The restaurant industry is a market that has been greatly impacted by the pandemic, inflation, and soaring food costs in the past few years. Despite the efforts of lobbyists such as the National Restaurant Association, the restaurant business remains one of the most ruthless and challenging industries, with alleged profits of less than 3% and a failure rate that can reach up to 80% of establishments never making it to their 5th year.
However, among the diverse restaurant types – Italian, Mexican, Chinese, American, Japanese, and others – there is one that has consistently proven to be the most lucrative and makes up over half of the Top 100 highest-grossing restaurants in the United States each year: the steakhouse.
Steakhouses have made a name for themselves by offering tried-and-true classics with good ingredients, good execution, good service, and good ambience.
They aim for predictability in their menu and experience, as this is what sets them apart from other fast-casual restaurants that prioritize convenience and affordability. Customers who visit steakhouses are usually looking to splurge, making the high prices for menu items and drinks, such as wine, a non-issue.
The focus on ingredients, service, execution, and ambience, along with the high-end target market, makes steakhouses difficult to scale as there are few ways to automate or streamline a business that requires so much human capital.
This also means that people do not frequently dine at steakhouses, which makes it harder for these establishments to increase their customer base.
One of the classic high-end steakhouses is Ruth's Chris, which prides itself on its service and USDA Prime beef. Its target audience is the 35-65-year-old business-centric, high-paying upper-middle-class demographic.
The menu features traditional opulence priced from $35 to $100, with prime and choice-grade cuts, along with seafood, chops, lobster, and desserts. The average check for Ruth's Chris has grown from $70 to $90 in the past decade, with $18 of that being spent on beverages and the remaining $72 on food. Historical data shows that wine made up 60% of all beverages sold between 2010 and 2017.
In contrast to fast-casual restaurants that focus on volume and broad appeal, Ruth's Chris cannot scale in the same manner, opening only an average of two new restaurants per year.
The company values its brand as its greatest asset, as a bad experience at Ruth's Chris could damage the reputation and pricing power that it has cultivated for over 50 years. As a result, Ruth's Chris steakhouses have remained consistent over the past decade, with half being franchised and half run by corporate.
The company earns an average of $20 million per year from royalties, with franchise fees growing by an average of 6% annually in the past decade.
However, not all steakhouses have the same approach as Ruth's Chris. Companies like McDonald's, iHOP, and KFC aim to make money from royalties and are less concerned with day-to-day execution. They expand faster by finding local operators to run their restaurants and let just about anyone with the money and interest franchise a location without much due diligence. This strategy is most apparent in fast food and fast-casual restaurants, but it is not the same for high-end steakhouses.