Parasole’s Endless Appetite

Parasole’s Endless Appetite

The company means to feed its development side by positioning more of its concepts for sale. The upshot: Parasole will double its number of restaurants in the next five years.

Phil Roberts takes an oxfords-on-the-pavement approach to creating a restaurant concept. A few years ago, when the cofounder of Parasole Restaurant Holdings was considering the burger-joint idea that is now Burger Jones, he showed up at a competing restaurant at 6 a.m. and watched for the bakery truck. He wanted to count the hamburger buns being delivered.

Roberts also crisscrosses the globe. He racks up more than 150,000 miles a year to do his research, and snaps pictures wherever he goes to document restaurant décor, service, even the entrées he orders—typically two per sitting.

“I subscribe to over 50 publications,” Roberts says, lifestyle and culinary titles from around the world. They’re displayed in wall mounts at Parasole’s 50th and France headquarters in Edina. In the evening, “I go home, turn on Seinfeld or The Office, and thumb through five or six magazines.” He rips out whatever catches his eye, and scans his clippings into a database with more than 50,000 entries. He’ll scour them when he’s incubating a new concept.

Roberts’ creative approach and ability to zero in on the impactful detail—he studied art and design, and used to design retail interiors—have served Parasole well. The company, started in 1977, owns 10 restaurant brands (12 stores) and has spun off several more, among them Buca di Beppo and the Oceanaire Seafood Room, which grew nationally and became public companies.

But Parasole is taking a new approach to growth now: faster, more disciplined. Since CEO Dennis Monroe joined the company in January 2009, Parasole has launched three new brands (Burger Jones, the Uptown Cafeteria and Support Group, and Mozza Mia).

This year, Parasole will make its first push into the suburbs south of the Minnesota River. It’s eyeing the western suburbs, too, and actively planning to grow outside Minnesota.

“We’re a concept development company,” Monroe says. Parasole is still a restaurant company, he adds, with some properties whose site is so integral to the concept that they won’t transplant well. He puts Uptown’s Cafeteria, Chino Latino, and Il Gatto into that category. But others—“Burger Jones possibly, and maybe Salut”—have more growth potential. Monroe’s goal is to develop them further, then sell them and create the liquidity needed to incubate more new ideas: “Phil and our team are brilliant concept people.”

“The only reason we haven’t sold anything in the last three or four years is because of the state of the industry, the multiples and such,” Monroe says. “But now that’s turning around.”

“Get to $100 Million in Five Years”

Parasole projects gross revenues of $67 million in 2011. With 1,200 employees, it’s the largest restaurant holding company in the Twin Cities metro area.

Until now, nearly all of its stores have been in the Twin Cities proper or just beyond the city limits. The only outliers have been Good Earth, with stores near the Southdale and Rosedale malls, and Pittsburgh Blue, a steakhouse in Maple Grove.

Asked about a five-year plan for growing the roster of brands and stores, Roberts deflects the question. “Five years is an eternity,” he says, but the group has “an intuitive sense” of what it hopes to accomplish.

Monroe spits out rapid-fire details: “We want to get to $100 million in five years. We plan to open three to five restaurants a year, and by the end of 2013, we want to own approximately 21 restaurants.”

As Roberts says, to succeed in the restaurant business, “You need a cookbook in one hand and a P&L in the other or you miss.” Between them, the two have it covered.

Monroe is chairman and senior partner of Monroe Moxness Berg, PA, a Minneapolis law firm that he cofounded in 1987. For years, he was outside counsel to Parasole Restaurant Holdings, then a board member beginning about 10 years ago, and finally a partner after acquiring an interest in the company three years ago. His law practice has focused on restaurant development, business strategy, financing, and franchising.

There are really two sides to Parasole’s expansion plans, Monroe says. One is “opportunistic,” meaning the company will fill in empty spots on the metro map with its popular brands, or snap up “a really strong site that we can develop a new concept in, like we did in Uptown with Cafeteria,” whenever those chances come along. This year, besides opening a Burger Jones in May in Burnsville’s Aurora Village, Parasole will put a Good Earth near the Ridgedale shopping mall and a Pittsburgh Blue at the Galleria in Edina.

But the other side of Parasole’s expansion is more strategic. After studying Salut’s customer base in St. Paul and Edina, “we’re looking at Salut possibly going into Indianapolis. We’re looking at sites right now,” Monroe says. “The idea there is to take one of our concepts, like we did with Buca and Oceanaire, develop it to a certain level—four, five, six stores—and then sell it as a concept. We’ve taken away the concept risk from a buyer, and that very fact creates a premium on the selling price, because people want to buy proven concepts that they can grow.”

Monroe adds, “If you get too large—8, 10, 15 restaurants—then you aren’t a concept anymore, you’re a restaurant company. I have this theory, borne out from my 30-plus years doing restaurant finance and development as a lawyer, that we can grow to what I call the ‘optimization of a concept’ level, which is three to five stores, and then we look for a strategic buyer.”


Intuition Plus Data

Roberts prides himself on understanding his customers. For instance, he says, St. Paul and Minneapolis diners have different profiles.

“St. Paul is more of a beer-drinking, meat-eating crowd,” he says. “In Minneapolis, there are a lot of people who want to see and be seen. People in St. Paul tend to be a little more low key, less flashy.” Consequently, St. Paul’s Salut has a larger, more casual patio, and the St. Paul and Edina stores have differing menus and price points.

Parasole’s picture of its customers has been based largely on anecdotal observation, Monroe says, “and you’d be surprised at how good you could get at being anecdotal.” Given a choice between the frontline observations of servers and bartenders or a lot of empirical data, he says—only half joking—that he might choose what his employees could tell him.

But increasingly, Parasole relies on data. When choosing the Burnsville site for Burger Jones, the company turned to readily available public data: traffic counts, population density, number of households, number of businesses, access to shopping and theaters. “Burnsville has a really strong tax base, and it’s a well-developed older suburb,” says Alan Ackerburg, vice president of real estate development for Parasole. “It’s in the center of the population density south of the river, and it’s a business-friendly suburb.”

Parasole, like most restaurants and retailers, has its own data pool to tap, as well: addresses and other information from credit card purchases or from loyalty cards. It can build something of a customer profile from those. Over the years, Parasole has also turned to any number of consumer-data analytics services. In the past six months, Monroe says, the company has put Dallas-based Buxton on a “full-court press” to get more comprehensive data about Parasole customers.

Buxton, which claims around 2,000 retail and restaurant clients nationally, analyzes the data trails that consumers unthinkingly leave behind them as they pick up groceries or dry cleaning, go to a movie, grab takeout for dinner. Many of those businesses bundle and sell their customer data to companies like Buxton, Quantivo in California, or Third Wave Research Group in Wisconsin.

What emerges from those companies’ proprietary analytics is more than demographics, according to Bonnie Riggs, a restaurant industry analyst with the New York–based research firm NPD Group. It’s consumer “psychographics.”

“Demographics are the typical characteristics, like age, income, education, geography, number of children of a consumer group,” Riggs explains. “Psychographics define . . . what they want, how they go about their day-to-day lives, what is important to them, and how they make purchasing decisions.” Most big restaurant chains are adept at using this kind of data, Riggs says.

Monroe says Parasole is moving more deeply into these analytics because the company has now surpassed 50,000 members in its “Dining Club” loyalty program, and “we’ve been sort of a leader in the social media world.” The company is an early adopter of QR, or quick response, codes and says it picked up hundreds of new Chino Latino customers by using QR codes and mobile apps to distribute ads and special offers earlier this year. “We’ve gathered a lot of information,” Monroe says, “and the key is analyzing the information,” especially as the company prepares to enter new markets like Indianapolis.

“We are comparing demographic and psychographic data from the two Twin Cities Saluts and correlating that with Indianapolis neighborhoods that represent a good fit for Salut,” says Kip Clayton, Parasole’s vice president of business development and marketing. “Psychographics represent one more bit of data that becomes crucial anytime you’re placing a $2 million to $3 million bet on a new restaurant.”


A Turning Point in the Market

Why make that bet? Why push to grow the company?

Monroe says one reason is to make good returns to shareholders. Parasole has just 10 of those: cofounders Roberts and Pete Mihajlov; Kevin Kuester, an investor since 2003; Monroe; and six of Monroe’s direct reports whom he wanted to have a small equity stake in the company.

“Eventually, I really believe this will be pretty much an employee-owned company,” Monroe says, noting that he’s the youngest of the three active partners at age 58. “That’s what the three of us and our fourth partner, Kevin, would all like to see.” No other exit strategy is in the works, Monroe says.

Then there’s the desire to remain a dominant operator in the Twin Cities market. “Most major metropolitan areas the size of Minneapolis or thereabouts—the Denvers, the Clevelands, the Dallases—they all have a Parasole company, because somebody’s been able to become dominant,” Monroe says. Minneapolis stands out, he adds, because there are other strong competitors here, particularly the D’Amicos.

Finally, there’s the lifestyle, Monroe acknowledges: “I mean, the reason that I’ve phased down my law practice is because I love the restaurant business so much.”

It’s been a tough business to be in lately, even for good operators. The number of restaurants has been on a slow but steady decline for at least two years in the U.S.

“There is overcapacity, and a number of chains are reducing the number of units they operate,” says Sima Griffith, managing principal for Aethlon Capital, a Minneapolis investment bank that works with restaurants, though not with Parasole. This year, rising costs, particularly food costs, will be a challenge, she says: “Restaurants are being forced to choose between passing those costs on to price-sensitive consumers, or absorbing the costs and reducing their profitability.” And margins are already thin.

“If you net 5 to 7.5 percent, you are doing extremely well in the restaurant business,” says Dermot Rowland, a Bloomington entrepreneur who started the Timber Lodge Steakhouse and Homestyle Country Buffet chains. He estimates that of all the concepts developed with expansion in mind, only one in every 10 to 15 ever grows beyond one or two stores.

Parasole has looked after its existing brands. After annual sales at Figlio fell 10 percent, from $6 million in 2006 to $5.4 million in 2009, Parasole transformed it into the trendier Il Gatto and later hired Chef Tim McKee to run the kitchen, the first chef in Minnesota to win a coveted James Beard Award for Best Chef Midwest. When Manny’s annual sales fell 5 percent from their 2007 peak, Parasole relocated the steakhouse in 2008 from the Hyatt Regency Minneapolis to the posh W hotel, where it could attract a younger crowd.

“Manny’s was in danger of becoming your father’s restaurant,” Roberts says. “Our customers were getting older; they were dying.”

Now it’s time for growth again. Griffith says, “We’re seeing signs of renewed confidence and activity among private equity funds and restaurant holding companies interested in acquiring robust concepts with good growth potential.”

Jerry Vlaminck, president of Hospitality Services Corporation in Delano, a real estate brokerage firm that represents bars and restaurants, says other positives include an available work force and competitive leases: “The good operators are taking advantage of low lease rates and lower property values.”

Monroe has been watching multiples rise on restaurant acquisitions. A good operating restaurant now will sell for four times cash flow, he says, up from two or three times cash flow two to three years ago. A growth concept will go for much more, he says, and that’s up from a market that essentially had ceased to exist.

“If I’ve got 20 Applebees, they’ll go for four times, maybe four and a quarter times cash flow,” Monroe says. “If I’ve got the next new Applebees, and I have five of them—the next new Applebees that hasn’t been franchised—that may go for seven or eight times [cash flow], which is equivalent to about one times sales.”

Like other parts of the economy, Monroe says, restaurant sales grew overheated heading into the second half of the past decade, then crashed. How will he know Parasole’s growth plans aren’t overheating, too?

“We will use three factors to determine whether we are being stretched too thin. The first is what our management team can handle, and that is an assessment I need to make,” Monroe says. “Second, what are our consumers saying about the performance of our existing stores? And third, what’s available for financing?” If cash flow and financing tighten up, he says, it’s time to pull back.

Roberts, the architect of Parasole’s growth from the start, says, “the bricks and mortar part is the easy part—site selection, building a restaurant.” What’s harder is rolling out new concepts with a high level of service and culinary expertise.

“Throughout the company,” Roberts says, “there is an acute awareness that growth can beat up on quality.”

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