Street Fight: Food Trucks vs. Restaurants

Story first reported from  WSJ.com

A street fight is brewing between gourmet food-truck vendors and restaurants—not over the grub, but how it's sold.

Under pressure to protect local food businesses from mounting competition, cities across the country -- including Chicago, Boston, New York and Sunnyvale, Calif. -- are putting the brakes on a rising tide of food-truck vendors. Sarah Needleman has details on The News Hub.

Under pressure to protect bricks-and-mortar restaurants from increased competition, several big cities are starting to apply the brakes on a rising tide of food-truck vendors with fully loaded kitchens.

Boston, Chicago, St. Louis and Seattle are among the cities enacting laws that restrict where food trucks can serve customers in proximity to their rivals and for how long. Some food-truck operators argue that they shouldn't be punished for offering an innovative service, especially since many cities already allow restaurants to open up alongside one another.

"The rules are unfair," says Amy Le, owner of Duck N Roll, a food truck in Chicago serving Asian-style cuisine that includes short ribs and mango lychee.

Three weeks after she launched the business last fall, she received a ticket from local law enforcement for doing business about 150 feet from a wine bar—50 feet within the city's limit for how close food trucks can park outside of retail food establishments.

Ms. Le says she later had to spend nearly a full day in court to find out what the violation would cost her—about $300—and that she lost an estimated $600 to $700 in sales as a result.

"The 200-foot buffer prohibits me from competing," says Ms. Le, 32 years old, who also opposes a new rule requiring food trucks to install global-positioning devices so the city can track their whereabouts. "It is a free market. Let the consumers decide when and where they want to eat."

Tom Alexander, a spokesman for the city of Chicago, says the new ordinance "is a workable compromise" that includes the addition of 60 free parking spaces in high-traffic areas for food trucks. "[It] reflects everybody's interests," he says.

Gourmet food-truck operators say another problem is that in many cities they are still relegated to antiquated rules intended for ice-cream, hot-dog and other traditional mobile vendors with smaller and less complex menus.

New Orleans, for example, requires mobile food vendors to change locations after 45 minutes in one spot, among other restrictions.

"It's not a feasible amount of time for this business model," says 31-year-old Rachel Billow, who last year co-founded La Cocinita, a food truck that serves Latin American cuisine such as plantains and arepas. "It takes about a half-hour to set up."

Ms. Billow says she and her business partner, Venezuelan chef Benoit Angulo, started La Cocinita after several years of working in the restaurant industry. They invested $50,000 in start-up costs, an amount that included $12,000 in modifications to their vehicle to satisfy the city's fire code, she adds.

Revving Up

Thinking of starting a food-truck business? Here's how to avoid biting off more than you can chew:

1. Shop around. Food trucks outfitted with fully loaded kitchens range in price from about $50,000 to $250,000, depending on whether the vehicle is new or used, as well as the type of cooking equipment installed.

2. Know the rules. Cities have different laws regulating where and for how long food trucks can park on public streets and even private property.

3. Become legal. Cities commonly require food-truck vendors to obtain permits and licenses for varying fees before they can do business. These may also need to be renewed annually.

4. Create a budget. In addition to cooking supplies, regular expenses typically include fuel, parking and truck-maintenance fees.

5. Use social media. Once you get started, let customers know where you'll be by posting your location on Twitter and Facebook.

Danielle Viguerie, communications director for New Orleans City Council member Stacy Head, says the city is currently looking into adopting more progressive laws for regulating gourmet food trucks.

Truck operators say being able to stay in one spot for several hours also is important because they typically post their locations every day on their Twitter and Facebook pages.

"Even if we have to move once, people are going to complain they can't find us," says Skip Stellhorn, who runs Pollo Fritto, a fried-chicken truck that began operating throughout the San Francisco Bay area in January.

Restaurant owners may be concerned for good reason. In Boston, there are now 38 food trucks in operation, up from 17 a year ago and about six in 2010. St. Louis currently has 29 food trucks, up from 14 last year and zero in 2010. Meanwhile, inquiries about food-truck permits in Sacramento, Calif., now average three to four a week, compared with just one a month a year ago.

Established restaurants say the influx of food trucks is eating away at their bottom lines.

"They come during our busiest hours and park in front of us," says Camy Silva, co-owner of El Gaucho Luca's Café in downtown Las Vegas, where legislators are considering an ordinance that would prevent food trucks from parking for more than four hours a day on a public street within 300 feet of a retail food establishment.

Ms. Silva says she supports the proposed ordinance because she wants to protect her five-employee establishment from the food trucks, as they often undercut her in price. Her restaurant charges about $8 for a hamburger, twice as much as the food trucks.

"We spend a lot on advertising and promotions to bring people downtown, and the food trucks benefit from that," adds her husband and business partner, Pablo Silva.

Gavin Coleman, general manager of the Dubliner, his family's Irish pub and restaurant in Washington, D.C., says food trucks don't just compete with him for foot traffic. They also occupy a long stretch of parking spots where his customers look to park their vehicles. And they play loud music that he fears is a disturbance to patrons who dine on his outdoor patio.

"Businesses pick locations and business models around certain peak times," says Mr. Coleman. "Food trucks can poach that business and then pick up and leave."

Two or three times a week, a fleet of food trucks—as many as 17—pull up alongside a busy road roughly 75 feet from his establishment, creating a transient food court for lunch seekers, Mr. Coleman says. Three years ago there were none.

Officials in Washington, D.C., are considering an ordinance that would restrict where food trucks can operate and require them to make arrangements for trash removal. Andrew Kline, spokesperson for the Restaurant Association Metropolitan Washington, says the trade group supports the proposal. He says restaurants in Washington pay about $60 to $70 a square foot for prime locations, while food trucks pay parking rates that equal about just $12 a square foot.

"We support anybody's right to compete in the marketplace, but we think food trucks should do so fairly and on an even playing field," says Mr. Kline.

To be sure, not all cities have been successful at regulating food trucks. Last year, El Paso, Texas, was forced to overturn a 2009 ordinance prohibiting food trucks from doing business within 1,000 feet of retail food establishments after being sued by four local food-truck vendors.

The case also resulted in the removal of an ordinance that only allowed food trucks to do business when hailed by customers and to remain parked only for as long as customers were being served.

"Economic protectionism is not a legitimate governmental interest," says Bert Gall, a senior attorney at the Institute for Justice, a national nonprofit law firm based in Arlington, Va., which represented the plaintiffs.

Bruce Parsons, a spokesman for El Paso's health department, says the case reflects the interests of the city's growing food-truck community.

"It is a much more acceptable ordinance now to the mobile vendors," he says. "There are lots of them. Food trucks are very popular here."

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Expanding Eateries Target Shuttered Sites
Originally Posted to the Wall Street Journal

As restaurant chains go out of business or prune their store counts in the tough economy, competitors are jumping on the opportunity to move into the vacated locations as a way to expand quickly and cheaply.

Restaurants can convert their competitors' closed sites to their own brands at a lower cost than building new restaurants from scratch, industry executives note. Incoming businesses also have the upper hand in negotiating rents with landlords stuck with empty restaurant space.

"You definitely have the bargaining power because you have all the vacancies, and landlords are aware of that," says Navin Nagrani, vice president of Hilco Real Estate LLC, which specializes in real-estate restructuring.

Buffalo Wild Wings Inc., a sports-themed bar chain based in Minneapolis, is one of the companies emphasizing conversions as it expands. Over the past two years, it has acquired eight Don Pablo's restaurants and turned them into new versions of its sports-themed bar chain. As of the end of the year, Buffalo Wild Wings had 560 sites.

[ Photos: Buffalo Wild Wings took over a Don Pablo's restaurant, above, in Fort Worth, Texas, converting it into a Buffalo Wild Wings that opened July 28, 2008. ]

It has also put in place a rebranding "SWAT Team" of construction, operations and other professionals who can take a vacated site and convert it in just a little more than five months.

Giving Buffalo Wild Wings a boost in pursuing the locations is the chain's balance sheet. "We don't have any debt and we have cash on the book so these are the kinds of opportunities that we can take advantage of" and the competition often can't, says Matt Brokl, a vice president and associate general counsel.

Conversions cost the chain at least 20% less than building a new restaurant from scratch, which can take up to 13 months, Mr. Brokl says. Others estimate the savings can be even greater. Gene Baldwin, a partner with the restructuring firm CRG Partners LLC, estimates that moving into an existing site can cut development costs in half.

While the restaurant industry has been hammered over the past couple of years by a consumer-spending pullback, lower real-estate and development costs and lower rents have emerged as a tailwind for those chains still in expansion mode.

Panera Bread Co. has been negotiating with landlords to move into several former Bennigan's locations since the parent company of the bar-and-grill chain filed for Chapter 7 liquidation last summer, according to Mike Nolan, the fast-casual chain's chief development officer.

"Our experience says the best time to grow, all else considered, is during times of recession," says Mr. Nolan.

Burger King Holdings Inc. is breathing new life into some of the hundreds of Starbucks Corp. locations closed by the coffee chain in response to the economic downturn.

"Who would've thought five or six years ago that we would ultimately be able to take over a conversion of a Starbucks location?" Burger King Executive Vice President Russell Klein said at a recent investor conference.

And a Chili's Grill & Bar operator in Ontario, Canada, has already inquired about moving into at least two former Outback Steakhouse locations after the latter chain pulled out of the Canadian market last week, says John Reale, president of global business development at Chili's parent company, Brinker International Inc.

In the fast-food sector, which has held up better than full-service restaurants because of its lower prices, the credit crunch is one of the factors making more sites available for conversion. According to Hilco Real Estate's Mr. Nagrani, unprofitable fast-food locations are having a hard time selling their sites to other franchisees and shutting their doors instead.

Of course, not all chains are scouting closed sites and not every closed location is suitable for a new restaurant to move in. Chipotle Mexican Grill Inc., which plans to open as many as 130 restaurants this year, says it has found that many possible conversion sites are less than desirable.

"We're finding that people who are closing restaurants tend to close bad locations and keep the good ones," says Chris Arnold, a Chipotle spokesman. "We're not willing to make concessions."

Dining Chains Shut Doors

Bennigan's, Steak and Ale To Liquidate as Glutted Restaurant Industry Shakes Out


After filing for Chapter 7 bankruptcy, the parent company of national chains Bennigan's and Steak and Ale on Tuesday shut hundreds of restaurants, putting thousands of employees out of work.

The move by privately held Plano, Texas-based Metromedia Restaurant Group knocks down two sit-down chains that have been part of the country's casual-dining landscape for decades.

About 200 restaurants were closed immediately, including all of the remaining 50 or so Steak and Ales. The filing eliminates full and part-time jobs for more than 9,200 employees, many of those in Texas, Florida and Illinois, three people familiar with the matter said.

Another 138 franchisee-owned Bennigan's sites aren't part of the filing and intend to remain open. They face a more uncertain future, however, given they'll no longer have the full support of parent company Metromedia Restaurant Group, a unit of billionaire John Kluge's Metromedia empire.

A company spokeswoman, Leah Templeton, declined to answer specific questions about the closings and the filing. In an email, she said that stores operated by franchisees are not named as debtors in the filings, and that future decisions regarding the affairs of the debtor companies will be determined and administered by a bankruptcy trustee.

In addition to Bennigan's and Steak and Ale, the filing includes a handful of Tavern restaurants, an experimental concept at Metromedia. It doesn't include the company's Ponderosa and Bonanza restaurants, which operate under Metromedia Steakhouses Co., she said.

The filing marked one of the largest Chapter 7 bankruptcies of a restaurant chain in recent history, according to restaurant consultancy Technomic, and is the most extreme sign yet of how midprice, sit-down restaurants are undergoing one of their worst periods in decades. Challenger, Gray & Christmas says the resulting layoffs constitute the sixth-largest mass job cut of the year.

High ingredient and labor costs are eating into profits, and several years of rapid expansion by bar and grill chains has left a glut of locations in the market. Pressures such as high gasoline prices and dwindling home values have prompted consumers to eat out less often or switch to cheaper fast-food meals.

Restaurant pioneer Norman Brinker founded Steak and Ale in 1966 in Dallas. The chain, with its dimly lit dining rooms, has billed itself as offering an upscale steak experience at lower prices. It was seen as a model for the casual-dining steakhouse chain, and many executives there went on to run other large chains.

Bennigan's, founded in Atlanta in 1976, expanded rapidly across the country in the 1990s, opening hundreds of its pub-themed restaurants to entice diners with over-size sandwich platters and happy hours. Irish-themed Bennigan's is known for fried Monte Cristo sandwiches, walls cluttered with antique photos and slightly lower prices than its rivals, like three-course meals for $10.99.

The venerable chains weren't able to survive in part because their menus and atmosphere failed to set them apart from the pack, said Ron Paul, president of restaurant consultancy Technomic.

"There's just too many stores in this category," said Mr. Paul, whose firm has done work for Metromedia. "Most of these places aren't even that full on a Saturday night." Chains have already started slowing their expansion and shutting locations, and Mr. Paul expects that will accelerate.

Other large national chains that have filed for bankruptcy this year include Vicorp Restaurants Inc.'s Bakers Square and Village Inn and Buffets Inc.'s Old Country Buffet. Those chains, however, are trying to restructure and eventually emerge from bankruptcy, while Bennigan's and Steak and Ale are planning to liquidate.

Metromedia Restaurant Group earlier this year violated terms of a lending agreement with GE Capital Solutions. It had been in negotiations with lenders since last year to stave off the filing, while closing about 75 stores and looking for a buyer, said two people involved in the matter.

Metromedia's largest lenders are GE and the Bank of New York, which also own most of the chains' real estate. Over the past year, the parent company has had to contribute about $100 million to meet payroll and some debt obligations, these people said.

Late Monday, managers at Bennigan's and Steak and Ale were called or emailed and told not to open restaurants the next day, according to two people familiar with the matter. Employees were told there wouldn't be enough money to pay them for the rest of the week, these people said.

The abrupt shutdown took employees and customers by surprise. At a closed Bennigan's in downtown Chicago on Tuesday, tables were still stacked with rolls of silverware, ketchup and menus, and the neon signs remained lit. Posted on the doors, however, were paper signs that read: "Sorry we are closed."

A hostess at that location, who declined to give her name, said she worked until midnight on Monday and was given no indication the store was in trouble. "I was kind of shocked," she said.

A growing number of struggling companies are opting to liquidate rather than try to restructure in bankruptcy. Bankruptcy lawyers say many are caught between a slowing economy, a lack of bankruptcy financing and loose, covenant-lite bank agreements that allowed their financial situations to worsen before creditors could intervene.

By: Jeffrey McCracken and Janet Adamy
Wall Street Journal; July 30, 2008