As usual, I will use this letter to update you on our business activities and discuss some of our goals for the future. I will also highlight our achievements and comment on some areas where we fell short of our expectations last year.
We operate restaurants in 22 individual trade areas in 18 different statistical metropolitan areas (SMA's) in 11 states. The annual volumes of our restaurants range from $2.8 million to $5.8 million. Population densities of our SMA's range from 452,000 to a high of over 8 million. Median household incomes within the five-mile trade areas range from $37,000 to $107,000.
We have previously said that we more closely resemble a collection of 22 individual restaurants than a typical restaurant chain group. Our building design often varies substantially from market to market. One of our objectives last year was to use our in-house culinary skills to diversify menus on a market by market basis, and we believe that we were successful in achieving this goal. While the core of our menu remains the same from restaurant to restaurant, the number of items varies, as does the emphasis on local menu features and rotating products. When we think it necessary, we are also willing to adjust our menu to position ourselves to be more successful in individual markets. For instance, in Baton Rouge we offer a local specialties section of the menu that has featuring several Louisiana-style products.
In some markets we have an extremely high demand for our prime rib and steak products, and we offer sizing options on our different steaks as well as additional steak products. There our menu feels almost like a steakhouse. On the other hand in some markets we slant our menu toward chef-driven features and sell a significantly higher number of seafood entrées. Nevertheless, our core products remain the same in all our restaurants. Our prime rib, filet, baby back ribs, grilled salmon, fresh ground chuck burgers, specialty sandwiches and entrée salads represent the core of our menu, but even within these categories there are considerable variations in sales mix. We also offer dessert options and several fresh in-store prepared soup rotations.
In order to discuss some of our business issues with you, I want to introduce a little restaurant jargon, so I can share my views on the benchmark data by which we monitor our restaurants.
We have a broad-based menu ranging from entrée salads to steaks and prime rib. When we increase prices on menu items, guests sometimes migrate to other selections. Thus, it is possible to increase some prices and still not have any increase in the amount of our average check. Check average is consequently an important statistic for most restaurant operators and in many cases is more important than individual menu prices.
If we only had one item on our menu and increased its price by 5 percent, we could be sure that our check average would rise 5 percent. However, total sales might decline because fewer guests would purchase our one product at its higher price. This introduces the second important statistic – guest counts. Many an entrepreneur has opened a restaurant concept and experienced high levels of guest counts combined with a check average that was too low to earn a fair return on capital, if any. The converse, high check averages but guest counts so low as to preclude profits, can be equally true. Obviously, within the range of rationality, we seek high check averages and high guest counts. In a typical J. Alexander’s, we expect to serve about 4,800 to 5,500 guests per week, depending on the check average.
Armed with both guest count and check average data, a restaurant operator can much more effectively manage the impact of in-restaurant marketing programs and menu pricing strategies, as well as other aspects of the spending behavior of its guests.
Restaurants are frequently grouped for analytical purposes around specific check averages. The broad-market casual dining concepts generally are in the $10 check average range, and several of the popular and better known national-branded restaurants fall into this category. Most casual dining restaurants with approximately a $10 check average have approximately the same number of seats or tables. While there are exceptions on the high and low ends of the spectrum, most casual dining restaurants have between 190 and 230 seats for food service. A typical J. Alexander’s has 210 seats.
In many different restaurant concepts, the ranges of entrée pricing is approximately the same, although check averages are much more divergent. For example, a restaurant with a $10 check average might have entrées priced from between $8 and $18, while one with a $15 check average could well have entrées priced from $9 to $21. Obviously, the latter generates 50 percent more revenue per guest than the former. A host of factors contributes to these differences – the prices of signature items, concept focus, in-restaurant promotion, trade area demographics, service format, etc., but there is no question that the more money guests spend in a casual dining restaurant, the higher their expectations for both service and product quality.
I apologize if I have forced on you more information than you desire, but for the remainder of this letter, I am going to discuss the relationships of our check averages and guest counts, compared to market size and trade area incomes. Hopefully, this background will provide you with the keys to decipher all the “restaurant talk.”
In 1999 we implemented several programs to improve sales and profitability performance. We reduced the number of our menu items and especially paired down some of our lower priced items. We also expanded our feature menu offerings with several premium priced products. All this was done in order to boost check averages, decrease cost of sales and improve profitability. We knew that by aggressively re-engineering our menu, we would suffer some guest count decline and estimated that those declines might be as high as 3 percent.
Overall, our programs worked well and check averages increased over 8 percent to $15.62 (all check average statistics are exclusive of alcoholic beverages). This was on top of a 6 percent increase in check averages in the previous year. However, our guest counts for 2000 declined somewhat more than anticipated -- about 4.6 percent in the same store sales base. These declines were significant in our smaller markets (SMA's with under 1 million people) and in mid-market locations (SMA's between 1 million and 1.5 million people) with guest count loss in one location of 14 percent. Starting in the fourth quarter of this year, we implemented programs in those markets to reverse this trend by putting lower priced entry-level products on the menus. This should not have a significant impact on margins, because these items also have favorable food costs. We are confident that our current menu line up will increase guest counts – and correspondingly reduce check averages – in some of our mid and small market restaurants and yield profitable results.
In our major market restaurants, we have had little difficulty managing a higher check average. Our Overland Park, Kansas and Troy, Michigan restaurants for instance, had 8 percent increases in check average, as well as increases in guest counts. Our ability to grow same store sales is much higher in our larger market areas. Last year same store sales improved 7.5 percent in our major metropolitan markets, and the weekly average sales performance was even better, increasing 9.2 percent. In our mid and small markets, however same store sales averages were flat for the year.
Results of these recent trends confirm our thoughts from three years ago that we will confine our future development activity to major markets. While we have some very successful restaurants in mid and small market locations, the odds of reproducing these on a successful basis are long. On the other hand, we believe that our opportunity to develop major market restaurants is extremely strong. The top 40 SMA's account for approximately 45 percent of the U.S. population. The other criterion that is extremely important to our success is high median household income in our restaurants' immediate trade areas. With the exception of Florida markets or very large trade areas (over 250,000 population), we intend to develop restaurants only in trade areas that have in excess of $65,000 in household incomes.
We believe that a $15 check average is a moderate price relative to the quality of food that we serve and the level of service we offer to back up that food quality. We simply must locate our restaurants in markets that have adequate population densities and income levels that can support our pricing strategy. We have learned many lessons and this was one of the hardest in the nine years since we started J. Alexander's. A concept like ours cannot be as successful in as many trade areas as a $10 check average restaurant concept. Just because a market can support a Wal-Mart does not mean it can support a Nordstrom's.
We were extremely successful in small and mid markets when we first started J. Alexander's. However, as we needed to increase our check average to continue to reflect the high quality of our product offerings and high level of service in our restaurants, it became apparent that this would be a very difficult task in our more price-sensitive markets.
While we do not plan any additional small and mid market restaurants, we need to maximize our success in the ones we already operate. In that regard, we will be much more aggressive on offering lower priced and lower food cost items for these markets. We are also making some modifications in our management systems so that we can operate these restaurants with less management staff. Most of our more expensive chef-driven products will not be featured in the mid and small market locations. We will stick to the basics of our menu in these restaurants.
The reason we are so enthusiastic about pushing forward with our major market developments can best be demonstrated by the Detroit market. We have three restaurants in that market which averaged over $95,000 per week last year. In addition to increasing check averages in the market, we also posted an overall guest count increase. We expect these restaurants to continue to improve and hopefully average over $100,000 per week this year. The Detroit SMA has a population of approximately 4,475,000. In our best trade area in that market, the median household income is $107,000 and in our lowest market area the median household income is $77,000.
Our premium menu features as well as our expanded wine program and specialty cocktail offerings are well received in the Metropolitan Detroit market. Equally as impressive is our profitability structure in this market, where the average cost of sales of these three restaurants was in December 2000 approximately 200 basis points lower than the average cost of sales of our 22 restaurants. The combination of high sales average and lower costs is hard to beat.
We believe our Michigan restaurants demonstrate that we have developed J. Alexander's into a well positioned upscale restaurant concept which is capable of delivering consistent high quality food backed up by professional service with a $15 check average. And our format represents great value relative to some of the much higher priced concepts that offer similar quality menu items.
We are a contemporary American restaurant without any gimmicks. Internally we believe that we are a service organization pure and simple. We believe that our menu offerings are unique because of our creative approach, but at the same time we know that steaks, fresh seafood, hamburgers, baby back ribs, salads and desserts can be purchased almost anywhere. We do believe that our food quality sets us apart and that making virtually everything that we serve from scratch in each of our restaurants serves to differentiate our concept from others. Nevertheless, we believe that the most important thing we do is offering our guests outstanding service. Our teamwork concept, hospitality, attention to detail and genuine desire to provide a superior dining experience are the foundations of the J. Alexander's concept. We want to give each guest that comes through our doors the best possible experience available in the restaurant industry.
One thing that I will always believe sets us apart from other restaurants is our commitment to continuous improvement. We know that we have not arrived yet – and never will. We believe our service and food quality have improved each year since we started J. Alexander's, but we can still get a lot better.
As mentioned previously, we are diligently working to improve sales performance in our mid market and small market restaurants and we believe that we will achieve our goals for these restaurants long term. As we look out into the future, there are two issues that are of concern to many at this time. One is the possibility of an economic slow down and the other is commonly referred to "mad cow" disease.
On the economic front, notwithstanding our own sales issues, history would suggest that a recession will have some negative impact on casual dining. The difficulty in projecting this historical experience to a future recession centers around two areas. First, there has been a considerable amount of growth in casual dining since the last recession. The other issue is that it has been almost ten years since we have experienced an economic slow down, and then the recovery was fairly rapid. One upscale steakhouse company in a recent annual report related its same store sales data to major economic events over the past 20 years, and does not appear to have encountered any serious difficulty during economic slow-downs. Some of the larger casual dining chains were still in their early stages of development during the last recession, so we don't have a good database for our exact segment of the industry.
Consumer lifestyles have changed hugely over the last 15 to 20 years, and it may be that eating out today is more of a lifestyle experience than a discretionary one. Nevertheless, if the economy does go into recession we would certainly expect some shifting of consumer demand and perhaps some trading down by customers within the various segments of casual dining. However, overall we expect sales growth to continue, though possibly at a lower rate than the high levels of the last two or three years. We believe that most of our restaurants are located in markets that have solid future economic prospects.
The other topic of concern that is being talked about, but in almost a whisper, is the problem we have been reading about that the United Kingdom and several EU countries have encountered with "mad cow" disease. So far the U.S. beef supply has been completely free of the horrible virus that causes this disease. We are fortunate to live in a country that has such a strong and well regulated agricultural industry. The biggest fear I personally have relative to beef consumption in the United States relates more to the possibility of a rumor (which is exponentially enhanced in this age of the internet) linking our beef supply to "mad cow" disease than to any actual occurrence of the disease. Hopefully this will not happen, but I am sure we will read more about problems in the U.K. and Europe this year.
Beef has always been our top selling item, but we have quite a diverse menu, with an extremely strong fresh seafood program, as well as a significant number of poultry, pork and pasta items on our menu. In the event we were to encounter a decline in beef demand for any reason, we believe that we could easily shift our menu direction into these other areas, especially fish and seafood.
On the development front, we plan to open two restaurants this year -- one in Boca Raton and the other in metropolitan Atlanta. Both these sites meet our more stringent site selection criteria, being located in very upscale markets with adequate residential backup and high median household incomes. We are currently working on our 2002 development program and focusing most of our attention on the metropolitan Chicago area. We are also evaluating some exciting opportunities in other large upscale markets. We are very confident about our development activity and believe we have some outstanding growth opportunities. We continue to believe that two new restaurants per year is an adequate growth plan for the next couple of years and we have considerable under-roof profit leverage in our existing restaurants.
We have been able both to significantly improve our restaurant operating profit in each of the last three years and we have reduced our general and administrative expenses as a percentage of revenues from 10.1 percent of revenues in 1997 to 8.2 percent last year. We will continue to emphasize improving profitability. Our performance for the first half of 2001 could be somewhat under last year's first half, because of the sales softness in our mid and small markets, but we expect that situation to improve in the last half of the year.
On a long-term basis, we are extremely optimistic about our prospects for continued success and development in our major markets. We expect our financial performance to continue to improve for many years to come.
We are thankful to our 2000 coaches and champions, whose daily dedication to J. Alexander's enables us to deliver on our commitment to superior service and high quality food. We are most grateful to our shareholders for their patience and support. We reached a significant goal this year by posting our first profit since the divestiture of our quick service business. We look forward to building on this milestone and continue to be dedicated to maintaining every J. Alexander's as a first-quality restaurant and making our company a first-quality investment for its owners.
Last year marked the passing of my friend, mentor and fellow director, John L.M. Tobias. We will be forever grateful for his guidance, inspiration, friendship and generosity. It was a very sad ending to an otherwise good year.
Sincerely,
