Rare Hospitality International Inc.

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Rare Hospitality International Inc.

8215 Roswell Road
Building 200
Atlanta, Georgia 30350
(770) 399-9595
Fax: (770) 399-7796

Public Company
1981 as Contemporary Restaurant Concepts Inc.
Employees: 6,321
Revenues: $218.7 million
Stock Exchanges: NASDAQ
SICs: 5812 Eating Places

With over 100 company-owned and franchised restaurants throughout the Eastern and Midwestern United States, RARE Hospitality International Inc. has a fast-growing presence in the steakhouse segment of the dining industry. This relative new-comer to the marketat scarcely 15 years in business, compared to such 1960s-era chains as Ponderosa and BonanzaRAREs irreverent style of cowboy cuisine shook up the segment. By 1996, the companys core chain of LongHorn Steakhouses numbered 81 units. Following its initial public offering in 1992, the company acquired the Bugaboo Creek Steak House chain and its smaller The Capital Grille group of pricey eateries. Founder George W. McKerrow, Jr. continued to serve the company as chairman through the mid-1990s.

Early 1980s Origins

George McKerrow had nearly a decade in food service under his belt when he made his first stab at restaurant ownership in the 1970s. A 1972 graduate of Ohio State Universitys political science program, he had worked in a Cleveland pancake house as a teen and was tending bar at Columbuss Smugglers Inn when he bought his first restaurant, a West Virginia supper club, in 1973 at the age of 22. McKerrow quickly sold the eatery, however, and went to work for the Victoria Station chain of restaurants in 1974. He relocated to Atlanta to take a management position with the chain in 1976, and had advanced to a regional manager prior to leaving the enterprise in 1978.

With support from a partner who lined up $100,000 in startup capital, McKerrow bought a shuttered adult bookstore on Atlantas Peachtree Road in 1981 and started renovations that would eventually transform the location into a traditional Texas roadhouse. The 30-year-old supported himself with a bartending stint by night and directed construction at the restaurant by day.

McKerrow suffered a serious setback when his financial backingand his partnerdisappeared in March 1981. Repairs and renovations came to a halt for two months while McKerrow sought new financing. He found it close to home; his father and another investor came through with enough funds to resurrect the project. They created a parent company, Contemporary Restaurant Concepts Inc. (CRC), resumed construction, and launched the first LongHorn Steaks Restaurant & Saloon that August. Not content to be a silent partner, George McKerrow, Sr. soon joined the company as chairman.

In a 1991 interview for the Atlanta Business Chronicle, McKerrow recounted the early months, noting that he served as cook, waiter, busboy and bartend. But it wasnt as if he was especially harried; at the time, the restaurant was only serving about 18 tables per day, divided among lunch and dinner shifts. Within just three months, the struggling business required an-other $30,000 capital injection.

The establishment got its big break when a January 1982 snowstorm stranded hundreds of commuters on Peachtree Road. McKerrow saw an opportunity and didnt hesitate to grab it, hosting an impromptu $1 drink special. The promotion brought in $700 and, more importantly, introduced hundreds of customers to the steak joint.

Core Concept Establishes Cowboy Cuisine Segment in the 1980s

The budding restaurateur aimed to serve the best steaks and the coldest beer in town, in a deliberately rustic if not dumpy decor. The ambiance has since been compared by one industry observer to a honky-tonk Texas roadhouse filled with stuffed jackalopes, armadillos and rusty license plates. A country-western radio jingle summed-up the atmosphere: Talkin bout LongHorn/And their pan-fried steaks/Come on and eat one/No matter what it takes/They got big bowls of peanuts, Texas taters and ice cold brew/And some animal heads on the walls staring back at you. Large portions and moderate prices completed the casual ambiance.

Though the decor was originally intended to set a casual mood, it took on a strategic element as the restaurant evolved into a chain. Low-cost furnishings allowed the restaurateur to purchase high quality beef, which was cut by hand by the manager of each restaurant, without handing the entire cost on to customers. McKerrow also limited expenses by restricting the dinner menu to seven cuts of steak, one potato, and a salad, adding only a salmon entree and some desserts in 1989. This limited menu allowed for a bare-bones kitchen with just one grill and two fryers. As he told Nations Restaurant News in July 1989, Too many choices only confuse the customer and paralyze the kitchen.

McKerrow opened his second location, this one in suburban Atlanta, in 1983. By the end of the decade, CRC had 15 restaurants and had expanded from its geographic base in Atlanta into North Carolina. The company also had its own meat processing subsidiary, Superior Meats. Growth accelerated in the ensuing years, as the company more than doubled the number of restaurants and increased revenues from less than $25 million in 1988 to $39 million in 1991.

Transition to Big-League Restaurant Corporation in Early 1990s

By 1992, CRC had 32 restaurants in the southeastern United States and three Skeeters Mesquite Grilles (described as slightly more upscale in a 1989 Nations Restaurant News article) in the Atlanta metropolitan area. Along with dozens of Georgia-based companies, the chain went public that March with a two million share offering constituting about 38 percent of the company at $16 per share, applying part of the proceeds to reducing its minimal debt. The remaining 62 percent stake was divided among McKerrow, his father, CFO Ronald San Martin, and Vice-President of Operations Joseph Norman. Buoyed by investor interest in the specialty steakhouse segment, the stock jumped 50 percent in the first day of trading and stood pat at about $25 per share through the end of 1992.

It seemed at first that the renamed LongHorn Steaks Inc. would live up to all the hoopla surrounding its initial public offering; its sales rose by more than one-fourth to $50 million by the end of the year, and net income more than doubled, reaching $3.4 million. Egged on by eager Wall Street analysts, McKerrow dove into an ambitious expansion program, launching 24 new locations in just over 18 months. As McKerrow later acknowledged to Bill Carlino of Nations Restaurant News, We were a little too aggressive with some of our new restaurant openings, and it hurt us. Some new units were only doing half the volume of LongHorns existing restaurants. Internal problems included hasty management training, inadequate introductory marketing, and inappropriate site selection. External influences included rising beef prices, which ate into profit margins. The chain was also buffeted by ever-intensifying com-petition in the steakhouse segment, with rivals ranging from high-end players like Ruths Chris to budget chains like Ryans, Ponderosa, and Bonanza. Direct competitors in the steak theme subset included Outback Steakhouses and Lone Star Steakhouse & Saloon. In June 1993, when the company announced that the second quarters earnings would not meet projections, its stock plummeted to $11.

Same-store sales declined by four percent in 1993 and profits remained flat at $3.4 million despite an increase in revenues to $70 million that year. With quarterly unit profit margins eroding from nearly 20 percent in early 1993 to less than 12 percent in the fall of 1994, and the stock price declining to single-digits, McKerrow made a gutsy, selfless decision. That February, he assumed the position of chairman to make room for a new president and chief executive officer; someone who, as Georgia Trend s Lindsey Kelly put it, would help the chain complete its transformation from an entrepreneurial, seat-of-the-pants kind of outfit to a big-league restaurant corporation. The man he chose, Richard Dick Rivera had been called an icon in the restaurant industry by ADWEEKs Julie Soble. One of the few Hispanics to penetrate the upper echelons of management in the business, Rivera made a name for himself when he guided TGI Fridays early 1990s turnaround. In five years as that chains CEO, he not only nearly doubled annual sales and number of restaurants, but also achieved record profits every year.

Company Perspectives:

We intend to provide hospitality that is attentive, caring and demonstrates and eagerness to please; hospitality seldom encountered in todays environment. Rare hospitality has been and will continue to be one of the keys to success for all our concepts. We are dedicated to this goal and confident that it is the foundation ion which we will build long-term profitable growth.

Reforms Bring Stability and Renewed Growth in the 1990s

Riveras reforms at LongHorn included a moderate but chainwide renovation program, menu additions, and a reduction in the rate of unit growth. Atmosphere changes amounted to a subtle homogenization, changing from rustic dark paneling to brightly-lit beige walls, reducing the amount of taxidermy, and taking down the racy posters featured in restrooms. The menu was expanded to appeal to a broader range of customersparticularly familiesadding chicken, pork, seafood, and barbecue entrees; appetizers; salads; and a wider variety of side dishes. Management reigned in new restaurant openings to less than ten in 1994 and would eventually close several underperforming locations and terminate its meat cutting and distribution business. Rivera also fortified the marketing department and hired a new advertising agency to manage the companys growing national presence.

Sales advanced from $115 million in 1994 to $156.4 million in 1995, and net income multiplied from $1.5 million to $6.6 million in the same period. Wall Street acknowledged the changes, boosting the share price to a high of over $ 18 by the end of 1995.

With its finances stabilized, LongHorn moved into the hotly-contested northeastern U.S. market via the 1996 purchase of Bugaboo Creek Steak House Inc. The stock swap, valued at $53.2 million, added the namesake 14-unit chain as well as a subsidiary of three high-end Capital Grille restaurants. Named for an actual region of Canada, Bugaboo Creek featured a family-oriented mountain-lodge-theme, while The Capital Grilles Providence, Boston, and Washington D.C. locations were bedecked with African mahogany paneling and other fine furnishings. An early 1997 name change rechristened the parent company RARE Hospitality International Inc. to reflect its broadened array of restaurants and menus. Some analysts believed that the alteration also telegraphed the multinational ambitions of this growing business.

Principal Divisions

RARE Hospitality; LongHorn Steakhouse; Bugaboo Creek Steak House; The Capital Grille.

Further Reading

Allen, Robin Lee, LongHorn Steaks Hooks Bugaboo in $53.2M Deal, Nations Restaurant News, July 8, 1996, pp. 12.

Anthony, Margaret, Those Two Guys That Sing, Atlanta Business Chronicle, February 5, 1993, pp. 3A, 4A.

Aven, Paula, Wall Street Burns Steak House Stocks, Denver Business Journal November 15, 1996, pp. 3A-4A.

Brammer, Rhonda, Whats the Beef?, Barrons, January 2, 1995, pp. 2324.

Carlino, Bill, LongHorn Rides Again, Stresses Internal Focus, Nations Restaurant News, August 2, 1993, pp. 810.

, LongHorn Steaks Grabs the Billboard by the Horns, Nations Restaurant News, August 27, 1990, p. 12.

, LongHorn Steers New Ads Toward Traditional Route, Nations Restaurant News, June 13, 1994, p. 12.

, Shareholder Files LongHorn Suit, Says Company Inflated its Finances, Nations Restaurant News, February 28, 1994, p. 3.

, TGI Fridays CEO Rivera Exits to Lead LongHorn, Nations Restaurant News, January 17, 1994, pp. 12.

Curtis, Susan K. LongHorn May Hit the Trail Outside U.S., Atlanta Business Chronicle, June 30, 1995, pp. 3A, 4A.

Feuerstein, Adam, Hes Hooked on Steaks, Atlanta Business Chronicle, August 19, 1991, pp. 3A-4A.

Garrett, Echo Montgomery, Rare Sticks to Southeast and Three Brands, Atlanta Business Chronicle, January 24, 1997, p. 17B.

Hayes, Jack, Casual Steak Houses Lasso Value-Minded Customers, Nations Restaurant News, January 28, 1991, pp. 3233.

, LongHorns Sizzling Nationwide, Nations Restaurant News, July 31, 1989, p. F18.

Kelly, Lindsey, Can Rivera Put the Sizzle Back in LongHorn? Georgia Trend, June 1994, pp. 7778.

Norvell, Scott, Trading Saddles, Restaurant Business, May 1. 1994, pp. 5862.

Papoiernik, Richard L., LongHorn: Stampeding on the Fast Track to a Turnaround, Nations Restaurant News, December 11, 1995, pp. 1112.

, LongHorn Steaks Shows 1st Signs of Turnaround, Nations Restaurant News, May 15, 1995, p. 4.

Ruggless, Ron, Richard Rivera: Chairman, Chief Executive, LongHorn Steaks Inc., Atlanta, Nations Restaurant News, January 1995, pp. 173174.

Schonback, Judith, Bully for LongHorn Steaks, Business Atlanta, June 1992, p. 8.

Soble, Julie, LongHorns Wild Ride, ADWEEK Eastern Edition, November 4, 1996, pp. 5458.

Turnaround Expert Rivera to Dissect Change at MUFSO, Nations Restaurant News, May 30, 1994, pp. 12.

Walkup, Carolyn, LongHorn Steaks Files for IPO, Nations Restaurant News, March 2, 1992, pp. 1415.

April Dougal Gasbarre