Fw: article from startribune.com - Granite City's cluster approach

The full article, with any associated images and links can be viewed here. Dick Youngblood: Granite City founders have recipe for growth Dick Youngblood, Star Tribune Granite City Food & Brewery Ltd. has grown in six years to nine restaurants and more than $30 million in sales on the strength of a made-from-scratch menu complemented by handcrafted beers and a drolly named brewing process called "Fermentus Interruptus." If veteran restaurateurs Steve Wagenheim and Bill Burdick are right about their strategy, however, the growth so far is just a drop in the schooner. The company's founders figure to have 12 stores with on-site brewing facilities operating in seven Midwest states by the end of 2005, when sales are expected to top $37 million. And they are well along on plans to have at least 26 open in the region by the end of 2007, when revenue is projected at $100 million. Those 26 -- or more -- stores would complete the Midwest portion of the founders' growth strategy, which is to expand the company in regional "clusters" to take advantage of operational efficiencies. Once the Midwest is filled in, the partners figure to start a new geographic cluster on the way to creating a national restaurant chain. These are not pipe dreams, it appears. Given a healthy balance sheet, a solid growth strategy and experienced management, securities analyst Nicole Miller of ThinkEquity Partners is carrying a "buy" recommendation on the Granite City stock and sees the potential for as many as 200 stores nationwide. Wagenheim, 51, Granite City's president and CEO, is the former president of the Champps sports bar chain and a onetime restaurant consultant in the Minneapolis office of the Laventhol and Horwath accounting firm. Burdick, the company's chairman, is the former owner of Sherlock's Home, once a popular English-style brewpub and restaurant in Minnetonka. Armed with nearly $20 million in private and public funding since opening their first restaurant in 1999, the two have developed a concept that yields almost as much revenue in small-city locations as it does in metro stores. Thus, stores in St. Cloud, Fargo, N.D., and Sioux Falls, S.D., yield more than $4 million a year -- "big-city numbers," Wagenheim calls them -- compared with about $5 million in its Maple Grove unit. Overall, the chain averages sales of about $4.5 million per store. The company also has restaurants in Des Moines, Cedar Rapids and Davenport, Iowa; Lincoln, Neb., and Wichita, Kan. Concept 'has legs' The Maple Grove store, plus one scheduled to open in Eagan in September and two more slated for Kansas City, Mo., at year-end, represent the company's move into major markets after six years focused on smaller cities. The company plans to add the Milwaukee and Chicago markets in the next two years, as well as Madison, Wis. "We started out in smaller markets to prove the concept had legs," Wagenheim said. "I think we've done that." What's the attraction? The key is "non-chain-like food" at affordable prices that yield tickets averaging $15 per customer, Wagenheim said. He's talking recipes you don't often find on chain menus, or adaptations of classic items that add Granite City's own touch. Thus, there's the chicken Caesar chalupa, a baked-flour tortilla brushed with Caesar dressing and topped with sliced marinated chicken, Roma tomatoes and melted mozzarella cheese. And the Overlake sandwich, which offers smokehouse bacon, sliced tomatoes and smoked turkey with Monterey jack cheese. Not to mention the grilled London broil, topped with a caramelized onion and bourbon sauce. Menu updated regularly I tell you, I gained 5 pounds just reading that menu, which lists more than 80 items and is revised twice a year based on sales records that go deep enough to tell management what one server in Wichita served in the past hour. The specials are used to test new items before adding them to the menu. But while food is 80 percent of sales, on-site brewing adds a crucial element to the brand. It might not have happened, however, if Burdick hadn't figured out a way to slash the capital costs that burden classic microbrew operations. "Installing a full microbrewing operation at each location would have been prohibitively expensive," Wagenheim said. So Burdick, whose margins at Sherlock's Home were pinched by the cost of brewing equipment, proposed a central facility to do the most expensive part of the brewing process -- the blending of water, hops and barley to produce a nonalcoholic liquid called wort. Then he designed the tanks, hoses and valves for a special truck used to deliver the wort to the restaurants, where less-expensive equipment is installed and yeast is added to complete the fermentation process. That's where the term "Fermentus Interruptus" came from, and that's the name the partners used in applying for a patent on the process. The strategy is to build one so-called worthouse for every regional cluster of restaurants the company develops. The upshot: When a regional cluster has been filled, the partners figure that economies of scale will reduce their beer-production costs to less than $70 a barrel, better than 40 percent below the lowest cost of major national brands. That, in turn, makes it economically feasible to offer both proprietary beers and the national brands. "We think the synergy between made-from-scratch food and made-from-scratch beer gives us a distinctiveness and creates a proprietary brand," Wagenheim said. That and the regional worthouse concept "represents a significant barrier to duplication" by competitors. Dick Youngblood can be reached at 612-673-4439 or at yblood(a)startribune.com.