F. Scott Fitzgerald is reputed to have said, "The rich are very different from you and me," to which Ernest Hemingway reportedly replied, "Yes, they have more money."
That could be why fine dining restaurants like Ruth's Hospitality Group (NASDAQ:RUTH) continue to perform so well in this anemically growing economy. Its target clientele have done quite well for themselves and can afford the expense of going out to eat.
Market analysts at Technomic believe well heeled customers are the reason high-end steakhouses in particular have done so well. Where overall restaurant traffic has been flat and full-service chains saw traffic actually fall 2% to 3% for the year ending in May, fine dining establishments enjoyed 4% increases.
That's in line with what other chains are reporting as well. While Darden Restaurants (NYSE:DRI) is perhaps best known for its Olive Garden Italian family eatery (and formerly its Red Lobster seafood chain as well), it also runs a string of high-growth specialty restaurants, one of which is The Capital Grille, a high-end steakhouse.
In its fiscal 2015 first quarter, The Capital Grille, a top ranked chain among consumers, witnessed a 3.9% jump in comps outpacing any of Darden's other chain's. This includes midtier Long Horn Steakhouse, which saw same restaurant sales rise 2.8% from last year.
While industry traffic conditions have improved somewhat in the most recent period, they're still negative even though same restaurant sales are higher. The Black Box Intelligence & People Report showed third quarter comp sales were among the best they've seen in two years, rising 1.6%, but traffic continues to come in negative and was down 0.2% in September and 0.7% throughout the quarter. The industry hasn't recorded a single quarter of positive traffic growth since the recession.
That suggests it's higher pricing that's driving the improvements rather than a stronger dining environment.
Still the trend is heading in the right direction, and perhaps soon the industry will catch up to Ruth's Hospitality, which continues to turn in impressive results.
For the second quarter ending in June, Ruth's company-owned restaurants saw comps rise 2.8% -- the 17th consecutive quarter of positive comp sales for the chain -- with the bulk of it due to higher traffic. For franchised restaurants, comps were 1.3% higher.
For individuals willing to work hard but work for themselves, franchising has long held an allure as a limited-risk opportunity. But because it's not without risk, entrepreneurs and investors will want to carefully weigh where they put their money.
A piece of the action
Franchising isn't a get-rich quick scheme by any stretch -- it can be quite costly to buy into a concept, reiterating the old saw that it takes money to make money -- but there several good reasons to consider the option, and just as many to dissuade you as well. For those researching this avenue of opportunity, however, Ruth's Hospitality is a top company that uses the franchise model and could be one you'd want to consider.
Ruth's operates 161 restaurants, 140 of which are its namesake steakhouses and 54% are franchised. Where its company-owned restaurants are based solely in the U.S., it has 29 franchisees operate in U.S. and 10 countries, including Canada, China, Japan, Mexico, Singapore, Taiwan, and the United Arab Emirates.
The steakhouse operator appears to be in the sweet spot of dining, welcoming the customers who can still afford to enjoy the experience of dining out and giving them the meal they're most looking for.
According to the market researchers at Technomic, the top 10 steakhouses in the U.S. generated over $8 billion in sales in 2013, an average 7% increase, that led them to increase their footprint by 6%. And steakhouse sales in the U.S. jumped 6.2% compared to the 2.4% increase that the top full-service chains recorded.
By the numbers
Yet buying into a Ruth's Hospitality franchise doesn't come cheap.
While the high-end steakhouse is accepting new franchising applications, prospective franchisees need a minimum liquid assets and net worth of $1 million, respectively, for each restaurant you plan to own, with a commitment to build out more than one .
The current franchise agreement requires franchisees to pay a 5% royalty on gross revenues plus up to a 1% advertising fee that's applied to national advertising expenditures.
It's an exclusive club to be sure, and explains why just three franchisees own one third of all the franchised locations.
Having opened its first franchised operation in Baton Rouge, Louisiana, in 1976, Ruth's plans to continue growing its base by investing further in the franchising opportunity. There are three franchises in its 2014 pipeline (one's already completed), and it has commitments for 13 more between 2015 and 2017.
A rare business model that's well done
A key concern for Ruth's Hospitality remains its input costs. Beef prices are at record levels and were up 8% in the second quarter alone. The steakhouse anticipates they'll be up 5% to 8% for balance of year as a combination of illness and smaller herds drive prices higher.
That may mean your expenses will rise and consumers could become leery of dining out at steakhouses, even high-end ones, so that while buying a franchise may entail less risk than starting up a business of your own, it's still possible to lose your entire investment.
And of course, restaurants do close and the economy can weaken once more. It's not a business without risk.
The last roundup
Franchising is not for everyone, and you need to consider your own temperament, your finances need to be in order (and be substantial at that), and if you're the creative type, you may find the restrictions franchisors place on franchisees limiting, so you need to do your homework.
If that still sounds like a business you'd like to operate, however, Ruth's Hospitality Group just might be one place where you should start your due diligence.