Scratching a Nich

by Restaurants and Institutions - 2/15/2006

French fries and Caesar salads may dominate many chain restaurant menus but some smaller chains are hoping that selling pho and cream puffs can be good business too.

Before high-end coffeehouses blanketed urban areas, bagel shops broke through to the mainstream and smoothie cafes caught on in cities across the country, each represented a niche in the marketplace, an entrepreneur's grand vision and big gamble.

For every concept that takes off, a new round of restaurateurs sprouts, trying to replicate that success. Some try to improve on what's already out there, perhaps by building a better sandwich, while others set their sights on an entirely new market.

"We are trying to make ourselves the Starbucks of tapioca pearl drinks," says Kevin Fang, franchise manager for Tapioca Express, a South El Monte, Calif.-based chain of bubble tea shops. Its specialty, based on a drink popular in Asia, is a blended fruit drink filled with raisin-sized chewy tapioca pearls. About 80% of the chain's sales are from beverages.

Tapioca Express is one of several small chain restaurants trying to take their unconventional menus nationwide. Regardless of whether they serve noodle soup or buttercream cupcakes, these operations hope that they've found the next big thing.

Beard Papa, a Japanese chain of cream-puff restaurants, opened its first U.S. location in New York City in March 2004. Since then, Beard Papa has opened another company-owned store and eight franchise locations in the United States.

"We were just going to open one store and use that to test new products before expanding. The last 18 months really caught us off guard," says Craig Takiguchi, chief operating officer of Beard Papa, a subsidiary of Muginoho, an Osaka, Japan-based restaurant chain. "We literally opened five in the same month."

Making a Menu

In a chain-dense marketplace, finding an underserved niche can be daunting. Some upstarts have imported ideas from across the globe. Others have made a business of serving basic foods--the kinds that people eat at home--with a restaurant's flair.

Cereality Cereal Bar & Cafe, a chain of four cereal-only restaurants, grew out of two men's observation that people love cereal any time, not just for breakfast.

"We wondered why no one had figured out a way of making people's perfect cereal meal available to them in a restaurant," says David Roth, president and chief executive officer of Chicago-based Cereality.

Locations serve 30 kinds of dry cereal with 30 choices of toppings and nine varieties of milk. The restaurants also serve hot cereal as well as breakfast bars and smoothies made with cereal.

"Cereal is the most-purchased food item in grocery stores after milk and soft drinks," Roth says. Most restaurants serve soft drinks, but "we've got the cereal and milk."

Similarly, the Saladworks restaurant chain took an item on most restaurant menus and designed a concept around it.

Saladworks serves 12 different tossed salad recipes, made to order for customers and served with a choice of 12 dressings, made fresh daily. While the chain also offers wraps, sandwiches and pasta dishes, salad accounts for about 70% of its sales.

"Our No. 1 salad is our Create Your Own. Guests can say, 'I want some eggs, some cucumber, some carrots and some fresh beans' and we'll make that salad to order for them," says John Scardapane, chairman and chief executive officer of Conshohocken, Pa.-based Saladworks. "They see it made to order right in front of them," like they would at home, he adds.

Other chains import specialties from overseas, betting that Americans might take a liking to more-unique offerings.

Pho Hoa, a Sacramento, Calif.-based chain of Vietnamese noodle soup restaurants, opened its first restaurant in 1983 in San Jose, Calif., primarily to serve a growing Vietnamese population. But in the 1990s, Pho Hoa began expanding in other Asian communities. Now with 76 stores in the United States, Canada and several countries in Asia, the company is testing its appeal to the mainstream market, says Trang Huynh, marketing and franchise manager for Aureflam Corp., parent company of Pho Hoa.

"We don't want to be an ethnic restaurant chain, we want to be mainstream," Huynh says. "We want people to see us more as a noodle soup company and not so much as a Vietnamese noodle soup company."

Adaptive Behavior

Key to the success of many small niche chains has been their ability to evolve the concept as they move into new markets.

Beard Papa, for instance, opened its first location in a 1,200-square-foot space. Now the company is aiming smaller, focusing on kiosks in grocery stores and shopping malls.

So far, the move has paid off. In Beard Papa's newest location, a 300-square-foot supermarket kiosk in Gardena, Calif., the company posted $80,000 in gross sales in its first month.

"We started as a destination concept, where we were going to have big units and the concept was going to bring the traffic," Takiguchi says. "Now we're learning more about the heavy fast-food-user demographic, and we're looking to be less of a destination concept and more of a convenience location."

Beard Papa presently is trying to find the best coffee to pair with its ultra-rich cream puffs, hoping to prevent its dessert customers from splitting their purchases with Starbucks or Dunkin' Donuts.

"Our research shows that if we serve a decent cup of coffee, then customers will sit down and have a drink with us," he says.

Small chains should always adapt menus to attract more repeat customers, says Bob Goldin, vice president of Chicago-based Technomic Inc.

"You can sustain yourself on curiosity for a while, but ultimately you need a customer base," Goldin says. "Will your menu draw customers back again? A larger menu tends to broaden your appeal."

Many chains with limited menus say they have to find the right mix of products to turn the best profit and attract the most customers.

Tapioca Express has found that it sells more of its blended avocado drinks in markets with large Filipino populations. And while cantaloupe and jackfruit are popular in areas with large Vietnamese populations, markets with more white consumers show greater sales of bubble tea with white tapioca pearls instead of black ones, Fang says.

Pho Hoa has added grilled salmon and curry chicken to its menu to broaden the concept's appeal. And it has begun to serve its noodle soup--traditionally served with beef tripe, tendon or meatballs--with more American-style meats, such as chicken and shrimp.

Menus and Margins

But as niche chains try to broaden their menus to attract more customers, some find that profit margins are lower on these noncore items.

Tapioca Express added crispy chicken and calamari snacks. Most of the company's 63 stores menu several snack-food items and meal combinations, using them as a draw for lunch and dinner customers, Fang says.

"Our profit margins are pretty good only on the drinks," Fang says. "If we developed a fixed food menu, the profit margin would be much greater on the food."

Saladworks has found that as it expands its purchasing power grows-- and lower food costs mean higher profits. Since the chain buys its produce on contracts, the more restaurants it has, the cheaper its supplies, Scardapane says.

"We're buying at 15% less than what the street market is for produce, and our margins are good because of that," he explains. "In the quick-serve category the competition just doesn't allow an operator to price-gouge anyone else. The real advantage has to come from doing a good job buying."

Protecting the Brand

When a chain finds that its product or concept catches on, competition is quick to follow.

Fang says the bubble tea market has become "tremendously competitive recently," and that his chain tries to stay ahead by constantly adapting its menu and perfecting flavors to consumer tastes.

"When we first brought this idea to Los Angeles, we got huge traffic. You could see a huge line of people outside our store waiting for drinks," Fang says. "Those first couple of years we were booming, opening 20 stores per year. Now we're encountering very severe competition. A lot of people want to copy our concept."

Huynh says Pho Hoa tries to beat its mom-and-pop store competition by expanding its menu to attract more customers than local pho shops. Saladworks tries to best its competitors by stocking fresher ingredients.

Cereality, however, has taken another tack to dealing with the greatest form of flattery: legal action.

"In cases where there have been some attempts to knock-off Cereality, we have been very bullish and aggressive in protecting our intellectual property," Roth says. "We have been successful in having them change their names. If we feel it infringes on our intellectual property, we immediately take action."

Regardless, a Cleveland-based company has announced that it expects to open several Cerealicious Cafes in the next few months.

Fetching Franchises

by: Kristina Buchthal

Many small chains have found that the quickest way to grow is through franchising. And there's no shortage of interest.

Long before Cereality Cereal Bar & Cafe opened its second unit, the company was getting e-mails and phone calls from people who had heard about a small cereal restaurant at Arizona State University in Tempe.

"Parents were saying, 'We want to invest, we want to franchise,'" says David Roth, president and chief executive officer of Chicago-based Cereality, who adds that his company has had about 7,000 inquiries from people interested in franchises.

Now, more than two years later, Roth says Cereality is in talks with several potential partners. The company hopes to ink deals in first quarter 2006 and have stores open by the end of the year.

Pho Hoa is cautious in its approach to franchising. With 16 company-owned units and 14 franchises in the United States, Pho Hoa is increasing the amount of capital a partner must invest from the current $250,000 to $380,000 to $600,000 per store, depending on location.

Tapioca Express has received franchising inquiries from throughout the world, including Egypt, China and countries in the Middle East. "There's a huge market in China," says Kevin Fang, franchise manager. "But we are being very careful in franchising and licensing. We don't want to ruin our image or reputation."