Meat And Potatoes
TAKING HIS MIDDAY MEAL AT A fast-food restaurant a few miles out of Greenville, S. C., Alvin A. McCall Jr., a trim 59-year-old with the hungry look of a toughdriving businessman, admires how efficiently this eatery functions. Items: the wait in line was brief, the sirloin was cooked just right, the iced tea was refilled without asking, the bread was served warm and buttery, the salad was crisp, the desserts were plentiful and free, the wall-to-wall carpeting was litterless. What more could a diner-out ask?
To be sure, the decor is strictly American roadside: high-ceilinged, fake-beamed, illuminated weakly through windows that reveal close-up views of steamy automobile radiators. Still, the place reeks of efficiency, from the cook grilling a score of steaks, to the waitress carrying the tray, to the cashier toting up the tab. In that bustle, customers don't linger: the average turnaround time for a sit-down meal has been clocked at a brisk 35 minutes. On schedule, McCall fires up his pipe, then disgorges more than enough cash to cover the bill (a meager $5.09) and tip. "Pretty nice little operation," he remarks, appreciating the brains behind this establishment, the very first restaurant of Ryan's Family Steak Houses Inc. and sire to some 50 more exactly like it.
The brains behind them belong to none other than Alvin A. McCall Jr. himself, founder of the chain that he called Ryan's because the name "had a good ring, was short and easy to identify, and was Irish." Ryan's wasn't McCall's first foray into quick cuisinery. Back in 1971, he started Western Family Steak Houses, a chain he later renamed Quincy's Family Steak Houses, because it had a good ring, was short and easy to identify, and, more or less, was Irish. When McCall sold his portion of Quincy's to what is now Trans World Corp., he not only got the buyer to waive the usual noncompete clauses, but built explicit permission into the terms of the sale to compete. "I left them a good structure, though," McCall recalls guiltlessly.
And compete he did, founding Ryan's in 1977 and bringing it public in '82. Today the average unit takes in about double that of its nearest competitors (led by Quincy's, along with Sizzler Restaurants International, Ponderosa, and Western Sizzlin). Ryan's net profit margin of 9.9% in 1985 ranks well above McDonald's Corp., often considered the leader of the fast-food industry. On revenues of about $55 million for fiscal 1985, Ryan's earnings stand out among chains that boast many more units. Sizzler, for instance, with 488 units owned or franchised, made about $10 million last year; Ryan's earned $5.4 million with only 53 owned and franchised outlets. For fiscal '86, Ryan's is projecting revenues of close to $100 million, well ahead of its 58%, seven-year compound growth rate.
What has made Ryan's exceptional, McCall says, is good food with good service at a good price. To achieve all three, Ryan's, in an uncommonly stubborn way, flouts convention while committing few errors. For example, the industry has seen more than one chain overexpand like a five-year-old feasting on cotton candy, then run out of capital altogether. Ryan's not only thoroughly trains the 60-person staff of one unit before opening the next, it pays for the real estate and construction of each one in cash. As a result, the company at the end of 1985 owed a mere $772,000 on shareholder's equity of $38 million. By the end of 1986, net equity should be approaching $50 million.
Like just about everyone on the highway, Ryan's started out franchising, the accepted path to restaurant-chain fast growth. But it soon stopped. "We couldn't exercise control," complains McCall. Today there are only four franchisees, with a total of 12 stores. For the same reason, Ryan's refuses to use OPM -- "other people's money," as in borrowing -- to expand. "Leverage?" he asks, biting tentatively into the word as if it were a slice of undercooked liver. "We happen to like the equity route. If hard times hit, we'll be here when a lot of these highly leveraged places are long gone." Already split (as of May 1) four times since '82, the value of the shares representing that equity has risen more than 2,000%.
How does Ryan's do it?
Not with brass bands, that's for sure. A new site's grand opening is as low key as an eighth-grade cotillion. No searchlights, no balloons, no coupons, no clowns, no give-aways. Instead, McCall pledges, "We put that money in the food budget, where it belongs." Simply through word of mouth, in less than a month a new store takes in at least the average unit gross of $38,000 per week, he claims. A recent exception was when Ryan's cautiously expanded from its eight-southern-states base to the Midwest. A few units there needed the extra boost of a paid announcement in local newspapers because "we had to overcome the bad reputation of a competitor when we first opened last spring. Customers said, 'Well, here comes another Ponderosa."
WORL'D MOST UNIQUE SALAD BAR NOW OPEN, read the streamer hoisted last April over the 43d company-owned store, referring to the 64-foot, U-shaped stretch of help-yourself eats that Ryan's was in the process of introducing throughout the chain. This gala opening, held in a cast-from-the-mold structure in Snellville, Ga., about 20 miles from downtown Atlanta, was the 26th for Ryan's full-time supervisor of debuts, Richard Forrest. It was the company's 9th in Greater Atlanta, an expanding part of the dining-out universe that its site-acquisition people favor because they make their biggest gross margins there.
On the day before each new restaurant's opening, local hoi polloi are invited to wine and dine on the house. Well, dine, anyway: largely because most of its restaurants are in the Bible Belt that cuts across Alabama, Georgia, and South Carolina, Ryan's serves no alcohol. Still, the corporation spends as much as $3,000 on food for a store's baptism, attended by a bevy of its youthful executives. "Restaurants need young management," says McCall, chief executive officer and chairman of the board. "It's a seven-day, 14-hour business."
The Snellville store's new general manager is Kenny Brown, 26, a seasoned Ryan's employee who started as a cook five years back. Like Brown, each of the stores' general managers, assisted by two or three junior managers, hires his own staff and assigns working hours, paying the regional going rate for reliable help. A general manager is allowed $17 in payroll for every $100 worth of daily business.
Opening-day freebies aren't designed so much to win customers as to provide the store's novice crew with a real-life dress rehearsal. For three weeks, the new staff has been drilled in the niceties of service as defined by McCall (for instance, rotate condiment bottles once a week, lest dust inadvertently gather on one side) and inter-employee protocol (how to pass on tips that were left for the preceding waitress). Ryan's crack training team, a group of six in-house tutors, travels from new store to new store in its own van, like rescuers from "Mission Impossible."
At Snellville, pictures of 24 succulent entrees -- 17 of them beef, ranging from a $1.39 child's burger to the $8.49 prime rib -- were hung along the walls, a torture chamber for vegetarians. The day's four soups du jour steamed invitingly. Not a cracker was out of place. But, nervous as an ingenue, Brown paced the floor, fearful that the Chief, as McCall is sometimes called, though he may not be aware of it, might find something askew. "Well," grudgingly remarked Mr. McCall, as he's most often called, when asked for a critique of the performance, "the bell peppers were not as fresh as they should be."
Tomorrow they undoubtedly would be. Under Ryan's unusual bonus incentive structure, as much as 70% of the pay of regional supervisors (who oversee five stores), general managers, and junior managers is dependent on such details. Last spring, bonuses were humming on all cylinders: the average regional supervisor's pay was more than $50,000; the average general manager's was $40,000. Ryan's diligently promotes from within, and at the current expansion rate, about 10 people a year are plucked from the ranks of its 3,000 employees and turned into store managers. Trainees are paid an average of $300 a week for five weeks' attendance at the management-teaching center just instituted as an adjunct to a Greenville unit. And even without prior restaurant experience, a trainee tapped for a leadership role could be earning in the $30,000 range within a year. "We want our managers for all practical purposes to feel like they're in business for themselves," McCall says. But he doesn't just give the green stuff away. Unit and regional managers' bonuses are dependent on keeping within food-cost and labor budgets, thus making the home office's job foolproof by, essentially, having the workers underwrite labor and food variables.
It's critical to Ryan's profitability to hit both numbers, since its exceptionally high food costs must be offset by low labor costs. Ryan's payroll as a percentage of sales is lower than its competitors', but that does not mean its payrolls are lower in absolute terms. Instead, it relies on volume to bring payroll percentages down. As Charles D. Way, executive vice-president, treasurer, and secretary, explains, "Payroll is not a truly variable cost; it's semi-variable. As your sales go up, your payroll doesn't go up quite as much. When you do more volume, your payroll as a percentage of that volume decreases. You've got the skeleton crew and you've got the managers; those two groups are fixed, no matter what the volume." Ryan's labor constitutes under 22% of sales, while its competitors' is apt to be three points more.
On the other hand, flogged by McCall's insistence on top quality -- he wouldn't let stores switch catsup brands from H. J. Heinz to Hunt's, for example, even though it could have saved $60,000 a year -- the chain's food and beverage costs have been running more than 45% of sales for the past four years, versus the industry's norm of around 38%. To control costs, Ryan's centrally purchases meat and dry goods (condiments and tableware), and thus each unit incurs the same costs for those items. Individual units buy their own fresh produce locally, which Ryan's prefers over having it shipped from a central warehouse hundreds of miles away, a journey that might wilt the lettuce. Whatever fresh produce isn't used by the end of the day is examined the next morning, and anything that can't be set back out is thrown in a tub, and subsequently weighed. "Waste in ham, cheese, cantaloupe, and watermelon can cost a ton," says director of training Kevin Barlow, age 26. "By studying the waste, we get to see where purchasing mistakes were made."
Ryan's open-ended incentive program is based on a percentage of a store's total volume (not on an increase, as traditional bonus formulas often have it, which creates disincentives when times get hard). But the awardees also must bring in budgets that conform to the average food and payroll percentages of gross for all Ryan's restaurants. (If managers go over their budgets, dollar-for-dollar deductions are taken from their bonuses.) There's no bonus for being under, though, lest a general manager get the idea that by hiring cheap help or purchasing inferior food, he can enhance his own fortune at the restaurant's expense.
"It's a very good system relative to the competition," says restaurant analyst Hardy Bowen, of Arnold & S. Bleichroeder Inc. "Their assistant managers are making more money than the manager in the typical competitor. And to have three managers in a unit, versus one in a competing chain, is a major advantage. I don't see how you run a restaurant that's open seven days a week with one manager. The answer," Bowen concludes, "is to run low enough volume so he can control it."
Such a "solution" is anathema, of course, to McCall, who unswervingly believes that volume cures all ills, including, in Ryan's case, high costs. Charles Way philosophizes: "Give the manager more to work with. Give him more payroll than he would have with another chain. Give him more food costs by setting your raw materials at a higher percentage [of sales]. Then give him a tremendous incentive to work at the percentages that are going to do both the job and produce quality with service."
To make sure its incentives are drawing effectively, Ryan's employs a network of area supervisors, responsible for three to five stores at a time. They are "the key to making it all work," says Way. Nothing exceptional to that, except that even in middle management, Ryan's practices Alvin McCall's heartfelt preachment that you can't run a restaurant from behind a desk. "The money is made in the field," is one of the favorite sermonettes of the founder, who selected the sites of, arranged for the construction of, opened, and operated the first four Ryan's before hiring his first employee, Way. Unmistakably underscoring that message, Ryan's provides no offices to its regional supervisors: a district manager, whose bonus also constitutes more than half his pay, is expected to put in some 1,000 miles traveling six days a week, persuading individual store managers not to be off budget. Ditto Ryan's two quality controllers, who, similarly officeless, roam the territory like men without a country.
Expansion of daily volume has been rendered more rewarding, but hardly any easier, by last September's gamble on the hulking salad, hot-food, and dessert oasis that Ryan's terms its "mega" food bar. A marketing ploy devised as much to keep competitors at bay as to increase income, the mega bar was introduced by 28-year-old chief operating officer T. Mark McCall, an ex-dishwasher who happens to be Alvin's elder son. This irresistibly stocked (with some 68 items) cynosure, with "Ryan's" etched into its smoked-glass sneeze guard, had already increased per-store sales by close to 40% in April. Had it not, the $55,000 capital expenditure required by each installation -- plus precipitously soaring food expense, to as much as 55% of sales, and labor costs that suddenly rose 2% -- would have threatened to undo eight years of steady growth. And for a while it appeared that complications of inventory control would force units to add another manager. "We have lived with food costs going higher for a short period of time, but at over 50%," stewed the Chief, "we had to sit back and look at them." Happily for all, relative costs came back in line as the bar's sales, at less than $4 for all you can eat, climbed rapidly. In May, the title of president was bestowed on young McCall.
At the same time, Ryan's also installed break-making equipment so that each restaurant could make its own rolls from scratch, like so many wayside grandmas. While competitors mainly served what bread cognoscente term "Texas toast," a hard crust that diners tend to eschew rather than chew, Ryan's was experimenting with an oven-baked recipe that would distinguish its efforts from also-rans. With the help of General Mills Inc. (which owns York Steak House Systems Inc.), a proprietary bread formula was developed.
"No other chain that I know of does it from scratch like that," says General Mills's Martin Kazanjian. Approving he well might be: account manager for the entire chain, Kazanjian processes Ryan's orders for close to 5 million pounds of flour a year. Now he tours from store to store, teaching the staffs how to knead the dough. "Most companies figure suppliers are a nuisance," marvels Kazanjian. "Ryan's uses them as a resource. They don't take the position they know it all." Ryan's is presently serving an average of 1.5 rolls to each patron. Although each savory chunk costs the company nearly 3? in labor and materials, no one's complaining: every roll that the ovens' fragrance entices a customer to eat cuts down on revisits to the more costly mega bar.
The mega bar's barbecued ribs, banana pudding, fried chicken wings, meat loaf, chocolate mousse, and other assorted artery cloggers put the lie to the country's dietary concerns. Not only did customers keep eating choice sirloin during what Ryan's refers to as "the beef scare" of the early '80s, they scarfed up so much of the added stuff that mega bar sales now constitute 47% of total sales, up from the 35% the old traditional salad bar accounted for. As a result, while a 10? rise in beef prices used to affect food costs eight-tenths of a percent, now it's only four-tenths. Thus, should beef prices start to roam -- so far they've been cycling cooperatively between $1.70 and $2.60 a pound since Ryan's has been in business -- management won't have to take corrective steps immediately. "The next grade of beef down can average 20? less," says Alvin McCall, "but you'll know it once you take a bite of it."
What enhancing the salad bar was meant to accomplish in practical terms was to increase return on assets -- that is, to drum up more business and fill otherwise empty tables. "If customers were eating steak and potatoes for dinner, maybe they wanted to cut down a little at lunch," Mark McCall mused. "So we put out some vegetables and hot items, and offered a bigger variety for lunch, and hoped it would increase business." It did. Within months after their unveiling, mega bars were judged an overwhelming success: surprisingly, dinner as well as lunch sales improved.Nor did beef orders drop, as management feared they might.
Some customers, management has found, dine at a given Ryan's twice a day. But they can't do it thrice: the company steadfastly has refused to join the highway breakfast battles triggered by McDonald's in 1973. The mega bar has extended the number of servings that store managers have to face every day, never mind the prospect of rising at 5 a.m. to prepare an entirely different breakfast menu. If the notion of adding to gross receipts through ham and eggs is fiscally appealing, it has been outweighed by humanitarian concerns for the 14-hour-a-day tour of duty junior management already is expected to put in.
Since Ryan's earns a lot less per person served than its competition, it has to serve a lot more people to keep growing. One solution to unused seats is to change the culinary habits of the masses. "If only they'd eat out the first part of the week, there's no telling what the volume per store could do," says Alvin McCall. "We can probably get it into the $70,000s and $80,000s." But, he frets, "when the line backs out the door, there are as many cars that come into the lot and go right back out as stay and get fed. I hate to lose them." In order not to, most units have been undergoing modest expansion, from their original 250 seats to the present 325. And among those that have the extra land, Ryan's is tacking on a "solarium," an area around the perimeter that adds yet another 100 seats.
As those seats fill with diners, Ryan's sales-to-investment ratio is an enviable 2 to 1 (that is, for every dollar spent on constructing a unit, $2 comes back each year in sales). Ryan's revenues are running at over $2 million per unit, at which level, guesses Alvin McCall, "we're probably the highest in the United States right now." But that may be the limit, at least for the time being.
Would Ryan's counter the threat of arrested growth by trimming expenses? Bite your tongue! The chain wears the highest food costs in the industry as a badge of honor, taunting the opposition to match its quality and still make money. Ryan's agent purchases unfrozen sides of aged USDA Choice beef, which are then further aged at the stores. Each store has a meat cutter who tediously trims each piece uniformly, so that when the customer comes back a few weeks later, that day's steak will be identical with the last. What is not trimmed, though, is corners. No mega bar item, for example, is dropped simply because, like honeydew melon, its price is seasonal. When coffee prices soared last winter, Ryan's continued pouring its brew into bottomless mugs. "We do not cut costs because margins may be suffering," avers McCall. "We're not going to lower our grade of meat just because things start getting a little rough out there. I'd rather serve a smaller portion and still serve quality.
"There's nobody can touch us for dollar value," he fervently maintains. "They're just not going to do it. Yet it's so simple. They don't think like we do. They don't think quality. They think about cutting cost -- down, down, down -- but that's where they're wrong. Nobody thinks like we do. Thank goodness they don't -- that's why we're able to put twice as much on the bottom line as our nearest competitors. Competition is going to force all of them to serve a higher-quality product; instead of cutting costs, they're going to have to raise them." Warns McCall: "The days of running food costs in the mid-30s [percentages] are over."
On the drawing board, if not yet the groaning board, Ryan's next thrust is toward mega restaurants that will be able to handle considerably more diners (a prototype seating 450 to 500 will be tested this year). But, what with constantly increasing land, building, and equipment costs -- Snellville took $935,000, and that could be the last of the under-a-million-dollar units -- the tactics of establishing a Ryan's presence are under flux. The company's site-selection and construction department, run by 27-year-old John Jamison and staffed by up-and-coming 24-year-old Jeff McCall, has turned to rezonings. Like a real estate speculator, Ryan's buys a chunk of land that is not commercially zoned, then tries to get the zoning changed. Sometimes the company buys more land than it needs, and if it is successful at rezoning, it keeps a couple of acres and sells the excess at a serendipitous profit, since who wouldn't pay a premium to be next to a Ryan's?
To determine a likely spot, site selection taps U.S. Bureau of the Census figures. A demographic requisite left over from startup days demands 60,000 people within a four-mile radius of the proposed site. That, Alvin McCall feels, defines a truly residential area. "We have it pretty much down to a science," he says. "We get a lot of church business, for example, and the churches will be there if the community's there." But lately the rules have been stretching: to find 60,000 residents for the Snellville unit, you had to look five miles out. Then the neighborhood is screened for such telltale statistics as owner-occupied homes, property values, consumer spending in retail establishments, and traffic patterns. "When you're doing only 2 a year, there's not much to finding sites, but when you're opening up to 20 restaurants [as Ryan's intends in 1987], you have to be a lot more sophisticated," says Jamison of the computerized process that can take the coordinates of two streets anywhere in the country and disgorge the buying habits of the locals. "I like to look at spending on hardware and lumber," Jamison admits. "People who do their own work are our kind of people. They end up eating with us."
What with its asset-rich balance sheet, on which real estate is carried at cost rather than at market value, Ryan's is an obvious candidate for acquisition or takeover. Should that come to pass, chances are we won't have heard the last of Alvin. "I'm not going to retire and just play golf," he pledges. I've got too much left in me for that." Maybe the next chain will be named McCall's -- it's short, easy to identify, and Irish.