P.F. Chang's to Open New Concept

P.F. Chang’s China Bistro Inc. plans to open an even more limited-service and pared-down-menu version of its fast-casual Pei Wei Asian Diner in Phoenix next April, executives said Friday.

Called Pei Wei Asian Market, the new test restaurant will take over an existing Diner unit in Phoenix, said K.C. Moylan, president of the 173-unit Asian Diner division. The division is also looking for three to five additional locations around the country.

The Asian Market, as described by Moylan, seems positioned to more closely compete with such quicker-service fast-casual concepts as Chipotle’s recently opened ShopHouse Southeast Asian Kitchen in Washington, D.C.

During an Investor Day webcast Friday, P.F. Chang’s executives also discussed the company’s investment in the expanding four-unit True Food Kitchen, new lunch and other pricing initiatives at the casual-dining China Bistro, international expansion of both the Bistro and Pei Wei concepts, and the move into non-traditional airport locations.

Jeffrey A. Bernstein of Barclays Capital said it was only the second such investors’ gathering in the company’s history; the other was in November 2006. “The question remains whether efforts will resolve comp [sales] concerns without damaging consumer perception and financial performance,” Bernstein’s team wrote in a pre-meeting note.

Pei Wei Asian Market leans towards quick-service

The new extension of the Pei Wei fast-casual brand to the Asian Market drew wide attention. “We’re excited about this opportunity,” Moylan said. “We feel very confident about the diner and our positioning of it.”

The Market will have some distinct differences from the 11-year-old Diner concept, Moylan said.

While the Asian Market will have the same line for queuing and display kitchen as a Diner, it will have two registers instead of four, a spice rack for décor, a digital menu board that resembles a chalkboard, a possible touch-screen terminal with information about ingredients in specific dishes and all items packaged to go, Moylan said.

“So they can dine in if they want, but it’s all going to be in disposables so there won’t be plates. There won’t be service to the table,” Moylan added. The no-service strategy offers “a significant amount of margin,” he said.

The Market food also will be more portable than the counter-order and table-delivery Diner locations, Moylan said.

“One of things about having more portable food is that it makes you feel it’s less expensive if you can eat it with your hands,” Moylan said, adding that the Market aims for “everyday affordability.”

The menu will be smaller to accommodate delivery times of three to four minutes, he said, and offer more flexibility for single diners, which he said is more important in dense urban markets.

“The menu will be much smaller. It will have some of the core items. They will be priced and portioned more like the Selects,” he said.

Rather than the typical six to eight ounces of protein in a Pei Wei Asian Diner entrée, the Diner Selects introduced earlier this fall are four ounces, he said.

“So you’ll see us portion it down and portion it down,” Moylan said. “We think the check will probably be a little less expensive, and the menu size and variety will be less.”

The division debuted Diner Selects in mid-October, providing a limited number of reduced portion entrées with a choice of an added slaw, soup or eggroll for the combined price of $6.25.

Moylan said the Market would also have a more flexible footprint, smaller than the traditional Diner’s 3,000 to 3,200 square feet, to fit into more dense urban areas, like the District of Columbia, Philadelphia and Los Angeles.

Pei Wei Asian Diner currently has 173 locations in 23 states, and Moylan said the division plans to open 16 to 20 locations in 2012. Target markets are Los Angeles, Florida, the Mid-Atlantic and Chicago, he said.

“I’ve been spending more time in QSR restaurants than I ever have in my life,” Moylan said. “There is some learning to that. I think of Chick-fil-A, I think of In-N-Out Burger. I think they a do a fabulous job in quality, execution and speed.”

Pei Wei’s new director of training comes from Taco Bell, he said.

“You will see us shift more down from casual to QSR. That is one of the things that is necessary,” he said. “You don’t have to lose the atmosphere and ambience; you just have to price it and portion and do a bit more of that value play that they get a lot of credit for.

“I would say by September of next year, or October of next year, a year from now, we’ll have a pretty good idea of how this brand is trading and how it is working,” Moylan said.

Additional areas of growth

P.F. Chang’s executives addressed a number of other efforts at the company:

? True Food Kitchen investment: Rick Federico, chief executive and chairman of P.F. Chang’s, said the healthier-food casual-dining concept created by Sam Fox’s Fox Restaurant Concepts of Scottsdale, Ariz., and health advocate and author Dr. Andrew Weil is where the company believes the consumer is going.

P.F. Chang’s provided True Food with a $10 million credit facility to open up to five restaurants, which would take them through a sixth restaurant, Federico said. The first True Food Kitchen opened in Phoenix, Ariz., in 2008 before P.F. Chang’s made its credit deal. The fifth restaurant is scheduled to open in San Diego, Calif., and Federico said a sixth unit has been committed. P.F. Chang’s retains a right at the sixth restaurant to convert its debt position to an equity position, which would give it 51 percent of the concept, while Fox and his team would continue to run True Food’s day-to-day operations. Federico said at that point P.F. Chang’s would look for a concept president to lead the brand. He also added that P.F. Chang’s could buy up to 90 percent of the brand if Fox remains involved, and if Fox does not remain involved, it could end up owning 100 percent of it.

Revenue and cost structures of P.F. Chang’s and True Food Kitchen are similar, Federico said. The four True Food restaurants have average unit volumes of $5.9 million, compared with $4.6 million at China Bistro; sales per square foot are $1,120, compared with $660 at China Bistro; annual sales per seat are about $25,000, compared with $19,300 at China Bistro; and the cost to build per seat is about $8,200, compared with $14,240 at China Bistro.

“We’ve been talking about this as being as close to an economic model as what we’ve experienced at P.F. Chang’s,” Federico said, which makes the executives optimistic about the brand.

“There are so many similarities, I think, between where True is today and where the Bistro was back in 1996,” Federico said. “The Bistro is an incredibly complex restaurant to execute, as is True.”

That complexity requires significant training and real estate capacity, he said, and added that opportunities for True exist in such markets as Boston, Chicago, Dallas, Houston, Miami and New York.

? China Bistro pricing: Lane Cardwell, president of the China Bistro division, said that as a focus on value messaging, a new single-page lunch menu will roll out to the system on Dec. 6. It features new pricing, such as a $6.95 Dim Sum Lunch, and a 25 items under $10 section. The menu has been tested in Arizona and Dallas units.

? Airport locations: R. Michael Welborn, president of P.F. Chang’s global brand division, said the first non-traditional Pei Wei unit opened on Nov. 15 in the Minneapolis-St. Paul International Airport, and a second is scheduled to open in early December at John Wayne Airport in Santa Ana, Calif. Four more airport units are planned in 2012, with two in Las Vegas and one each in Charlotte, N.C., and Salt Lake City.

“Airports are going through an evolution,” Welborn said, away from contract service to individual operators, which offers an opportunity. The new airport units include such menu items as banh mi sandwiches with roasted pork or grilled chicken at $7.99, wraps at $7.99, salads at $7.69 and breakfast items, such as bacon and egg fried rice at $7.79.

? International development: Welborn said it has four international partners with 17 Bistros operating internationally, and it expects to have six partners operating 30 Bistros abroad by the end of 2012.