Keg chews up competition even as industry sales drop

TORONTO -- Canadian steakhouse chain Keg Restaurant Ltd. has a simple operating formula: no matter what happens, stick to the formula. 

"We have total alignment within the company as to what we should be doing . . . what we should look like, what we smell like, feel like," says David Aisenstat, owner and president of Burnaby, B.C.-based Keg Restaurants and head of Keg Royalties Income Fund. 

Indeed, walk into almost any Keg restaurant and you'll see what the company describes as a contemporary steakhouse decor: fireplaces, stone accents, iron work, hardwood and dim lighting. 

The entrées look the same from one restaurant to the next, as cooks follow head office's precise preparation instructions, sent to each kitchen on DVD. 

Its handful of suppliers are "monitored almost fanatically," and food must meet requirements that are "so detailed and so specific" -- on everything from cut size to age -- before they make it through a restaurant's delivery door, Mr. Aisenstat explains. 

"Not only do we have the vision of what it should look like, we make it happen. We have incredible guest loyalty and we execute all the time," he says. 

The company's strategy is simple: run great steakhouses and bars that keep customers satisfied. He says that mantra is what prevented Keg from taking a significant hit two years ago when the industry was pummelled by what management described as a "perfect storm." 

In 2002 and 2003, the entire food-services industry was hit by a plunge in tourism to Canada, the impact from the deadly SARS virus, the discovery of a mad-cow case in Alberta, the blackout that hit Northeastern North America and consumers' tendency to cocoon at home rather than take the family out to dinner. 

How did he battle those headwinds? By doing nothing. 

Mr. Aisenstat says that because of Keg's corporate structure -- 4 per cent of all sales at the 86 Keg restaurants are sent to the fund, which are then distributed to unit holders -- the chain needn't worry about constantly increasing profit. Even though margins may be squeezed, it can maintain the status quo in difficult times -- same menu prices, same level of service, same quality of food, same portion size -- and not drive away customers. 

"Had we been under pressure to deliver bottom-line earnings consistently, we might not have had the luxury of acting the way we did," Mr. Aisenstat says. 

The 49-year-old is the son of Hy Aisenstat, the founder of high-end chain Hy's Steakhouse, which began in Calgary in the 1950s. 

After graduating university in the 1980s, David did stints in Montreal and New York with Nabisco Inc. then returned to Vancouver to help run his family's steakhouse chain and a side-venture his father was involved in -- Keg. In 1987, Keg was sold to British brewer Whitbread PLC for $14-million, just before his father died. 

David Aisenstat re-acquired the chain 10 years later, when annual sales were about $185-million. 

Last month, it reported 2004 sales of $321.8-million, up from $297.8-million in 2003. Same-store sales -- a key measurement in the food-services industry, measuring receipts at locations open at least one year -- rose 1.1 per cent in 2004 after sliding 2.4 per cent in 2003. 

The sales growth is more impressive when compared with its peers: According to NPD Group Canada, $450-million was spent at Canadian steakhouses in 2004, a decline of 13 per cent from 2003. 

While his company doesn't provide precise financial guidance to the Street, Mr. Aisenstat is bullish that sales will continue to rise in 2005 on the back of upcoming store openings in the Maritimes, British Columbia and Ontario. 

Still, he admits that sales are being held back by the narrowing gap between the Canadian and U.S. dollar. About 22 per cent of sales come from the United States and royalties take a hit when they're converted into Canadian funds for accounting purposes. 

The chain's ability to increase sales as other steakhouses struggle doesn't surprise industry experts. 

"I've never had a bad experience at the Keg," says Gary Miller, a chef turned food-services-industry consultant. "The difference between the Keg and a lot of other chains is that the others try to be all things to all people -- they try to do nachos and pizza but they don't do any of them well, while the Keg has stuck to their product, which is steak." 

Douglas Fisher, president of Toronto-based consulting firm FHG International, remembers when the Keg was considered more bar than restaurant, and he is impressed by the way management has overhauled its image to appeal to young families. 

He says Keg's success has come on the back of a marketing campaign that has trumpeted its high-quality steak and fresh vegetables, its casual-yet-classy environment and middle-of-the-road menu prices. (Keg has an average bill price of $35 a customer, which includes alcohol but does not include tax or tip; the average bill at a high-end steakhouse, such as Morton's or Hy's, is in the $75-to-$100 range.) 

"It really has moved successfully from a roadhouse steakhouse . . . to a very family-oriented restaurant chain," Mr. Fisher says, adding that the Keg is now also a popular date restaurant and location for salespeople to woo clients. 

In fact, Keg's recently opened restaurant in Toronto's financial district is one of the area's most popular après-work locations. 

Keg's success has also been reflected in the market capitalization of Keg Royalties Income Fund, which went public in 2002 amid income trust mania at $10 a unit. Its units closed Friday at $13.25. 

Leslie Lundquist, manager of the $925-million Bissett Income Fund, which holds a 10-per-cent stake in Keg Royalties, says even though the units are now at the top end of their 52-week range, there's still "some room to grow" as the overall trust market continues to rise. "I don't see why the Keg would be left behind . . . I don't think it's cheap but I do think it's a reasonable value at these levels." 

Since going public, Keg Royalties has maintained per-unit distributions of 9 cents a month, or $1.08 a year. Based on its initial public offering price of $10, that translated into a yield of 10.8 per cent. However, as the units appreciated, that yield has dropped to 8.3 per cent -- on par with other restaurant trusts.