The recession is killing chain restaurants. So why is P.F. Chang's thriving?

Commentary about business and finance.
May 16 2009 7:09 AM

The Secrets of Chang

The recession is killing chain restaurants. So why is P.F. Chang's thriving?

P.F. Chang's. Click on image to expand.
P.F. Chang's

During a recession, making macaroni and cheese for dinner instead of heading to the Macaroni Grill is a no-brainer. And so the vast casual-dining sector, which grew fat during the late free-spending consumer boom, has been getting hammered. Restaurants are the top category in which U.S. consumers said they are most likely to cut back, according to a recent Boston Consulting Group survey. "Casual dining is getting hit hard," says BCG partner Catherine Roche. The higher up on the food chain you are, the worse it is. Sales at the upscale Morton's steakhouse fell 24 percent in the first quarter of 2009.

But at least one comparatively pricey restaurant chain is turning in the equivalent of a Michelin-starred performance. P.F. Chang's China Bistro, whose two restaurant chains—P.F. Chang's and Pei Wei Asian Diner—are staples of upscale malls and mixed-use developments, said that same-store sales fell a bit but profits produced at its 350 outlets rose 38 percent from the first quarter of 2008. Operating margins—the holy grail of any business—at P.F. Chang's 190 stores rose from 12.8 percent to 14 percent, largely because of "incremental operational improvement opportunities." The stock has doubled since November.

What accounts for the sizzle in P.F. Chang's wok? Probably not the food. Just as saxophonist Kenny G provides jazz for people who don't really like authentic jazz, P.F. Chang's peddles Chinese food to diners who might not cotton to authentic Sichuan fare. Waiters don't wheel around carts laden with steamed chicken feet as they do at dim sum parlors in New York and San Francisco. In the comfy confines of Boston's Prudential Center, I was presented with a raft of desserts as American as, well, apple pie, including the Great Wall of Chocolate. "It's like The Cheesecake Factory, only ethnic," says Jennifer 8. Lee, author of The Fortune Cookie Chronicles: Adventures in the World of Chinese Food. "It's very consciously designed to cultivate an appeal to mainstream America." The "P.F." stands for company founder Paul Fleming, and the kitchen features ingredients that wouldn't be found in Chinese restaurants, such as chocolate, cheese, and melon balls. (Try picking up fruity spheroids with chopsticks.)

P.F. Chang's rode the trading-up boom of this past decade, opening stores in tony malls and economic hot zones and becoming the first Chinese-food chain to reach $1 billion in revenue. But the days when you could simply open the doors and welcome consumers armed with credit cards and cash from mortgage refinancings are over.

In this downturn, the company has avoided wholesale restructuring and panicky discounting. For many restaurants, Chinese and otherwise, 2009 is the Year of the Closing. But no P.F. Chang's bistros have shuttered. Rather, it simply has worked hard at doing a better job running things. Co-CEO Rick Federico says that in early 2008, when traffic first softened, management went through "all elements of our business that don't touch our guests or our product" in a search for efficiencies. P.F. Chang's cross-trained prep cooks and line cooks, so the folks who dice chicken and vegetables can fry them up in woks, too. It also hired an expert to develop a new scheduling tool to manage staffing better. In a period when growth is muted, this unglamorous focus on operations and seemingly minor efficiencies will allow all types of businesses—not just restaurants—to distinguish themselves from their competition.

While loath to discount aggressively, P.F Chang's introduced $7.95 lunch specials for the first time in mid-2008. As the recession deepened, the company noticed more people cutting back on the discretionary parts of dinner, such as appetizers and desserts. So in December, it rolled out a three-course fixed-price menu for two for $39.95, which was plenty for me and a less ravenous colleague at a recent lunch.

P.F. Chang's has dialed back the number of new restaurants it is opening this year, from about 20 to eight, in part because so many ambitious real-estate developments have been scrubbed. But it turns out there are plenty of solvent communities starved for unthreatening, satisfying portions of beef with broccoli. At the new restaurant in Westfarms Mall, outside Hartford, Conn., 45-minute waits on the weekend are common. Other openings are planned in 2009 in Rust Belt cities regarded by coastal food snobs as culinary wastelands: Akron, Ohio; Pittsburgh; Buffalo, N.Y.

Federico, who started a previous restaurant company amid the downturn of the late 1970s, believes restaurants must adjust to a slower pace of growth. "I think what we've been through will leave behind a fundamental shift in how consumers purchase," he says.

P.F. Chang's made it to $1 billion in sales by taking cues from successful Asian businesses. Now by focusing on process improvement rather than helter-skelter growth, it seems to be doing so again. Continuous improvement, the philosophy pioneered by Japanese companies such as Toyota in which managers and workers relentlessly seek out small modifications that add up to big profits, seems to be the recipe for success in 2009.

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