Who's Behind the Ethnic Eateries?


By Eric Wahlgren

SPECIAL REPORTEATING OUT IN AMERICA

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Who's Behind the Ethnic Eateries?

Did you like that whole-wheat penne with smoked mozzarella and roasted eggplant at the trendy Pasta Pomodoro outlet the other night? If so, thank Wendy's (WEN). Yup, the fast-food chain famous for its all-beef burgers has a stake in these Italian eateries, where guests can also order organic wine at cozy wood tables illuminated by hand-blown Italian lamps. It's a far cry from tiled floors and neon lighting.

Pasta Pomodoro, which has 45 locations in California and Arizona, isn't Wendy's only foray into so-called fast-casual dining. The Dublin (Ohio) company also has invested in Café Express and Baja Fresh Mexican Grill.

STEMMING THE TIDE. Plenty of places Americans like to go for fare that's a little fancier than burger and fries are owned by fast-food biggies nowadays. But often the public doesn't know about the low-brow connection. And the owners, for obvious reasons, are in no hurry to publicize it.

Wendy's and its rivals first started buying into what were fast-growing, more upscale chains in earnest during the mid-to-late 1990s. At the time they feared these upstarts would cut into their markets, says Dennis Milton, an equity analyst with Standard & Poor's in New York.

But lately the fast-food outfits have added salads and healthier items to their menus, keeping the fast casuals from eating their lunch, Milton says. "What fast food has done is go into their markets, and that has stemmed the tide," he says.

OPERATIONAL EDGE. Indeed, the ownership stakes in fast casuals haven't always been a sure bet. McDonald's (MCD), for instance, bought Donatos Pizza, a Columbus (Ohio) pizza chain, in 1999. But the world's largest restaurant company sold it four years later, along with interests in other, slightly higher-end offerings, after losing millions of dollars.

Still, Ronald McDonald and other fast-food players have maintained stakes in a number of fast-casual outlets, which clearly have increasing appeal among many Americans. Mexican-food chains have received much of the investment, as the burger flippers seek more exposure to one of the quickest-growing segments of the U.S. food business.

So what do the fast casuals get out of their association with the more plebian names? The deep-pocketed giants can give fast-casual chains an operational edge over independent chains like, say, bakery-café outfit Panera Bread (PNRA), restaurant watchers say.

NUTURING BRANDS. With investment from the likes of a Wendy's or McDonald's, the fast casuals get more capital, purchasing power, and real-estate expertise -- to name just a few benefits, says Eric Wold, an analyst with Merriman Curhan Ford in Austin, Tex.

But Wold adds that the fast-food backers must be mindful of taking care of their newly acquired brands. "They risk being folded into a larger company," he says. "If the fast-food companies don't give them the attention they need, they could end up hurting."

Baja Fresh, a fast-casual Mexican chain, has floundered since Wendy's bought it in 2002. But the fast-food company is getting around to making changes. In April, Wendy's appointed a new chief executive to take over the Thousand Oaks (Calif.)-based operation.

"JUST PRETTIED UP." Despite the bumps, fast-casual food is a growing trend. Skeptics say its popularity is just another sign that Americans are getting too uppity for their own good. "The closest thing you get to snobby is a fast-casual restaurant," says Rob Borucki, editor of Phoenix-based fastfoodsource.com, an information site for fast-food lovers. "You're still often eating food in a paper wrapper. It's just prettied up."

Before you pass judgment, BusinessWeek Online has made a list of some of the fast casuals and the big names behind them. You're unlikely to find this information at the restaurants you're visiting. (The fast-food players below have at least a stake in the fast-casual chains and in some cases own them outright). Here's a sampling of mass-market fast-food chains and their slightly ritzier spawns:

Fast-casual spawn: Baja Fresh

The concept: More than 300 quick-casual Mexican food restaurants in 23 states

Fast-food name behind it: Wendy's

Fast-casual spawn: Boston Market

The concept: About 630 home-style cooking fast-casual restaurants in 28 states

Fast-food name behind it: McDonald's

Fast-casual spawn: Café Express

The concept: 19 bistro-style fast-casual eateries, mainly in Texas

Fast-food name behind it: Wendy's

Fast-casual spawn: Chipotle

The concept: About 450 gourmet burrito joints in 25 or so states

Fast-food name behind it: McDonald's

Fast-casual spawn: LaSalsa

The concept: About 100 fast-casual Mexican restaurants in nine states

Fast-food name behind it: CKE Restaurants (Carl's Jr/Hardee's)

Fast-casual spawn: Mimi's Café

The concept: About 93 fast-casual, New Orleans-style eateries in 13 states

Fast-food name behind it: Bob Evans Farms

Fast-casual spawn: Pasta Pomodoro

The concept: About 45 fast-casual Italian restaurants in two states

Fast-food name behind it: Wendy's

Fast-casual spawn: Pret-A-Manger

The concept: London-based sandwich shops known for using natural ingredients now number about 150 in at least three countries

Fast-food name behind it: McDonald's

Fast-casual spawn: Rotisserie Grill

The concept: Five restaurants in four states specializing in open-flame grilling

Fast-food name behind it: McDonald's

Fast-casual spawn: Qdoba

The concept: More than 100 fast-casual Mexican outlets in more than 30 states

Fast-food name behind it: Jack in the Box

Fast-casual spawn: Tim Hortons

The concept: More than 2,700 fast-casual restaurants with a bakery focus

Fast-food name behind it: Wendy's

Wahlgren is a writer for BusinessWeek Online in San Francisco


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