Raising the Steaks
Battling tough competition and a weakened economy, steakhouses aim not just for survival, but for success

By Allison Perlik, Senior Editor

Sol Forman didn’t know much about the restaurant business when he purchased New York City’s historic Peter Luger Steak House in 1950. But with the pressure on to maintain the then 63-year-old restaurant’s storied tradition, he focused on one thing he did know: that quality begins with the product.

With that in mind, Forman sent his wife, Marsha, to the wholesale meat market, where she spent two years under the tutelage of a retired USDA beef grader who trained her eyes to select only the best cuts of USDA prime beef.

“He taught her all the details, and that’s what really brought us head and shoulders above everybody else,” says Forman’s granddaughter Jody Storch, now vice president of Peter Luger.

It’s that kind of quality assurance and attention to detail that helps keep a steakhouse alive in today’s competitive atmosphere, says Salomon Smith Barney restaurant analyst Mark Kalinowski.

“A lot of what makes a steakhouse concept stick around for the long haul is the basics,” he says. “If you provide good value, consistent, high-quality food, and friendly service, those things go a long way toward sustaining your brand.”

Steakhouses have ranked as a prime growth area in the restaurant industry for much of the past decade. But in an increasingly saturated market troubled by recent economic woes, can steakhouses sustain their success?

Overcooked or underdone?
Scott Tilghman, senior restaurant analyst for Ladenburg Thalmann in New York, isn’t sure.

“I think [the niche has] been largely played out,” says Tilghman, pointing to a current consumer emphasis on value and variety. “We’ve had a lot more pricing pressures in the last couple years, and we’ve seen beef prices much higher than we’ve seen in a long time ... It’s made some companies rethink menus, and in some cases there have been a bit of restaurant closings rather than growth.”

Kalinowski, however, takes a more optimistic view. He notes that while in the near term, steakhouse business has been sluggish, beef consumption per capita has been on the rise, albeit only slightly, in the past few years.

“That is a reversal of a multiyear trend,” he says. “I actually expect the steakhouse segment to have a pretty good future over the long term, even though the near-term outlook isn’t quite as bright.”

Holding up their end
As in other industry segments, upscale steakhouses face an uphill battle in retaining and building their customer bases. Fine-dining concepts such as Peter Luger Steak House and Miami Lakes, Fla.-based Shula’s Steak House are relying on tradition and proven strategies to maintain their business.

“I don’t know if we’ll ever get back to the levels we had previously,” says Shula’s president David Shula, son of the Miami Dolphins coaching legend for whom the chain is named. “We’ve seen lower cover counts, lower check averages, not as many group bookings ... But we see it coming back too.”

Shula’s concept, its theme based the Dolphins’ perfect season of 1972, is meant to inspire excellence. To keep standards high, the 24 locations serve custom-cut steaks purchased at volume discounts from an Atlanta distributor. Entrées are served la carte, in the typical fashion of upscale steakhouses, and side dishes are meant for sharing.

Despite the challenging times, Shula says, “We will not skimp on the cuts of our steaks, or the aging, or anything to do with quality, nor will we cut back on staffing levels such that our customers won’t receive the same attention they’re used to.”

At Chicago Prime Steakhouse, a white-tablecloth independent in the Chicago suburb of Schaumburg, Ill., co-owner Stelio Kalkounos says steak never will go out of style.

“The Midwest truly is a meat-and-potatoes type of environment, in the suburbs even more than the city,” he says. “There are a lot of other trends in dining that seem to come and go, but no matter what, there’s an appeal to steakhouses.”

Kalkounos says his business has been brisk, with sales up 18% to 20% in the 16 months the restaurant has been open. His angle: offering a high-end steakhouse experience that appeals to both business and neighborhood customers. With its 18-foot ceilings and high-backed booths, Chicago Prime’s dining room offers a private, exclusive atmosphere. The bar, in turn, aims to be more relaxed and comfortable.

Live entertainment on weekends and occasional wine dinners provide a boost from the neighborhood crowd. To attract out-of-towners, the restaurant partners with area hotels, offering guests priority seating and complimentary appetizers or desserts.

Distinguishing marks
High-end teakhouses are “having trouble proving to the public why they’re better than the next one, so therefore I think that end of the market is maybe losing a little of its luster,” says Dick Stubbs, owner of 91-year-old Cattlemen’s Steakhouse in Oklahoma City, where the dinner check average is about $17. “I do see both our price point and the more casual steakhouses actually expanding their business over the next few years.”

Despite his confidence, Stubbs acknowledges that the casual market is thick with competition as well. To stay in step with national operators such as Tampa, Fla.-based Outback Steakhouse and Atlanta-based LongHorn Steakhouse, Stubbs believes it is important for a concept to differentiate itself through a specific theme or style of service.

“For instance, there’s not any of the national chains that can provide history, so we make sure we market history in our restaurant along with our steaks,” he says, noting that Cattlemen’s is the oldest restaurant operating in Oklahoma.

Aside from competition, Stubbs says his biggest challenge as a steakhouse operator is securing a supplier that will provide consistent, quality product at a reasonable price.

“One of the problems developing recently is the mergers of all these suppliers,” he says. “The local guys are being bought up by the big ones, and the big ones have national contracts with certain companies, so it’s harder for us to get the product to meet our specifications.”

At Clearwater, Fla.-based regional chain Durango Steakhouse, President and Chief Operating Officer David Poore says the restaurant’s ability to secure consistent product is a key element in its success. But what really separates his concept from the rest, Poore believes, is the signature cooking style. All Durango’s U.S. Department of Agriculture choice steaks-along with chicken, ribs, fish and shrimp-are grilled over an oak fire and accented with special seasonings.

“Our differentiation is really the taste and the flavor more than thematics, and I think that’s a stronger, truer point of difference,” says Poore. “You can look like a cowboy restaurant, like an Australian restaurant or like a Southwestern restaurant like we do, but the bottom line is taste. It’s more than just saddles and hay bales in the restaurant. There’s a real flavor difference.”

The value equation
Signature flavors are part of the strategy for budget-price steakhouses as well. Such is the case for Sherman Oaks, Calif.-based Sizzler, which is trying to reposition itself as a family steakhouse.

“It’s very much our strategy to get back into that category,” says Chief Executive Officer Ken Cole. “Right now our consumers put us in the family segment because we had gone from a steakhouse into a buffet concept, but now our focus is definitely back.”

To place the restaurant back in consumers’ minds as a steakhouse, Sizzler has spent the past two years remodeling the interiors of its company stores. The new look employs darker, richer wood tones, more booths and a refurbished salad bar. The company plans to renovate store exteriors as well.

In addition, Sizzler’s marketing strategy appeals to customers with value-oriented menu specials. The company runs four quarterly promotions each year, introducing new items such as the Sizzlin’ Onion Stack Steak.

“[We’re] creating signature items in each category, items that have flavor profiles you can’t prepare at home and can’t get from another competitor,” Cole says.

Raleigh, N.C.-based Golden Corral is another concept that has shifted between the steakhouse and family-dining segments. Although the company views itself more as a player in the buffet and grill segment, Vice President of Marketing Bob McDevitt says the restaurants now are serving significantly more steak than in previous years.

Beginning late in 2001, Golden Corral began a program in which about half of its company stores added sirloin steak as a buffet item. Traditionally, steaks have been available only on a separate menu. Now many locations offer both options.

“It doesn’t [only] help sell more steaks; it brings more customers in for the buffet,” McDevitt says. “Steaks are a very significant draw, and the idea of all-you-can-eat, quality sirloin steak is highly appealing to customers.”

Riders on the storm
The steakhouse segment is an industry mainstay that has enjoyed an ebb-and-flow popularity over the years, proving itself significantly more sustainable than a simple passing trend. But the segment’s dependence on outside factors leads to perpetual challenges for operators.

Overseas troubles with mad cow disease had little impact on American restaurants last year, but the livestock-threatening disease remains an important issue and a looming threat. The economy also is a key variable, as many consumers view steak as a high-price-point item. Finally, livestock prices and consumers’ changing tastes factor in as well.

“While there still is opportunity for individual companies to gain market share, I think penetration is fairly deep within the domestic market,” says Tilghman at Ladenburg Thalmann, “and it becomes more a game of who has the operating fundamentals to keep the consumer in place and/or to take away someone else’s rather than continuing to appeal to new customers.”

On the other side, David Shula of Shula’s Steak House sees continued but more cautious expansion of the segment. “I think you’ll see companies growing more slowly, especially this year,” says Shula, who remains hopeful about the future. “Steak has proven for over 100 years that it’s an enduring concept, and we will endure.”