Serving Up Palate Pleasers : Restaurant Executive Keeps Up With U.S. Appetites : NORMAN N. HABERMANN

One year, pasta salads are a big hit. The next, sizzling fajitas are the talk of the dinner table.

The taming of the American palate is a never-ending task. Fast-food chains jostle with each other over which has the lowest prices on basic items. Coffee shops try to provide the homiest service. And dinner houses try to lure diners into spending a few dollars more for a luscious dessert.

With consumers facing so many choices about where to eat, restaurant chains are constantly trying to think up new ways to keep the booths filled and the coffee pouring.

For more than 20 years, Norman N. Habermann has been a leader in the restaurant trade. He is president and chief executive of the Restaurant Enterprises Group Inc. in Irvine, which is listed in the trade magazine Nation’s Restaurant News as the 13th-largest food service company in the country.

While the company is hardly a household name, most people would probably know most of the more than 500 chain and specialty restaurants it operates.

The company’s chains span the range of middle-class dining. They include the so-called coffee shops Carrows Restaurants and Coco’s Family Restaurant; the Mexican-style restaurants of El Torito, Casa Maria and in the East, Casa Gallardo; and the dinner house chains Reuben’s, Charley Brown’s and Baxter’s. Restaurant Enterprises also operates a few upscale specialty restaurants, such as those in the Los Angeles Music Center.

Last month, Restaurant Enterprises agreed to buy 104 Bob’s Big Boy restaurants in California from the Marriott Corp. for $65 million. The company plans to convert them to Coco’s and Carrows restaurants.

Habermann has led the company since it was established in 1986 as a result of a management-led buyout of W.R. Grace & Co. He had joined Grace the year before when it acquired Carrows Restaurants Inc., which he had headed as president since 1981.

Besides expertise in coffee shops and dinner houses, Habermann also has guided fast-food chains. He was a vice president for Kentucky Fried Chicken and later was chief operating officer of the H. Salt Fish & Chips chain.

He was interviewed in Irvine by Chris Woodyard, a Times staff writer.

Q. Where do you see the restaurant industry today? Where does it stand?

A. You have to break it down and look at it in different categories. The largest component is fast food, the McDonald’s and Pizza Huts of this world. The second group is what I would call family dining, or coffee shops. And there are the more expensive, one-of-a-kind white-tablecloth restaurants.

Each one of those has a different economic environment. Fast food is clearly the most competitive now. You’re seeing a lot of price competition, led by Taco Bell.

I think the family dining arena is very competitive as well. It is probably right now one of the more successful areas in the business because it does offer a broad variety of products at a good price and value. And it is more popular because many people are trading down either to cheaper menu items or a cheaper restaurant from white-tablecloth restaurants.

Q. Because of the tight economy?

A. It’s because they can get awfully good meals and a very nice atmosphere which is not much different from the mid-scale dinner houses. Eating out is such a way of life for the American people. They don’t give it up even during recessionary periods. They just do it less often.

Q. What about the image of the family restaurants? How do you establish them as a place people want to go?

A. I think that comes down to the niche that each one of these concepts uses to try to position themselves. For example, Coco’s, which is so well-known in Los Angeles and Orange counties, has become more upscale. While a broad variety of consumers eat there, it is generally the white-collar crowd that frequents it. It has dinner offerings like prime rib and shellfish that cater to a kind of elite consumer. Others at the very low end of the spectrum, the deep discount restaurants like Norm’s and Spire’s, are more oriented toward breakfast and lunch specials in the $1.99 range. So each of the concepts positions itself, and they are all over the spectrum. Each has a niche they feel comfortable with, and they trade off that niche.

Q. You mentioned people who are trading down in the tightened economy. What about people who are trading up, people who want a more comfortable, sit-down restaurant than fast food?

A. There’s no question that you get some trade up and trade down. As the population grows older--the so-called graying of America, with fewer children in the households--people do trade up from fast food to the so-called middle-market family dining. But during difficult periods, especially with a recession and the Gulf War on everybody’s mind, you are also seeing trading down from the expensive white-tablecloth restaurants. People don’t want to spend $25 or $50 per person to dine in tough times. They still want to eat out, so they will eat out in the middle market or even the low-end market such as steak houses.

Q. What about ethnic foods? It seems like Mexican food is still growing in popularity across the country. Is that one of the fastest-growing categories of restaurants?

A. It used to be. I think the Mexican category became prolific in California and then other areas of the country. I think that is still a growing segment and growing much faster outside California.

The segment that I would think is the fastest-growing in today’s restaurant market environment is clearly Italian. On the low end of the Italian market on the East Coast, you have a very successful chain called Sbarro’s. You have another chain that General Mills introduced a few years ago called the Olive Garden, and they have more than 200 units now. It is more what I would call the middle market because it is in a building that has 6,000 or 7,000 square feet. And that chain is growing in leaps and bounds. I think their compounded growth is in terms of 20% a year.

Q. How do you account for the sudden growth in the popularity of Italian food, which has been around for so long?

A. Italian restaurants have always been around in large numbers, but it generally has been more mom-and-pop-type businesses. Now . . . the chains have realized that it’s a very popular ethnic food. It has low food costs and is more healthful than other food categories. For those general reasons, it has become a very popular concept.

Q. Obviously, Mexican restaurants can profit from selling more liquor than the average restaurant since spicy food lends itself to more beverage consumption. Is there a similar effect with Italian restaurants?

A. No, far less of an effect.

Q. Are restaurants selling fewer alcoholic drinks?

A. For seven or eight years, alcoholic beverage consumption has been going down. There are many reasons. They are tied to health and lifestyles. AIDS has certainly impacted late-night drinking habits. In California and other states that have stringent driving codes and penalties related to driving under the influence of alcohol, you have seen a significant decrease in the “happy hour” business. For a variety of reasons, social and otherwise, alcoholic beverage consumption in all restaurants, regardless of concept category, has decreased fairly dramatically in recent years. And only recently have we seen a leveling off of that deteriorating pattern.

Q. How has that impacted profitability of restaurants since liquor is generally considered to be a high-profit item?

A. It’s impacted profitability, and companies have learned to live with a lower profit margin, especially those that were making 35% to 40% of their total sales in the form of alcoholic beverages. Many of those alcoholic beverage sales have been replaced by food sales. Food sales are more expensive. You have a higher cost of the product itself and you have a higher cost of servicing that product.

Q. What is your biggest challenge in terms of costs?

A. The biggest challenge from a costs and availability point of view is finding and retaining quality labor. This is a young people’s industry, and as the population gets older, without a lot of teen-agers and people in their early 20s coming into the work force, you have a shortage of opportunities to hire people.

The biggest impact, for the most part, is on the fast-food chains because they are minimum-wage employers. We don’t have the same problem in our restaurants because we are more upscale in all of our concepts. Our employees, in addition to earning a minimum wage, earn anywhere from $7 to $12 an hour in tips.

The second factor that has been onerous for employers has been employee benefit costs. The costs of insurance, both medical and dental, and the costs associated with workers’ compensation have been dramatically increasing over the last three or four years.

Q. What can you do about it?

A. Hopefully, you can deal with it in part. I don’t know anyone who has found the magic answer of passing all those costs along to the consumer. In part, employers are passing some of those additional costs, especially for medical and dental coverage, on to the employees. So instead of the employer paying 80% to 100%, many employers are paying 50% to 60%. So the employees are bearing a greater share of the burden as these costs continue to rise.

Q. How do you expect the restaurant business to evolve over the next decade? What will the restaurant of 2001 be like?

A. I do think there are some clear signals of what could happen. Besides the proliferation of the Italian concept, you will see companies in the Chinese food business. No one has done it because the menu and preparation is complicated. The fact that a lot of it is takeout and home delivery makes it even more difficult. However, I think someone in this next decade will be able to crack that code.

I think also what you are going to see in this next decade is perhaps the proliferation of additional units of successful chains. The early ‘90s and the late ‘80s have seen a dramatic slowdown in the number of units being added, even in successful chains. I think that that quiet period of three years or so will allow demand to catch up with supply, and I think in the mid-1990s we could see a new significant growth trend.

Q. How about franchising? Will it remain as popular as ever as a way of adding new restaurants quickly to a chain?

A. I think franchising is kind of a good-news, bad-news story. On the good-news side, it allows you to grow very rapidly with somebody else’s capital. On the bad-news side, that growth is far less controllable. In many instances, it provides you with a bad image, especially where you are operating in shared markets where company-operated units have certain standards and it is difficult to get franchisees to live by those same standards. Clearly, that is a function of individual companies’ philosophies on growth. We, as a company, have never been in the franchising business except in international operations. However, we are now looking very seriously at franchising our family-dining concepts, Coco’s and Carrows, because they are duplicatable and the cost structure would allow franchising.

Q. I would think that family-owned, independent coffee shops could bring a wealth of experience to a franchise.

A. From our perspective, there is a lot of opportunity for people who have their own family-dining restaurant to convert to a very successful chain and get the advantages of advertising leverage, common purchasing practices and alike. We’re probably going to test the waters with franchising by spring of this year.

Q. How much opportunity is there for American restaurant companies overseas? Is the market there getting saturated?

A. I don’t think so. I think there is significant opportunity. It was about eight or nine years ago that we did not have a single unit in the Far East. At the end of 1991, we will probably have 200 units. If we are any living proof of the potential, it’s certainly there. The Pacific Rim countries . . . like American food. If you think of how successful the fast-food chains like Kentucky Fried Chicken, McDonald’s and Pizza Hut have been over in the Pacific Rim, I think there is a lot of opportunity for others in the family dining, mid-scale concept. You need more of a chain mentality to be there. But I think there are also emerging countries such as Malaysia, Singapore and even China.

Q. What about Mexico?

A. Mexico has been so volatile over the years, both with its currency and its government, that most companies have basically steered clear of going down there because there is much more opportunity elsewhere and much more stable environments.

Q. Some chains, such as Bakers Square Restaurant & Pie Shop, have gone heavy into promoting desserts. Do desserts have a high margin?

A. Desserts don’t generally have a great margin, but they are an incremental sale. Each incremental sale has a significant profit margin associated with it. While the food cost of serving a drink is only in the 20% to 22% range, the cost of serving a dessert may often be 35% to 40%. But because it was an incremental sale that wasn’t expected, all incremental sales in the restaurant business have a pretty high profit margin.

Q. By incremental sale, you mean that extra part of the sale that would go beyond your expectations. Instead of just a sandwich and a drink, a customer orders a couple other things that adds to the total bill and gives you an economy of scale.

A. You are exactly right because you have so many fixed costs. Those are changed by these incremental sales.

Q. What about the trend away from red meat. Some steakhouse chains have had to change their images, but it seems as if lately that red meat may be making a bit of a comeback.

A. I think there has been some slowdown in red-meat consumption, but I think you hear more about the slowdown than the actual results would dictate. I think a lot of people would say they don’t eat much red meat when, in fact, they do. I think the way most successful chains have combatted the deteriorating red-meat consumption is by offering a more rounded menu. For example, at Reuben’s and Charlie Brown’s, we just expanded the menu. We added a lot of fish items, a lot of poultry items and some pasta items to give people who are not predisposed to red meat an opportunity to still dine there.

Q. Sizzler Restaurants, of course, have worked hard to change their image away from strictly being a steakhouse.

A. They have done a wonderful job. They have been, over a number of years, a truly outstanding concept.

Q. Sizzler also has been heavily promoting its new buffet. Doesn’t that substantially lower labor costs?

A. It lowers your labor costs but it increases your food costs. There is a tendency to have a lot of waste. Either people take more than they can eat or because you have to prepare such a full-blown buffet, when it doesn’t get eaten, it gets thrown away. We have had lots of tests with all-you-can-eat salad bars and buffet programs, and each time we’ve generally abandoned those. The costs are so hard to control and the incremental sales derived from those are more than offset by the costs.