke about the much-anticipated quick-service store as well.
Back in December 2016, the company reported it was internally developing a fast-casual concept, but the hype flickered out. However, Overton said in the call the company is finalizing lease negotiations for a space in Los Angeles and is projected to launch later this year. The yet-unnamed fast casual has growth potential as well. Overton estimated it would only take six months to monitor the new concept and ensure its profitability.
“Then we would look for another site once we feel really good about it and make sure that we've done all the right things operationally,” Overton said. “We're excited. We're working on a little bit everyday, and we'll see where it goes.”
The Cheesecake Factory has fostered new concepts beyond its flagship namesake in the past, namely through sister brands Rock Sugar and Grand Lux Café. The former opened its second location during Q4, while the company plans to add another Grand Lux Café to the system in 2018. The brand has yet to venture beyond the full-service format, so fast casual would mark a new chapter in diversifying its portfolio.
It starts in-house
The Cheesecake Factory was named to Fortune’s 100 Best Companies to Work For for the fifth consecutive year in February. The chain clocked in at No. 27 on the list, the highest dedicated restaurant brand featured (Kimpton Hotel & Restaurants was No. 6 and Wegman’s Food Markets, Inc. was second).
The Cheesecake Factory features a dual management structure above four-walls, which means an area director of operations oversees general managers and an area kitchen operations manager directs a team of executive kitchen managers.
By average tenure, The Cheesecake Factory tells a powerful story.
- Senior VP of operations: 29 years
- Regional vice president: 20 years
- Area director of operations: 19 years
- Area kitchen operations manager: 17 years
- General manager: 12 years
- Executive kitchen manager: 12 years
Looking at 2022 financial targets, The Cheesecake Factory said it expects revenues around $3 billion, net income margin above 6 percent, earnings per share of $4.50, and ROIC plus 15 percent. It predicts same-store sales growth of 1–2 percent and unit growth of 5 percent.
The long-term objective will be 13–14 percent total return to shareholders, on average (earnings per share plus dividend).
- Company owned: 6–7 percent (same-store sales growth 1–2 percent; unit growth 5 percent)
- International licensed: 2 percent
- Share repurchase: 3 percent
- Dividend: 2 percent
For 2018, the company expects to open four to six company units, have flat to 1 percent same-store sales growth, adjusted EPS of $2.64–$2.80, and free cash flow of about $150 million.
The Cheesecake Factory’s adjust earnings per share have trended mostly in the right direction over the past seven years.
- 2017: $2.60
- 2016: $2.83
- 2015: $2.37
- 2014: $1.97
- 2013: $2.10
- 2012: $1.88
- 2011: $1.64
- 2010: $1.42
As you can see, there is a lot in store for the coming quarters at The Cheesecake Factory. History would advise betting against one of the heavy-hitters of casual dining, but there’s no question it faces unique challenges to go along with its differentiating strengths. Will mall traffic improve? Hard to say. However, the chain is finding ways to overcome foot-traffic gaps regardless of what the future holds. Off-premise and delivery will play key roles, as will the core features guests have come to expect. Things like prime desserts and a menu with no veto vote in sight. Those won’t change, and guests will continue to flock back in response.