Supply Chain

In the Name of Rock

Can the Hard Rock Cafe brand keep its cool - and its value - in the overheated theme-restaurant world? Scott Little is betting on it.
Kris FrieswickSeptember 1, 1999

It’s a typical July afternoon in Orlando. A few tourists amble sluggishly along Universal Studio’s new CityWalk, an open-air shopping plaza next to the famous theme park. Across the man-made lagoon in the plaza’s center stands the largest Hard Rock Cafe in the world, open since December 1998. It looks like the Roman Coliseum with a Cadillac driven through the side. Based on the amount of foot traffic in the plaza, the restaurant should be as empty as a Florida motel without air conditioning.

Yet, despite the stifling heat, there are 15 tourists waiting patiently at the maître d’s desk. Inside, the place is packed with customers who eat to the pounding beat of Sheryl Crow and Peter Frampton, surrounded by rock memorabilia and waitresses with spiky hair. Scott Little, CFO of Hard Rock Cafe International Inc., which last year had $398 million in sales, grins. “It’s been busy like this since we opened. People just have to come here when they’re in town.”

Little, who joined HRC in August 1998, almost seems relieved. Given recent developments in the “eatertainment” industry in general, and at HRC in particular, he should be.

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After a growth spurt in the mid-1990s, the theme dining business is in a slump. Some chains, like Dallas-based Dave & Buster’s Inc., which combines games with dining, are succeeding. But most are suffering from a saturated market and customer boredom. Planet Hollywood International, HRC’s biggest challenger, posted a $35 million loss for first-quarter 1999 on sales of $75 million, a drop of 22 percent over first quarter last year. Competitors Fashion Café and Motown Café are closing units across the country.

At HRC, same-store sales (sales in cafés open more than one year) dropped 10.6 percent in 1998, and operating profits edged up just 2.1 percent, to $78 million. HRC’s parent company, Rank Group Plc, a London-based entertainment and leisure company with £2.05 billion in 1998 sales, just announced plans to shed more than £100 million in assets, and rumors are that HRC may be next on the block.

These circumstances don’t seem to faze Little. Formerly vice president of finance at Walt Disney Imagineering, he is applying to Hard Rock the finance disciplines learned at Disney- -superior staff, state-of-the-art technology, and a cautious approach to risk management. Furthermore, he believes that Hard Rock has a tremendously undervalued asset–a premium global brand. “They have the oldest and the best brand in the theme-restaurant segment,” says Ron Paul, president of Technomic Inc., a restaurant consulting firm based in Chicago, “and they have a cachet that it’s been hard for newcomers to duplicate.”

Between a Rock and a Hard Place

Little plans to build a finance department dedicated to protecting and leveraging that asset. But first he has to cope with the fruits of Hard Rock’s tumultuous history. The original company was founded in London in 1971 by Isaac Tigrett and Peter Morton. The lively, rock-memorabilia-packed restaurant chain and its brand grew fast, but in 1985 the two men parted ways, each taking half the company with him. Confusing matters further, an unaffiliated Hard Rock Cafe chain started in Canada. Rank Group bought Tigrett’s restaurants in 1990, and finally reunited the HRC brand in 1996 when it purchased the Canadian chain and Morton’s restaurants (excluding Morton’s HRC Hotel and Casino in Las Vegas).

Overnight, Hard Rock Cafe grew by 60 percent, from 15 company-owned and 26 franchised cafés to 31 company-owned and 38 franchised. It inherited separate management structures, different computer systems and operating procedures, and even different menus. Hard Rock Cafes had never advertised, and had never extended the brand much beyond the ubiquitous T-shirts.

“It was like a 25-year-old start-up,” says Little.

Jim Berk, who took over as CEO of HRC just before the Morton acquisition, gets credit for streamlining management and standardizing operations, and for initiating the brand- expansion program. Starting in 1997, the company launched Hard Rock Records, Hard Rock Live (a VH1-produced TV show), Hard Rock Beer, a concert series, and the first of several Hard Rock hotels. The next year, the company also agreed to team with the National Basketball Association to create NBA City, a chain of basketball “interactive” theme restaurants.

Unfortunately, the existing finance department could not help Berk determine whether these brand extensions were helping or hurting. “We had a traditional, competent accounting/financial department,” says Berk, “meaning that we had the capacity to pay bills, add the money at the end of the day, and say how much we made. But we had no ability to analyze that information. We were just going by our gut.”

Little says that wasn’t the half of it. “Hard Rock did $180 million in merchandise last year and had no tool to find out what was sold,” says Little. “The [finance staff] was dying because the volume increase was intense. To solve the problem, they added people and people and people to just process numbers and walk around. The first time we had a profit review meeting, we spent a full day with our executive team trying to … figure out if all the numbers were credible or not. We didn’t have any detailed metrics.”

Berk gave Little a mandate: Create a world- class finance department that would help Hard Rock keep track of its brand.

Technological Fix

When Little, 38, first arrived at HRC, he realized that he couldn’t leverage the staff without upgrading the technology. To no one’s surprise, the company ranked in the lowest quartile on IS expenditures. Working with IT director Ron Ward, Little has helped launch nearly a dozen new technology projects, estimated to cost nearly $5 million and funded by Rank, that will allow the company to closely track the effects of brand extensions and advertising efforts on customer behavior.

Central to this new system, which will push HRC’s technology capabilities one step further than most restaurant chains, is a data warehouse system from MicroStrategy Inc., in Vienna, Virginia. This system collects and analyzes point-of-sale information from the company’s existing restaurant point-of-sale system, Micros, and a new merchandise system called Open RSA (from Radius Corp., in London), and feeds the information directly into the company’s general ledger and accounts payable systems. This integration effort has resulted in a reduction in labor of nearly 500 hours a week. In addition, Little is also piloting a food and beverage management system to track usage and item profitability.

The metrics generated by these systems will include such information as cost of sales and profit margins, customer demographics based on zip code, daily and seasonal buying patterns, profitability of one menu versus another, and average weekly guest counts per café.

“I want to sit down every Monday morning and look at all my metrics for the prior week,” says Little. “I want to [be able to] figure out, did anything I do in terms of marketing or sales promotions move a needle? And why did it move a needle? What worked? What didn’t work?”

In the future, Little plans to chart changes in customer ordering patterns and profits resulting from menu changes and new merchandise lines. Eventually, he hopes to also incorporate customer exit-poll information into the system. This data will then be fed back to the departments that are creating the brand extensions so that their efforts can be modified as needed.

Industry watchers say because of the data warehouse technology and because HRC does both food and merchandising sales in its locations, the company can execute sophisticated data mining not often seen in the restaurant industry.

“There have been a couple of restaurant groups that have developed data mining to develop customer loyalty programs,” says Debra Smithart, CFO of First America Automotive Inc. and a former restaurant-industry finance executive, “but the typical transaction is low- dollar. Hard Rock has the advantage that when customers come in, they are purchasing a combination of food and merchandise for a higher ticket value. They get more data from each transaction and are better able to study demographics.”

Theme Staffing at the HRC

For his finance team, Little wanted the people who could best utilize the information generated by the new systems. To determine which of Hard Rock’s current senior and midlevel managers best fit that bill, he personally interviewed about 15 people. The interviews, borrowed from his experience at Disney, were designed to illuminate an individual’s dominant personality “themes,” like assertiveness, say, or communication.

“The secret to a good team is to have a collection of the themes that are important to your discipline,” says Little. “If I had all just math people good at ‘mastery,’ which is a dominant theme typical for accountants, I would have an organization in which I would never get any work out the door.” That’s because “they’d spend all their time making it perfect,” he explains.

In the end, people with such themes as communication, ownership, proactivity, and extroversion tended to win out over people whose main theme was mastery. “It didn’t go easy, but it went fair,” says Little of the staff purge that followed. Within months, he replaced all three members of the finance executive staff with new hires.

The new technology implementations then enabled Little to begin a drastic reduction of the finance department from its original 120 members to just 35. In July, layoffs were announced at corporate headquarters. And next year, the new food-and-beverage management and accounting system will allow Little to replace the 50 café-based finance employees.

The remaining staffers will have different jobs from their predecessors. For instance, before Little’s arrival, each accountant was responsible for the profit-and-loss statements for a certain number of cafés. Now, the remaining accountants are responsible for one line item each, such as cost-of-sales, on all the P&Ls.

Breaking Down Barriers

Another major step is to break down the barriers between finance and operations, merchandising, and marketing, which will allow finance staffers to share their analysis directly with those who execute the brand- extension efforts. Leading this integration effort is Todd Lindsey, whom Little named senior director of financial strategy and analysis in November 1998. “You can make a financial decision that looks good in isolation,” says Lindsey, formerly director of corporate planning and analysis for The Olive Garden, a chain of Italian restaurants, headquartered in Orlando. “But how does that impact my guests?”

Lindsey remembers when finance executives at The Olive Garden decided to stop handing out Andes mints with each guest check. The decision, Lindsey estimates, saved the company a couple million dollars annually. In the field, however, it was a disaster. “Everyone was mad because they didn’t get their Olive Garden Andes mint at the end of the meal anymore,” says Lindsey. “Taking that mint off probably cost us more than it saved us, because guests got upset.”

It’s a mistake Lindsey doesn’t want HRC to make. With the help of the new metrics, HRC finance can weigh in on such distinctly nontraditional subjects as menus and building plans. Little’s team can identify customer favorites and high-margin items, and work with operations to make sure both achieve premium menu placement. Finance staffers also help identify the optimum floor plan for restaurants based on the market, anticipated usage, and even the desired length of the waiting line at the maître d’s desk during peak hours.

HRC executives seem pleased with the new relationship with finance staffers, who act as their in-house analysts. “We really look to them to flesh out the financial assumptions of what we want to do on a line,” says Doug Mangino, vice president of merchandising at HRC and another Disney veteran. “We go to them to be our eyes and ears, or our voice of reason.”

The same is true of the marketing department, according to Dave Gust, vice president of marketing and new ventures, and another former Disney finance executive. “What I’ve been using from our new finance department is better information sliced in more ways,” says Gust. “[Before,] it was like looking at a flat picture; now I’m looking at a three- dimensional picture.”

But Will It Work?

Finance’s focus on brand at HRC is extremely rare, says Raymond Perrier, global brand valuation director for Interbrand Corp., a branding consulting firm in New York. “I could count on the fingers of two hands the number of firms doing what HRC does, with the CFO taking responsibility for the brand.”

Still, Little says it is too soon to gauge his team’s impact on the company’s financials. Interim results for the first five months of fiscal 1999 show that HRC revenues are up 3 percent (the same as all of last year), and operating profits are flat compared with last year, about 2 percent. The rate of decline in comparable store sales is better than it was for the second half of last year, according to reports, but Little will not release specific figures.

The big questions are whether Little can keep the brand healthy in the midst of all the brand extensions, and whether brand extensions can grow revenue enough to compensate for declining in-store sales. As Gary Wilson, chairman of Northwest Airlines and, as a former Disney hand himself, no stranger to the importance of branding, notes: “You can have brand loyalty, but if you don’t have the revenue, it doesn’t matter. If you have the greatest name in buggy whips–game over.”

Other observers are mixed in their predictions. Some are optimistic about brand extensions that keep the HRC image fresh, connect it to rock and roll, and target the coveted 20-something demographic. Others, however, are skeptical about the NBA City project, which, they contend, does not directly leverage the HRC brand. “The likelihood that [NBA City] can duplicate what HRC has done in a bunch of cities is low,” says Michael G. Mueller, a restaurant analyst with Banc of America Securities in San Francisco. “There are a lot of sports-related restaurants out there.”

Little says he’s not concerned with such criticism. Besides, he says, until now, “the brand has transcended all these business issues. We had 27 million people visit a Hard Rock last year. Twenty-seven million, and we’ve got only 103 locations. Despite all the business challenges, the product is really cool,” he adds. Little is betting that he can keep it that way.