Seafood Chain McCormick & Schmick's Struggles | Food Newsfeed

McCormick & Schmick’s Flounders

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The national seafood brand is struggling as it’s put up for sale. How did it get to this point, and will it survive?
By Amanda Baltazar June 2011 Chain Restaurants

For sale: McCormick & Schmick’s Seafood Restaurants Inc.

Is it a surprise? Not really. But the situation isn’t unique to McCormick & Schmick’s—many restaurants have had a hard time keeping their businesses running in the last few years. But according to industry experts, there’s more than the bad economy to blame for the downfall of the famous seafood chain.

The chain has lost its mojo, says Cliff Courtney, executive vice president, chief strategy officer of Zimmerman Advertising, Fort Lauderdale, Florida—an agency that works with a number of big restaurant brands.

“They’re really a cautionary tale for all dinosaurs,” he says. “Brands are fluid, and they have to change to stay relevant. But these guys are lumbering in a way that’s been killing them.”

The upscale seafood chain is lumbering in several ways, Courtney says. It has barely changed in the 32 years since it opened its first restaurant; it offers huge menus with seemingly everything on them; the brand feels stale; and the meals are intended to take a long time.

And time is one of the things that are most precious for consumers. It’s the ultimate commodity, he says—so a huge menu isn’t doing the customer a favor because it just overwhelms with choices.

But McCormick & Schmick’s is proud of the choices it offers. According to its website, it has a daily menu “highlighting an impressive number of fresh seafood varieties.”

“We are overwhelmed by choice,” Courtney says. “We are overwhelmed by our schedules. And we are underwhelmed by restaurants who can’t honor those priorities.”

Brand Reinvention

It seems McCormick & Schmick’s has simply not kept up with what the consumer wants and has certainly not managed to reinvent itself—something Courtney says every major restaurant brand should explore regularly.

Even the seafood brand’s literature says: “We do things the ‘old-fashioned’ way, from taking orders from memory and hand shaken drinks, to the physical appearance of our restaurants.”

And while this connection with the past might garner some points with the over-65 crowd, the chain is not attracting a newer, younger audience, Courtney says, which has disposable income and a desire to eat out.

But McCormick & Schmick’s is doing one thing that is garnering it some points, and the chain has been doing it since long before the practice was in vogue: Each restaurant’s menu is tailored to the local area, offering produce, seafood and meats from the vicinity.

And the dishes are inventive: Wild Alaska halibut is grilled and served with tomato and spinach spaetzle, yellow tomatoes and balsamic reduction; or there’s grilled wild Columbia River king salmon served with fava bean sauté, Chianti caramel and roasted fingerling potatoes.

McCormick & Schmick’s also draws a lot of attention with its happy hour food menu, which is known for offering a bar menu with items starting at $1.95, including a half-pound cheeseburger and steamed mussels.

Tom Kelley, managing partner of Concept Branding Group, San Diego, is not so sure about the success of this, however, in promoting the brand.

“They’re famous or infamous for their happy hour, but I think that deteriorates the brand. You’ve got to ask how they put out a $2 burger or even why they’d have a burger on their promotional menu when they’re a seafood restaurant.”

McCormick & Schmick’s: The History

Bill McCormick and Doug Schmick met working at Jake’s Famous Crawfish Restaurant, a failing restaurant that McCormick purchased in 1972 and brought back to life with the help of his then manager, Doug Schmick.

They joined forces in 1974, creating Traditional Concepts, the precursor to today’s McCormick & Schmick's Seafood Restaurants, whose headquarters are in Portland, Oregon.

The first McCormick & Schmick’s opened there in 1979. Upon its success, the company expanded through the Pacific Northwest and then across the country. It now has 87 restaurants, as well as six Boathouse Restaurants in Canada, a brand it purchased in 2007.

In 2004, McCormick & Schmick’s went public. That, according to Kelley, was the beginning of the erosion of the brand.

“When they grew too fast after they went public, they lost some brand culture and brand identity,” he says, but acknowledges that the scenario isn’t unique to McCormick & Schmick’s. “It’s not uncommon when companies go public for there to be a corporate culture that takes over.

“A lot of the time, when restaurants go public, they lose the entrepreneurial culture and spirit—which is bound to happen. It is bound to show over the years, and I think it has shown in this case,” he says.

And Kelley is a big supporter of Bill McCormick, having worked with him several years ago.

“He really is the consummate host and hospitality professional. He is a very visionary man, and that was behind the success of the brand for so long,” he says, adding that McCormick is less involved since the company went public.

“I do believe that when the founder of a company like this steps away or is not involved, [the brand] really deteriorates,” he says.

The Numbers Revealed

Today, things are looking rather bleak for the 37-year-old company.

In fact, in the first quarter of 2011, revenues decreased by 1 percent, to $84.0 million from $84.8 million. Comparable restaurant sales decreased by 3.2 percent and there was a net loss of $700,000, or 4 cents per diluted share, compared with a net loss of $400,000, or 3 cents per diluted share, in the first quarter of 2010.

And overall, in 2010, revenues decreased 2.3 percent to $351.1 million from $359.2 million in 2009, and comparable restaurant sales decreased 4.9 percent. For stockholders, in 2010, each diluted share lost $1.57 compared with a net loss of $1.05 per diluted share the previous year.

Early last month the company announced that its board of directors had decided to put the company up for sale, and that the company would continue to execute its strategic revitalization plan, which Schmick says “will improve revenue per location, provide strong returns on invested capital, enhance the overall guest experience and deliver significant value to all stockholders.”

The plan, which was announced earlier this year, includes:

Carrying out a multiyear service, hospitality and portfolio upgrade program designed to increase restaurant revenue and profitability, while also enhancing the overall guest experience.

Refreshing and remodeling restaurants.

Continuing to elevate the company's culinary program.

Better aligning the McCormick & Schmick's brand with local market guest preferences.

Considering opening more Boathouse Restaurants in Canada, as well as introducing them in the U.S.

“Doing a strategic plan now is so reactionary,” Kelley says.

“One of my questions is, how much objective outside advice did they have in putting this together? And why did it take so long to come up with this grandiose plan and why weren’t they doing it every day for the past 20 years?”

Rejecting Acquisition

In April the brand rejected the unsolicited tender offer from LSRI Holdings Inc., a wholly owned subsidiary of Tilman J. Fertitta’s Landry's Restaurants Inc.

The offer was to acquire all outstanding common stock of McCormick & Schmick's not already owned by it or its affiliates for $9.25 per share in cash. (Fertitta is McCormick & Schmick’s single largest individual shareholder, with 10.1 percent of shares.)

The seafood company’s board unanimously rejected the offer, saying that it “undervalues the company's current and future business prospects, is highly conditional, and is not in the best interests of the company or its stockholders.”

McCormick & Schmick's encouraged its stockholders to reject the offer and to not tender their shares to LSRI Holdings.

Does the brand have any chance of surviving?

Tom Kelley believes so. “I think that the brand, with a little reinvigoration of what it started with, or getting back to its roots, could survive because it still retains a lot of brand integrity and brand value.

“I think people oftentimes continue to have a good time there. It just seems as if some of the details aren’t being attended to. I would hope they could breathe life back into the original concept.”

It’s not too late for McCormick & Schmick’s to re-establish its core values, Kelley adds. “With the right management team and maybe with Bill coaxed into coming back and discussing why he started the company and reinvigorating the brand, I think they could definitely do that.”

Courtney believes that we’ll see one of two things happen. Either venture capitalists will swoop in and take control of McCormick & Schmick’s or there will be changes in the company’s executive team.

Whichever one it is, he says, whoever is running the company needs to “be bold, fearless, and turning their soil over in the pursuit of relevance. Incremental moves are not going to help these guys at the moment.”

Kelley agrees. “They’ve been just floating by for a while, and they don’t have the financial wherewithal to make the changes they need to. Unless they get some financing, they’re in serious trouble, and they’ll get gobbled up.”

The Effect of the Economy

The financial dire straits that McCormick & Schmick’s finds itself in don’t only come down to internal problems. The recession that the U.S. has suffered for the past two to three years had its effect on the entire restaurant industry—which has seen its first years of decline in almost two decades—particularly affecting the upscale casual segment, where McCormick & Schmick’s restaurants live.

“Any chain that was expanding in this time—and McCormick & Schmick’s was—those new restaurants don’t perform as well as expected,” says Randy Hiatt, president of Fessel International, hospitality consultants in Costa Mesa, California.

“And you take on the burden of additional debt for those restaurants. You’re taking on debt at the worst time. The combination of these things hurts several companies, including McCormick & Schmick’s.”

Courtney says that the economy isn’t really something to fear for strong brands, “because it weeds out the weaker players.”

What it does is it reduces the number of times consumers eat out. “But the [restaurants] who are on their game reinvent,” he says. “Statistically when people eat out now, they are more likely to make it special, that’s why Bonefish Grill still takes the share of those occasions.”

The economy doesn’t have to hurt you if you’re offering your share of occasions—which McCormick & Schmick’s is not, he asserts.

Increasing Competition

And just as the economy’s starting to recover, we’re seeing commodity food prices increase across the board.

“So it’s external factors that are determining the situation more than internal right now,” Hiatt says.

There’s also a lot more competition in the restaurant industry than when McCormick & Schmick’s came onto the scene in the late 1970s.

The Oceanaire, Legal Sea Foods, Bonefish Grill, Red Lobster and a host of independents are also vying hard for every seafood customer.

“These guys are getting killed from above—Bonefish—and below—fish taco is being offered by everyone—and full frontal from Darden—Red Lobster—who have done a good job of refreshing their brand,” Courtney says.

“Companies like these are on top of things so much more,” Kelley says. “There are so many more choices that are more distinctive and more relevant. I think McCormick & Schmick’s grew so fast and tried to create all these different concepts that they lost sight of what was really important, which was commitment to a great team, great food and their community.”

“There’s more competition and people are eating out less, so you’ve got to be not just on your game, but ahead of your game to win,” Courtney says.

Competition also comes in the form of other foods, Courtney says, with chicken being such a winner that McDonald’s now sells more of it than beef.

“So if you’re selling fish,” he says, “you’d better have a twinkle in your eye and something in your step.”