Why the most profitable steakhouses grow the slowest

Restaurants are a brutal business: profits said to be under 3%, and estimates that 60 to 80% close within five years, though the National Restaurant Association puts the failure rate at 17%. Steakhouses are the exception that keeps topping the charts. Every year they account for more than half of the 100 highest-grossing restaurants in the country.

Steakhouses thrive in conformity. Every one serves strip, porterhouse and filet with mashed potatoes, Caesar salad and chocolate cake, and diners pay for that predictability. They come dressed up, ready to spend: $50 to $100 for a steak, one each, and $10 to $15 for fries without a second thought. Cheap sides and wine carry the margin.

Ruth's Chris is the classic high end: USDA prime beef sizzling in butter on 500° plates, mains from $35 to $100, and over 250 wines at $50 to $1,000 a bottle. It targets upper-middle-class diners aged 35 to 65, often on business. The average check rose from $70 to $90 over a decade, about $18 of it drinks, and wine was 60% of drink sales from 2010 to 2017.

With about 150 restaurants, Ruth's Chris is the world's largest upscale steakhouse chain, and tiny next to casual dining: The Cheesecake Factory has 330 in North America, Olive Garden over 800, IHOP and Chili's over 1,600 each in the US. Ruth's Chris has opened about two a year for a decade. Revenue still rose, from $285 million in 2010 to more than $400 million by 2021.

The usual playbook is to franchise and collect royalties at low risk. Ruth's Chris has not bothered. Over 90% of revenue comes from restaurants it runs and 4% from franchise fees. Half its restaurants are franchised, a share that has hardly moved, and each pays just under $250,000 a year in royalties, against about $60,000 for a KFC.

The reason is the brand. Fast food will franchise to nearly anyone with money and interest, and KFC showed where that leads: operators cut corners, customers notice, the brand fades. One bad dinner at Ruth's Chris sends a customer to a rival steakhouse and chips away at pricing power built over 50 years. Slower growth is the cheaper risk.

Ruth's Chris aims to win each generation once it reaches 35 to 65, and sorts visits into three kinds: celebrations, business dinners and casual drinks at the bar. Boomers made it famous in the early 2000s. With them retiring, it is courting millennials with Tastemaker dinners, four fixed-price courses with wine for $150 a head, and a weekday bar hour of $9 cocktails and an $11 cheeseburger or steak sandwich.

An average Ruth's Chris grosses $5.5 million a year, with sales up about 4% a year for a decade, against $2 to $2.5 million for a KFC or McDonald's. Ingredients run about $1.5 million, near 30% of sales, and hit a record 32% in 2021: almost $2 million, $875,000 of it beef. Drought, labor shortages, fuel and the cost of cattle feed have all kept beef expensive.

Labor and rent take about $2.3 million a restaurant. Each has a general manager, two floor supervisors, an executive chef and about 60 hourly staff, mostly in tipped jobs paid under minimum wage. On a $90 check, tips add up quickly, so servers seek these jobs out and stay. The rooms run about 8,500 square feet and 270 seats, in hotels, convention centers, tourist districts and casinos.

After overhead, an average Ruth's Chris earned about $570,000 a year in operating profit over the decade, nearly $900,000 at best and about $550,000 at worst outside COVID. Its operating margin has stayed around 11% since 2001. The typical full-service restaurant made 6.2% in 2019, so despite prime beef, big staffs and expensive addresses, the high end earns close to twice the industry's margin.

Texas Roadhouse throws out the formality and competes on value, and says so: its filings say its prices match or beat competitors' in each market. Under $14 buys a 6-ounce sirloin with two sides and unlimited rolls with cinnamon butter. The average check was $14.63 in 2010 and only $19.68 in 2021, despite inflation and beef prices, and alcohol is about 11% of sales.

The steak is not prime, and some cuts fall below choice. Nobody goes for the best steak in town. Texas Roadhouse bundles ordinary things, a passable steak, decent mashed potatoes, endless rolls, into a cheap night out in a wooden lodge with neon, murals, jukeboxes and country music. It opens for dinner only, plus lunch on Fridays and weekends, so four days a week it staffs a single shift.

It grows fast: 270 restaurants in 2010, over 600 in 2021, about 32 openings a year, and revenue from over $1 billion to nearly $3.5 billion. Like Ruth's Chris, it mostly runs its own. Company restaurants bring in 99% of revenue, fewer than 20% of locations are franchised, and franchise fees are at most 1% of the total.

Each Texas Roadhouse grosses about $3.9 million, with sales up just 3% a year. Its 2021 ingredient bill looked about the same as Ruth's Chris's, beef being half its food cost even at choice and select grades. It seats as many in 7,400 square feet by packing tables closer, spends about $1.2 million on labor and $80,000 on rent, and netted a little over $300,000 per restaurant over the decade at an 8% margin.

Outback Steakhouse is the largest chain, with over 1,000 locations on three continents, and has the worst reputation of the lot. The Bloomin' Onion and Australian theme were a hit in the 90s and are not now. Sales have hovered around $2 billion for seven years, the check averages about $24, and it has closed about 12 restaurants a year since 2016. Only South Korea, up double digits for four years, still grows.

With the chains clustered near $20 and $100, Fogo de Chão is betting on the gap: Brazilian fire-roasted meat at a fixed price, for $50 to $60. And even the high end trails the franchisors: McDonald's and KFC earn higher margins for less work and risk. Chipotle, which runs every store itself, grosses $2 to $2.5 million a store and still beats the 6.2% average.