This reads like the ultimate fast casual success story — and it's been in the works for well over a decade.
— Kristen Hawley
As restaurants work to stand out in an increasingly competitive marketplace, big restaurant chains are diversifying their offerings to appeal to a different audience. This is the third in a Skift Table series dedicated to the stories behind the small names.
Fast casual spin-offs are proving themselves to be the best bet for chain restaurants to stay competitive as our relationship with dining out changes. But what happens when the spinoff appears to have the momentum to surpass the original?
If the goal of a spinoff concept is to generate revenue and business, then news like we’ve recently heard from Pei Wei and P.F. Chang’s China Bistro should be considered the ultimate success story. P.F. Chang’s started Pei Wei 17 years ago as a response to the changing restaurant market. The management of P.F. Chang’s first noticed the seismic shifts that would befall the restaurant industry back in the late ‘90s — specifically, as a response to the cost of labor. The city of Santa Monica had recently passed an ordinance mandating that the minimum wage be increased to $10.69, doubling the pay of most of the staff at one of PF Chang’s most successful units, and deeply cutting into the company’s profits. At the time, 41 American cities had passed living wage ordinances, a movement that was sure to continue despite the lobbying efforts of the restaurant industry. Raising prices was not an option, nor was cutting the number of staff required to operate units at company standards. P.F. Chang’s wisely decided to be proactive in its solution, creating a sibling concept, Pei Wei Asian Diner, that would reflect the future of the industry.
Founded in 1993 in Scottsdale, Arizona, P.F. Chang’s China Bistro started straight out of the gate as a massive success. Meticulously planned over three years, its Asian fusion food served in upscale surroundings quickly turned it into the city’s hottest restaurant, with frequent celebrity sightings and waits of up to three hours. Within two years the original 6,000 square foot space was generating over $4 million in annual sales, making expansion attractive. By 1995, the company opened three larger restaurants in California. Over the next decade, P.F. Chang’s grew to over 200 locations across the country, and was cemented as the most successful Asian restaurant chain in America.
In late 2000, the first Pei Wei Asian Diner opened its door. With a smaller footprint and a streamlined menu, each restaurant cost only about $500,000, a significantly smaller investment than its full service counterpart. There would be sit-down service, but the real money was going to come from takeout. By scaling down the familiar PF Chang’s menu to some of it’s most popular (and easily prepared) dishes, Pei Wei was able to scale down portions, lower prices, and operate with a fraction of the staff required for their China Bistro concept. Growing in tandem with it’s big brother, Pei Wei grew to 100 locations in only six years, with 168 total by the end of the decade.
Then came the recession. Compared to many other chains, PF Chang’s losses weren’t as extreme thanks to Pei Wei, whose price point made them more attractive to penny-pinching consumers. The company unveiled a massive turnaround effort to stay relevant. Its menu lent itself to gluten-free dining, and they were one of the earliest adopters for creating specialty allergy-safe menus and offering patrons the option of customizing dishes for their dietary requirements – a strategy mirrored at Pei Wei. Keeping an eye not only on changing cuisine but also changing tastes, items that had been traditionally branded as “appetizers” were now marketed as “small plates” at both concepts. Changes like these, while small, were effective, but not enough in the short term. Overhauling a single nationwide concept takes tremendous amount of manpower – overhauling two concepts simultaneously is a feat of monumental, and possibly insurmountable, challenge.
Management had laid the groundwork for a full rebound, though it would take a few years for those changes to pay off. In April of 2012, private equity group Centerbridge Partners purchased P.F. Chang’s China Bistro Inc. for a staggering $1.1 billion, buying out its shares at 30 percent over the average stock price and taking the company private. The Centerbridge acquisition meant more resources to stabilize both brands, as well as additional hands and capital to continue the company’s growth strategy.
What’s Working Today
The past five years have seen slow but steady growth for P.F. Chang’s — an anomaly in an industry that has recently become defined by declining sales. Pei Wei has seen larger increases in revenue as well as continued expansion, thanks to strong leadership the cultural swing to fast casual preferences. Now, after 17 years of operating side-by-side, the brands are separating – PF Chang’s will remain in Scottsdale, and Pei Wei is moving their headquarters east to the Dallas-Fort Worth area in Texas.
Both companies remain fully owned by Centerbridge, but behind the scenes the P.F. Chang’s and Pei Wei have changed significantly. Company leadership deemed the current structure — a large group of people responsible for the direction of two related, yet fundamentally different concepts — impractical, and counterintuitive to an accelerated growth strategy. Over the course of five years, the brands were slowly separated from each other organizationally. This year the Pei Wei executive team was completely overhauled with a new CEO, CFO, CMO, and new management in its IT and HR departments.
Pei Wei’s move to Dallas is telling on several fronts. First, the psychological aspect: by relocating the company 1,000 miles east, a both companies are able to be fully viewed as individual concepts. The city’s centralized location makes it ideal for concepts with an aggressive expansion strategy: the Dallas-Fort Worth airport is one of the country’s busiest, and allows travel to most major American cities in three hours or less. It’s central time zone makes it easy to communicate with locations on both coasts. The aforementioned benefits have been attractive to many other restaurant concepts, too. TGI Friday’s, Macaroni Grill, Corner Bakery Cafe, Red Mango, CiCi’s Pizza, Chuck E. Cheese, Dave & Buster’s and other rapidly growing brands have relocated to Dallas and Fort Worth.
Though P.F. Chang’s now stands alone, its internal reorganization has successfully built off the plans its once-divided management team set into motion at the beginning of the decade. A new “farm to wok” philosophy created relationships with local purveyors, appealing to modern tastes for fresh food and environmental responsibility. The restaurant has even expanded this idea to a “garden to glass” upscale, artisanal cocktail program. Consumers have reacted positively to a publicity push describing its from-scratch cooking techniques. They’ve steadily opened new locations and just last week announced an expansion into China, where P.F. Chang’s will, remarkably, be marketed as an American bistro.
It’s difficult to judge the financial health of the either company as they’re privately held, but typically, private equity firms like Centerbridge will sell assets between 7-10 years post-purchase — a timeline that correlates with the proposed expansion plans of both brands. Pei Wei CEO John Hedrick has stated that while expansion has thus far been moderate, 2019 and 2020 will be huge years for the Asian diner. In a few years, we’ll learn exactly how well the gamble P.F. Chang’s made way back in 2000 paid off – a sale that every chain restaurant should paying close attention to.