Outback Steakhouse

March 3, 2014.

Outback Steakhouse ............................................................................................................................ 3 Appendix A: Situational Analysis: Why has Outback been so successful? ........................ 7 Appendix B: Internal Analysis: What are Outback’s Strengths, Weaknesses, Opportunities and Threats? ............................................................................................................. 8 Appendix C: Internal Financial Analysis ...................................................................................... 9 Appendix D: External Analysis: What are some Key Success Factors for the restaurant industry? ............................................................................................................................................... 11 Appendix E: External Analysis – How attractive is the restaurant industry? ................ 12 Appendix F: External Analysis: PESTEL ...................................................................................... 14 Appendix G: Analysis of Strategic Alternatives: Vertical Expansion within US ............ 15 Appendix H: Analysis of Strategic Alternatives: Expand Internationally ....................... 16 Appendix I: Works Cited .................................................................................................................. 18

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Outback Steakhouse

Outback Steakhouse (“Outback”) has been successful to date due to a number of factors: experienced top management, strong focus on customer experience; quality ingredients; pricing strategy; positive relationships with suppliers; and robust employee culture. It is recommended that Outback first leverage its existing strengths within the U.S. market and grow through diversification into alternative restaurant concepts. Only after the local market has become saturated should Outback look into expansion abroad. The expansion must be done cautiously to ensure that the company understands their target market fully. There have been many instances in history where companies expanding internationally have failed due to poor planning and lack of understanding of the target country environment. Furthermore, a preliminary financial analysis has shown that there may be operational inefficiencies that are lowering the return on equity. It is recommended that Outback focuses internally and determine the cause of declining returns. If Outback must diversify internationally, it is recommended that Outback target countries that have a similar culture and background as the U.S. (i.e., Anglo-­‐Saxophone background – first Canada, then U.K). This allows for a smoother transition and the consumer preferences will be similar. Expanding overseas into Asia, Middle East, and South America would carry additional risks due to geographic distance from the US. Cultural differences must be understood and new distribution network established to ensure success. Given this, Hugh Connerty’s plan of targeting Canada, South America and Asia in the first year alone is overly aggressive and is not recommended.

Outback has been successful to date due to a number of factors. The three founders, all of whom have prior experience in the restaurant chain business, have a strong understanding of the industry and understand what it takes to succeed. Their focus is on providing an overall positive customer experience and implementing a strong corporate culture where employees are empowered to perform and take an active role through stock ownerships and other employee benefits. They have a strong relationship with suppliers to ensure fresh quality ingredients (Appendix A). While their strategy has been successful to date, Outback, with close to 300 restaurants, is approaching market saturation in the casual dining niche market in the US.

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While they have a strong market presence and a strong differentiation strategy, competition is fierce, and customers can choose from many different restaurant types, from fine dining to fast food, or to forego dining out all together in order to dine at home. Outback must either expand locally into other restaurant types, or to bring the Outback brand international and expand globally. Status quo is not a sustainable option (Appendix E). This paper recommends initial local growth by targeting other restaurant segments, along with a few pilot Outback restaurants in Canada. Only after the local market has been saturated, and the pilot restaurants have proven to be successful, should Outback look into aggressive international expansion, and they should do so cautiously. Further more, Outback’s return on equity has dropped from 41% in 1990 down to 27% in 1995, while the revenue has grown from 34 million to 734 million in the same period. This indicates that there may be some inefficiencies with current management operations, and further studies to determine why net income has not risen in proportion to revenue should be investigated. Outback can leverage its strong understanding of the local U.S. market to increase its market share by diversifying into alternative restaurant concepts. They already have an established brand presence in the U.S., and most importantly, expanding within the U.S. will allow them to utilize their existing distribution network and supply chain system. To determine which segment to develop into, Outback should conduct further studies to understand consumer preferences and where the growing trends are. However, growing within the U.S. market will further increase Outback’s dependence on the U.S. economy, and they will be entering an already mature and saturated market. None-­‐the-­‐less, the opportunity is there, and Outback has the strengths to make this a success. The key is to understand which market segment to diversify into (i.e., ethnic cuisine, fast food, fine dining?). Other factors to consider include: is there demand in the new segment? What is the risk to Outback if the new segment is unsuccessful? Is there an exit strategy? Will diversifying to other chains lose Outback’s brand? How should they manage this new segment? How many controls should they put in place? When will they reach saturation with this new market segment? (Appendix G). While expanding locally, it is suggested that Outback conduct further research to understand the international market, as there appears to be a strong desire within the Page 4 of 18

management team to expand internationally. However, based on the information provided by Hugh Connerty, there is limited justification as to why certain countries (e.g., Canada, South America) are targeted first, other than geographic proximity to the U.S. Factors to consider when developing an international expansion strategy should include an understanding of the political environment such as labour laws, trade restrictions, and tax policy. Economic factors such as unemployment rate could also impact the amount of disposable income available for a population and this could influence Outback’s pricing strategy. Social factors such as demographics, income distribution, and food preferences are also important factors (Appendix F). Outback must also examine their own internal processes, understand if they have the capabilities for expansion, and identify opportunities for improvement. For example, the company prides itself as having a relaxed culture with employee autonomy. If Outback is to expand overseas, how will it change the culture? Some countries, such a Japan, operate in a hierarchical and structured process. The same relaxed culture may not be successful in Asia. Countries such as India have a large Hindu population, and since their religion does not allow them to consume beef, expanding into India is not a viable plan. There must also be a formalized program to ensure standardization. One of the primarily reasons customers return is because they have come to associate the brand with certain qualities (e.g., Australian relaxed ambience, quality food, great service, etc.). A successful distribution network and supplier chain process must be implemented to ensure quality food. As successful restaurateur Sean Murphy once say, “you’re only as good as the last meal you serve” (Ries, 2012). Most restaurants fail because they do no understand their customers. As an example, Olive Garden failed in Canada due to three reasons. First, they failed to understand that Canadians are more health conscious and do not prefer high calories, high fat, and high sodium food. They tend to view American restaurants as a less healthy alternative. Second, Canadians, with their pride in diversity, is familiar with ethnic foods. They see Olive Garden as inauthentic, and prefer authentic Italian diners such as Terroni, Pizzeria Libretto, etc (Toronto Life). Finally, they were unable to compete against other restaurants that are already established within Canada (e.g., Milestone, Montana, etc.). Diversifying into other countries without fully understanding their preferences and structures could be Page 5 of 18

detrimental and not only will failed attempts impact Outback financially, it will have a negative impact on their brand image. As mentioned in the opening paragraph, Outback should first expand into Canada to leverage its existing supply chain network due to its proximity to the US. Although the steak and casual diner market in Canada is already saturated with many strong competitors such as the Keg, Baton Rouge, and Milestones, it is still the most logical expansion location. To compete against these established brands, Outback will need to focus on their core competencies to ensure they can rise above their competition. Outback Canada must continue to serve quality and fresh ingredients at an affordable price. They must adapt to local taste preferences and offer healthier options. Choosing the right location is also a key factor to success. As Outback targets suburban families, they should look into cities that are currently growing and have not been saturated with established restaurants. With respect to ownership structure, it is recommended that Outback expands as subsidiaries with an establishment of Outback Canada that reports to Outback US. Establishing an Outback Canada will ensure there is focus on the specific country to cater to their preferences, but at the same time, is able to ensure standardization and quality control through the parent company.

In conclusion, Outback has been a successful restaurant chain to date due to its successful management strategy. To grow, they should first target diversifying within the U.S. market to leverage their existing supply chain network, understanding of consumer preferences, and strong local brand awareness. If they are to expand internationally, it is advised that they follow a subsidiary philosophy to maintain control of quality and ensure standardization, but also to allow for cultural and geographical differences. The top three success factors include understanding cultural and consumer preferences, ensuring there is a robust supply chain, and understanding the local regulatory environment and risks.

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Appendix A: Situational Analysis: Why has Outback been so successful?

Outback has been successful to date because of a number of factors, as listed below: 1) Founders understand the business, and have a strong working relationship The three founders, Chris Sullivan, Bob Basham and Tim Gannon all have experience in the restaurant chain business, so they understand the industry well. Further, they met as management trainees at Steak and Ale, which would indicate that they already have a strong working relationship with one another. 2) Outback’s emphasis on providing an overall positive customer experience Outback has a strong focus on providing exemplary customer service through a lower table to server ratio (i.e., 3 tables per server, as opposed to 5-­‐6 tables per server). Their decision to only operate during dinner hours has enhanced the overall customer experience by ensuring that the servers are not exhausted. 3) Strong corporate culture and low employee turnover Outback places strong emphasis on employees. One of their catchphrases is “fully staffed, fully trained”. A typical Outback restaurant kitchen can occupy up to half of the floor plan to allow enough space for the chefs. Each server is assigned to cover no more than three tables to reduce overload.

Employee selection process is rigorous and includes attitude tests and interviews. Low employee turnover and engaged employees can often lead to higher quality Employees are eligible for stock ownership and health insurance. level of service, and in turn, increase customer satisfaction.

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Appendix B: Internal Analysis: What are Outback’s Strengths, Weaknesses, Opportunities and Threats?

The following outlines the SWOT analysis for Outback Steakhouse. Strengths: Outback’s strengths lie with having a strong relationship with their suppliers, low employee turnover rate, and providing quality food at an affordable price. Weaknesses: To ensure fresh ingredients, Steakhouse is only open during dinner hours. Their menu remains limited, focusing primarily on steaks. Opportunities: Outback can either stay only in the US and diversify vertically into alternative restaurant concepts, or expand internationally. Threats: As Outback is currently located only in the US, any economic downturn could impact their profitability. As the market is already saturated, any new players entering the market can pose a threat to Outback. Bottom Line: Outback’s main differentiation is with providing generous portion quality ingredients at an affordable price. If

Strengths • Differen5a5on (Quality ingredients and generous por5ons at an affordable price) • Customer service • Long term rela5onships with suppliers • Low employee turnover rate

Weaknesses • Limited menu selec5on • Dinner service only

Opportuni5es • Diversify into alterna5ve restaurant concepts • Expand interna5onally

Threats • Economic environment (operates in US only) • Compe5tors entering into the steak market • Market is saturated

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Appendix C: Internal Financial Analysis Revenue and Net income

Outback revenue and net income Revenue ($m), 1995, 734 Revenue ($m), 1994, 516 Revenue ($m) Net Revenue ($m), income 1993, 310 Revenue ($m), 1992, 189 Revenue ($m), Net income, Revenue ($m), 1991, 91 Net income, Net income, Net income, Net income, Net income, 1995, 61.3 1994, 43.4 1990, 34 1992, 14.8 1993, 25.2 1991, 6.1 1990, 2.3

Revenue has continued to increase from 1990 through 1995, however net income

has only risen slightly. This suggests operational inefficiencies.

$ m

Return on Average Equity

Return on average equity has continued to fall, further supporting operational

inefficiencies.

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ROE, 1990, 41.20%

Return on Average Equity ROE, 1991, 34.40% ROE, 1992, 23.60% 1990 1991 ROE, 1994, ROE, 1995, 27.40% 27.00% 1992 1993 1994 1995

ROE, 1993, 22.20%

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Appendix D: External Analysis: What are some Key Success Factors for the restaurant industry?

Loca5on • Loca5on, loca5on, loca5on • To aYract customers, restaurants must be located in a convenient area, easily located and accessed by customers. • Customers will tend to dine at restaurants they are familiar with (they know what to expect). • A strong brand presence will make it easier to promote any expansion plans.

Below outlines some Key Success Factors for the restaurant industry that Outback

should consider when developing an expansion strategy.

Strong Brand

Quality of Food

• Quality of food is cri5cal in ensuring that customers will return.

Customer Service

• Excellent level of service will increase customer sa5sfac5on.

Menu Pricing Strategy

• Selec5ng menus where the gross margin is high will ensure higher profitability. • Life cycle of a restaurant is typically 5 years, with the first 3 years focusing on building customer base. • Business must be re-­‐invented every 5 years to keep customers interested (Wilson, Dover). • Managers must be present, involved, and leading. • Employees must be engaged.

Long Term Strategy

Management and Employee Engagement

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Appendix E: External Analysis – How attractive is the restaurant industry?

Based on an analysis of Porter’s Five Forces, the restaurant industry operates in a

tough and competitive environment. Competition is high; customers have many dining choices, and can easily substitute dining out with eating in. Competition (High) • The casual dining market is already saturated, and competition is high with many existing players (e.g., Appleby’s, Tony Roma). • Many global and local players, some foreign companies have presence in the U.S.

Buyer Power (High) • The “buyer” for Outback are the customers, and to a lesser degree, corporate clients or caterers. • As customers have the ultimate power in deciding which restaurants to visit, or in fact, for individual consumers, whether to dine out at all, their power remains high. Supplier Power (Moderate) • Suppliers for Outback include suppliers for raw materials (e.g., produce, steak, cooking ingredients). • Their bargaining power is moderate, as Outback can choose to change their suppliers as long as they are not tied in to contracts and service agreements. Barriers to Entry (Moderate) • The restaurant business is diverse and spans from high-­‐end fine dining to simple “mom and pop” shops to fast food chains, or street vendors (hot dog stand). The segment that Outback is in is in “casual dining”, where initial capital investment is relatively low. • However, an already saturated market where competition is high increases the barriers to entry.

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Threat of Substitutes (High) • Casual dining is in the service industry, and is not a “mandatory” service, and hence the threat of substitutes is high. • Individual consumers can choose to dine at home, or to dine at a different segment (e.g., fast food, fine dining). • Corporate consumers have fewer choices, and they tend to gravitate towards larger establishments. However, they will still have an option of contracting a professional caterer. Furthermore, as Outback is only open during dinner hours and is often located in suburban areas, their primary focus is not on business customers.

Supplier Power (Moderate) Barriers to Entry (Moderate)

Buyer Power (High)

Compe55on (High)

Threat of Subs5tute (High)

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Appendix F: External Analysis: PESTEL

The external PESTEL analysis provides an overview of the macro-­‐environmental

factors of the industry. For a successful international expansion strategy, Outback must conduct sufficient research on the market they wish to expand into to understand the factors that influences the local environment.

• Tax Policy • Labour Law • Trade restric5ons

Poli5cal

Economic

• Economic growth • Exchange rates • Infla5on rate • Unemployment

Social

• Demographics • Health consciousness • Food preferences • Income distribu5on

Technological

• Staffing • Accoun5ng • CRM

Environmental

• Water availability • Wastewater treatment • Specialized waste (used oil) • Energy comsup5on • Employment law • Health and safety law • Labour law • Compe55on law

Legal

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Appendix G: Analysis of Strategic Alternatives: Vertical Expansion within US External Factors • Market factors – is there demand? How saturated is the domestic market (beside steak)? • Supply chain system/ Raw material suppliers – can Outback leverage its existing distribution network and supply chain? • Management structure – franchising? Joint ventures?

Internal Factors • Culture – Outback’s relaxed culture, will this change if Outback acquires other restaurants with different culture? • Controls – how much autonomy would these new restaurants have? How will Outback control them? • Pro • Diversify to increase market share in the US • Increases the total number of stores owned by the company • Strong local brand awareness • Supply chain and distribu5on system already in place, poten5al for further economics of sale • Understands the local market well Con • Greater dependence on the US economy • Market already saturated • Strong compe55on • Outback only familiar with casual steakhouse business models

Resources – does the company have the capability to expand?

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Appendix H: Analysis of Strategic Alternatives: Expand Internationally Factors to consider

Connerty suggests that Outback first expand to Canada, and subsequently to Latin America (e.g., Mexico) and the Far East (e.g., Japan, China). There are a number of factors to consider when choosing a location for expansion External Factors • • Market factors – is there demand? Social/ cultural factors – local consumer preferences regarding food choices, ambiences, level of service expected, demographics. Does the strategy need to change? • • Political environment – related to regulations and trade restrictions Supply chain system/ Raw material suppliers – are there suppliers and personnel available to ensure Outback maintains its fresh ingredients and exemplary customer service reputation? • • Infrastructure – utilities, transportation and communications Management structure – franchising? Joint ventures?

Internal Factors • • • Culture – Outback’s relaxed culture Controls – how much autonomy would international Outback have Resources – does the company have the capability to expand?

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Pro • Growth opportunity -­‐ US market is saturated, expansion will provide new growth opportuni5es. • Risk diversifica5on -­‐ hedge against US economic downtown. • Brand -­‐ an interna5onl presence can increase brand awareness for Outback both interna5onally and locally. • Marke5ng -­‐ expanding interna5onally can generate a new "buzz" or excitement. • Increases shareholder value -­‐ expand interna5onally is typically associated with a business that is doing well. • Opera5ons exper5se -­‐ with over 300 restaurants, Outback knows how to successfully expand. • Leverage and grow distribu5on network -­‐ once a global supply chain network has been put in place, it could give Outback greater bargaining power with its suppliers.

Con • Cultural differences -­‐ Outback has no experience with expanding outside of the US, and may not be familiar with cultural differences (e.g., Hindus do not eat beef). • Control measures -­‐ Outback prides itself as being a company with a culture of "no rules". While this may be a successful approach in US, interna5onal expansion would require 5ghter controls. Controls would include standardized training program and other controls (e.g., accoun5ng) • Weak distribu5on network/ supply chain -­‐ as Outback does not have any infrastructure outside of US, they will need to invest heavily to build a robust supply chain network. • Local compe55on -­‐ Outback may face local compe55on, especially if they are looking into entering the Canadian market first (e.g., Baton Rouge is already an established steakhouse in Canada). • Quality control -­‐ Outback prides itself in fresh and quality ingredients. Can they ensure quality ingredients in interna5onal markets?

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Appendix I: Works Cited • Ries, B. (2012, 11 07). Sean Murphy: "You're only as good as the laste meal you serve". Retrieved 01 31, 2014, from Ticket Sarasota: http://www.ticketsarasota.com/2012/11/07/sean-­‐murphy-­‐youre-­‐only-­‐as-­‐good-­‐as-­‐ the-­‐last-­‐meal-­‐you-­‐serve/ • • Taylor, M., & Grant, R. (2014). Outback Steakhouse. Toronto: Schulich. Toronto Life. (n.d.). Nine Restaurant Chains that Haven't made it in Toronto. Retrieved 01 31, 2014, from Toronto Life: http://www.torontolife.com/galleries/nine-­‐restaurant-­‐ chains-­‐that-­‐havent-­‐made-­‐it-­‐in-­‐toronto/#olivegarden • Wilson, G., & Dover, J. (n.d.). Secrets of success: 10 key factors for running a profitable restaurant. Retrieved 03 01, 2014, from Restaurant Central: http://www.restaurantcentral.ca/SecretstoSuccess.aspx

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