O'Charley's (CHUX)

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Shana Dunnigan

O’Charley’s Inc. operates or franchises 347 restaurants in the United States as of December 26, 2010. The three brands the company operates under are their casual dining restaurants O’Charley’s and Ninety Nine Restaurant, as well as their upscale-casual dining brand Stoney River Legendary Steaks. O’Charleys Inc. owns and operates most of their restaurants, with the exception of less than 1% of their total restaurants that are franchised, all of which are the O’Charley’s Restaurant brand.^[1]

Business Overview

O'Charley's Inc. owns and operates 3 different restaurant brands (O'Charley's, Ninety Nine Restaurant, and Stoney River Legendary Steaks), and also franchises a small portion of their O'Charley's restaurants. O'Charley's Inc. is headquartered in Nashville, TN and their restaurants are operated mainly in the Southeast and Mid-West states, however Ninety-Nine Restaurant has presence in Mid-Atlantic and New England states as well.^[2]

O'Charley's^[3]: O'Charley's restaurants are a casual dining brand with a full service bar, open 7 days a week. It is operated and/or franchised in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Michigan, Mississippi, Missouri, North Carolina, Ohio, Pennsylvania, South Carolina Tennessee, Virginia, West Virginia and Wisconsin. In December 2010, there was a grand total of 230 O'Charley's restaurants (9 of which are franchised), which accounted for about 64% of total restaurant sales. The average guest check for 2008, 2009 and 2010 (including beverages) was $12.99, $12.85 and $12.43, respectively.^[4]

Ninety Nine Restaurant^[3]: Ninety Nine Restaurant was acquired by O'Charley's, Inc. in 2003. It is a casual dining brand serving American food which is open seven days a week and offers lunch, dinner and a full service bar. As of December 2010 O'Charley's, Inc. owned and operated 106 Ninety Nine Restaurants in Connecticut, Maine, Rhode Island, Vermont, New Hampshire, New York and Massachusetts. The average guest check for 2008, 2009 and 2010 (including beverages) was $14.97, $14.62 and $14.59, respectively. About 32% of total restaurant sales come from the Ninety Nine Restaurant brand.^[4]

Stoney River Legendary Steaks^[3]: O'Charley's, Inc. acquired Stoney River Legendary Steaks, a casual upscale and upscale dining steakhouse restaurant brand, in 2000. Stoney River offers a variety of beef, seafood and other gourmet dishes, a full service bar as well as a large variety of wines. O'Charley's, Inc. owned and operated a total of 11 Stoney River Legendary Steak restaurants as of December 2010, which accounted for approximately 4% of total restaurant sales. The average guest check for 2008, 2009 and 2010 were $47.72, $41.22 and $36.97, respectively.^[4] Stoney River Legendary Steaks can be found in Georgia, Illinois, Kentucky, Maryland, Tennessee and Missouri.

Trends and Forces

New CEO

On June 4, 2010, O'Charley's Inc. announced that Jeffrey Warne, who was named CEO in 2009, would be resigning as President, CEO, and member of the Board of Directors. The announcement came just after a $4million first quarter loss was announced.^[5] In August 2010, O'Charley's Inc. announced that David Head was named president and CEO, effective September 1, 2010. David Head has had a vast amount of executive experience in the industry, serving as President and CEO of Captain D’s Seafood Kitchen as well as Romacorp, Inc. in years prior.^[6]

Restaurant Closings

In December 2010, CEO David Head announced that O'Charley's Inc. would be closing 16 underperforming restaurants, 11 of the O'Charley's Brand and 5 of the Ninety Nine Restaurant brand. O'Charley's Inc. will continue to focus efforts on improving the performance of their remaining restaurants.^[7] O'Charley's Inc. does not plan on opening any new restaurants under either of these brands in 2011.^[3]

SWOT Analysis

Strengths

- As a multi-concept restaurant company O'Charley's can reap benefits of having a more diversified business portfolio as opposed to a single concept business. This can lessen the effect of threats to O'Charley's that specifically affect only one type of restaurant.^[3]

Weaknesses

- O'Charley's restaurants are highly concentrated geographically, which puts O'Charley's at risk of being largely affected by conditions including natural disasters, economic and weather conditions that only affect smaller geographical areas that have a high concentration of O'Charley's restaurants. For instance, the majority of Ninety Nine Restaurants are located in Massachusetts and therefore conditions that may only affect that geographical area contribute largely to the performance of the Ninety Nine Restaurant business segment.^[8] - Unlike some of their major competitors, O'Charley's does not advertise on national television. Because marketing and advertising can have a large affect on revenues this could be hurting O'Charley's bottom line.^[8]

Opportunities

- Results of recent market studies O'Charley's has done showed that the O'Charley's restaurant brand was not living up to its competitors in the eyes of the consumers. Upon this news O'Charley's Inc. is focusing on a turnaround of the brand with a series of initiatives including working with a new advertising agency, simplifying the menu, and increasing the quality of menu items.^[9]

Threats

- O'Charley's faces the threat of ever changing customer tastes. Their restaurants must be able to accurately anticipate these and make menu changes to accommodate new tastes, while continuing to minimize costs. If they are unable to do so sales revenues face the possibility of suffering as a result.^[8]

Porter's Five Forces Analysis

Buyer Power: High

• Low switching costs give O'Charley's customers high bargaining power over the restaurant.

Supplier Power: Medium

• O'Charley's Inc. purchases commitment contracts with their suppliers to protect themselves against price volatile commodities^[10].
• O'Charley's Inc. purchases several types of protein products which must be of good quality and therefore must very selective when choosing who to purchase from, which shrinks the number of available suppliers and slightly weakens O'Charley's bargaining power with them^[10].

Threat of Substitutes: High

• There are many other casual and upscale dining restaurants available for customers to choose instead of O'Charley's.
• Other than restaurants, customers can choose to eat fast-food or purchase food from the grocery store and eat at home.
• Switching costs are very low.

Threat of New Entrants: Medium-High

• It is not very difficult to open a food establishment.
• Difficulty does lie within establishing a brand name that communicates value to customers.

Competitive Rivalry: High

• The restaurant industry is highly concentrated and companies compete with each other in a variety of areas including (but not limited to) location, service quality, food quality, price, atmosphere, menu variety, etc.
• Not only is O'Charley's Incorporated competing in the restaurant industry, but they are also competing for customers with fast-food companies and grocery stores.

Competition

The restaurant industry is very large and therefore O'Charley's Inc. has a large competitor base, however their major competitors can be narrowed down to some of the bigger players in the industry. Below the competitor description is a direct comparison of some of the financial metrics of O'Charley's Inc. and these competitors.

Brinker International, Inc. (EAT) - Restaurant company that owns and franchises 2 different restaurant brands including their flagship chain Chili's Bar and Grill, as well as Maggiano's Little Italy.^[11] Brinker also owned Romano's Macaroni Grill and On The Border Mexican Grill and Cantina, but sold them in December 2008 and June 2010, respectively.^[12][13]

Darden Restaurants, Inc. (DRI) - Multi-brand restaurant chain that owns and operates 6 different brands in Canada and the United States, which include Red Lobster, Olive Garden, LongHorn Steakhouse, The Capital Grille, Bahama Breeze, and Seasons 52.^[14]

DineEquity, Inc. (DIN) - Owner of casual dining chains Applebee's Neighborhood Grill and Bar and International House of Pancakes (IHOP). The majority of DineEquity's restaurants are franchised (75% of Applebee's restaurants and 99% of IHOP restaurants).^[15]

Competitor Comparison^[16]

References

1. ↑ O'Charley's Inc (CHUX) Form 10-K, Fiscal year 2010, "Item 1, Business", p. 3
2. ↑ O'Charley's, Inc. Enterprise Overview
3. ↑ ^{3.0 3.1 3.2 3.3 3.4} O'Charley's Inc. (CHUX) Form 10-K, Fiscal Year 2010, "Item 1, Our Restaurant Concepts, p. 3
4. ↑ ^{4.0 4.1 4.2} O'Charley's, Inc. (CHUX) Form 10-K, Fiscal Year 2010, "Item 7, Results of Operations, p. 26"
5. ↑ Nashville Business Journal, June 4, 2010 "O'Charley's CEO Jeff Warne resigns"
6. ↑ Business Wire, August 4, 2010 "O'Charley's Names David W. Head President and Chief Executive Officer"
7. ↑ Business Wire, December 13, 2010 "O'Charley's Inc. Announces Restaurant Closings"
8. ↑ ^{8.0 8.1 8.2} O'Charley's, Inc. (CHUX) Form 10-K, Fiscal Year 2010, Item 2, "Risk Factors" p.11-15
9. ↑ O'Charley's Inc. (CHUX) Form 10-K, Fiscal Year 2010, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations p. 22
10. ↑ ^{10.0 10.1} O'Charley's, Inc. (CHUX) Form 10-K, Fiscal year 2010, "Purchasing", p. 8
11. ↑ Brinker International (EAT) Form 10-K, Fiscal year 2010, "Item 1, Business", p. 1
12. ↑ Romano's Macaroni Grill - Wikipedia
13. ↑ On The Border Mexican Grill and Cantina - Wikipedia
14. ↑ Darden Restaurants - Brands
15. ↑ DineEquity, Inc. - Brands
16. ↑ Yahoo! Finance - CHUX Competitors