Rainforest Caf & #233; is in for some stormy weather: jungle fever has been cooling down.
The company’s shareholders met last week in Minneapolis and rejected a buyout offer from Houston-based Landry’s Seafood Restaurant, calling into question the future of the company and OC’s store at South Coast Plaza.
One restaurant industry analyst said he believes the ailing chain will continue to free fall in the wake of the deal’s collapse. That would potentially leave South Coast Plaza with the second themed restaurant to go down in the past 12 months, behind Planet Hollywood.
“They are in major trouble if the acquisition by Landry’s doesn’t go through , it’s probably over,” said Ron Paul, president of Technomic.com, a Chicago-based research firm that monitors restaurant industry trends and emerging concepts, before the vote last Thursday.
But Kenneth Brimmer, president Rainforest Caf & #233;, insisted before the vote that a rejection would simply mean “business as usual for Rainforest Caf & #233;.”
Landry’s operates the Joe’s Crab Shack chain which has a store in Newport Beach, but Paul says those in the industry are puzzled what value the restaurant group saw in the Rainforest chain.
“That’s the real mystery,” Paul said. He theorized that Landry’s might have been planning to change the Rainforest locations over to another brand, like Joe’s Crab Shack.
The Rainforest chain has found its sales at newly opened stores are strong, but they start to trend downward after they’ve been open for at least a year. That has been the case at the South Coast Plaza location, Brimmer said. Other “eatertainment” concepts such as Dave & Busters, which has two OC locations in Orange and Irvine, are also reporting declining overall sales.
Meanwhile, according to the California Restaurant Association, the state’s annual sales from restaurants are expected to grow 6% to $30.4 billion this year.
“A large number of the themed restaurants are struggling with declining performance,” said Nate Franke, a retail analyst at Deloitte & Touche in Costa Mesa. “The biggest reason is that people come to them for the theme and not for the food. After they have experienced the theme once or twice, they don’t necessarily come back unless there is something else that draws them back.”
Rainforest Caf & #233; owns and operates 28 units in the United States including 17 mall stores and licenses 11 units internationally. Projected sales for fiscal 2000 are in the range of $255 million to $265 million compared to sales of $257 million in 1999. The 2000 sales include the addition of three new units and a full year’s sales for six units opened in fiscal 1999. Landry’s offered $125 million to buy the chain, a number that prompted several large shareholders to band together against a sale.
Sales Down Across Nation
Brimmer has said the mall-based concept has reported declining sales across the country.
“We are continuing to monitor the performance of our mall-based units and we will closely review exit strategies and or attempt to renegotiate underlying leases if these units approach breakeven unit cash-flow,” he said recently in a statement.
Rainforest plans to close at least one store this year and possibly five to seven other restaurants thereafter, according to the Rainforest’s April 20 filing with the SEC.
Although the Costa Mesa unit has reported declining sales year-over-year since its opening,”It’s an average performer for us,” Brimmer told the Business Journal last week,the company president believes it will still remain viable once the larger unit planned for the Downtown Disney entertainment center opens in 2001.
“We believe so,” he said. “That’s a huge market.”
Rainforest’s biggest performers are at the Disney resorts Animal Kingdom and Walt Disney World in Florida and at Disneyland Paris. Unlike other landlords, Disney includes a clause that allows it to cancel its leases with Rainforest with a 60-day notice. Despite the questions surrounding Rainforest’s future, Disney has not exercised that option here.
“As far as we know we are still looking forward to Rainforest Caf & #233; being a part of the Downtown Disney tenant mix,” said Disney spokesman Ray Gomez.
Rainforest has an 11-year lease with South Coast Plaza, ending in 2008. Franke believes the Rainforest chain would have a difficult time renegotiating a new lease with South Coast Plaza. The regional center has the ability to hand-pick some of the world’s top tenants such as Tiffany’s, Hermes, Nordstrom and Christian Dior.
Although South Coast Village lost Planet Hollywood when that chain crashed a year ago, at least four potential tenants are competing for that space. Also, South Coast Plaza added the upscale sports-themed restaurant The Clubhouse last year.
Still Popular With Visitors
Debra Gunn Downing, marketing director at South Coast Plaza, said the center believes its Rainforest tenant remains popular with visitors.
The mall-based units average $5.8 million per unit to develop and landlords generally contribute an average of $1.7 million and opening costs average $760,000, according to the company’s annual report. However, it is unlikely that South Coast Plaza made such a contribution, industry sources say.
According to the Business Journal’s list of OC restaurants, Rainforest Caf & #233; was second behind the Cheesecake Factory with 581,664 meals served last year, down 9% from 1998, its first full year of operation. It was the only restaurant among the 10 busiest to report a drop in sales for the year.
Rainforest is forecasting disappointing first-quarter sales for its mall-based locations and expects a net loss of $500,000 to $1 million. Same-store sales for the 16 units open at least 18 months were down 9.8% in January and 11.6% in February.
The same-store sales declines prompted the company to adopt a no-unit-growth strategy for 2001 and beyond for the first time since the restaurants debuted, in October 1994 in the Mall of America in Bloomington, Minn.
Additionally, the no-growth strategy reflects the company’s inability to obtain third-party financing.
The company opened its 15,000-square-foot, 350-seat South Coast Plaza, its seventh, in June 1997. It plans to build a larger icon location that will seat 600 at Downtown Disney. That store, if built, will be one of the company’s largest units at 30,000 square feet, with a projected development cost of $18 million.
