The Applebee's of haute cuisine
By teaming up with Starwood Hotels and a private equity firm behind Outback Steakhouse, Jean-Georges Vongerichten plans to open 50 new restaurants in five years. Can the chef conquer the world without losing his three Michelin stars?
(Fortune Magazine) -- Watching Jean-Georges Vongerichten working out the kinks on the afternoon before he opens his latest restaurant, you might think Market by Jean-Georges was his first. As the chef walks through the kitchen, perched above Vancouver, British Columbia, in the new Shangri-La tower, his team is stirring sauces and filleting whole fish. The restaurant's manager swings by to report on the servers' uniforms. "I had to send them back," he says. "The shirts were too translucent."
But Market by Jean-Georges is hardly the New York-based chef's first restaurant: It is his 24th, and it is one of 10 new spots he plans to open this year. The Vancouver venue is a stripped-down version of the restaurant he launched in Paris in 2001 as a showcase for his signature dishes - nut-crusted fish, tuna-wasabi pizza, and foie gras brule.
But this spinoff of Market is more than just a restaurant; it is a widget on a truffle-oiled assembly line. With some 3,000 employees and over $100 million in combined sales from their restaurants last year, Vongerichten and his longtime partner, Phil Suarez, an ad man turned restaurateur, want to take the Jean-Georges name further.
Together the duo recently launched a joint venture with Starwood Hotels and Catterton Partners, a private equity firm based in Greenwich, Conn. The goal of the company, called Culinary Concepts by Jean-Georges, is to create an haute cuisine chain with the reach of McDonald's. Instead of using Big Macs and a clown named Ronald, Culinary Concepts plans to conquer the world with three main prototypes: Market, J&G Steakhouse, and Spice Market, a standalone restaurant that pays homage to Asian street food. As part of the company's deal with Starwood, Vongerichten and Suarez have right of first refusal to open restaurants in all of Starwood's new W, St. Regis, and Luxury Collection hotels.
Alsatian by birth and French by training, Vongerichten (pronounced von-grrr-eesh-ten) is a culinary chameleon. His flagship New York restaurant, Jean Georges, is one of only four in Manhattan with three Michelin stars (the others are Per Se, Masa, and Le Bernardin). So the chef is staking a reputation based on the gastronomic equivalent of haute couture to build a mass-market brand the way Gucci has in fashion. While it works with apparel, where designers have different lines for different price points, it is anyone's guess whether fine dining can be mass-produced. Or whether a product launch of this magnitude can succeed during a recession.
Vongerichten has taken his share of critical beatings as he has expanded. When he opened a Chinese restaurant called 66 near New York's Chinatown in 2003, critic A.A. Gill savaged the place, describing the shrimp and foie gras dumplings as "fishy, liver-filled condoms." And the New York Times gave Vongerichten's seventh restaurant, Mercer Kitchen (opened in '98), a scathing no-star re-review two years ago. Still, the chef seems to be laughing all the way to the bank. "The Times called Mercer Kitchen 'Applebee's.' I guess people love Applebee's," he says. "Mercer is packed, packed, packed."
Several years before Suarez, 67, and Vongerichten, 52, embarked on their latest expansion plans, they had already built, brick by brick, a collection of standalone restaurants. It was Spice Market, which they opened in New York City's Meatpacking District in 2004, that prompted the deal with Catterton and Starwood (more on this later). Within months of its opening, Spice Market became the second-highest-grossing property in the group, with $15 million in annual sales and roughly $5 million in annual profit, according to Fortune's calculations.
The idea for Spice Market had been germinating in Vongerichten's imagination long before he was a prominent chef. He had been thinking about creating a paean to Asian street food ever since he spent the '80s opening outposts in Hong Kong, Singapore, Tokyo, and Bangkok for legendary French chef Louis Outhier, a founding father of nouvelle cuisine. During those years Vongerichten witnessed firsthand how a chef could be bigger than just one restaurant.
"I talked to Phil about Spice Market even before I talked about [my first restaurant] JoJo," Vongerichten recalls. Suarez eventually grew to believe that Spice Market might be their golden ticket.
A fast-talking, sharply dressed, self-described "Latin from Manhattan," Suarez put up the money that launched Vongerichten's solo career in 1991 with JoJo on Manhattan's Upper East Side. Back then Suarez's company, Giraldi Suarez Productions, was still a major player in producing music videos and TV ads for clients like Pepsi. He officially left the ad business five years ago to devote himself full-time to restaurants, including 16 that he'd opened with Vongerichten before Culinary Concepts began taking shape in mid-2006. Through mutual friends, Suarez approached Michael Chu, founding partner at Catterton, with the idea of taking Spice Market global.
Chu was not only interested but also so enamored of Jean-Georges's cooking that he offered to buy all of Suarez and Vongerichten's New York restaurants, in the hope of spinning off clones with the two in managerial roles. Catterton has $2 billion in assets under management, and the firm seemed like a good fit based on its track record: It counts Outback Steakhouse as one of its portfolio companies, and it helped grow P.F. Chang's (PFCB) from a small Los Angeles restaurant into a national Chinese food chain. Chang's went public in 1998 - with nearly 200 outlets and $300 million in sales. Despite a recent downturn in sales, it remains a success story.
In the end Suarez and Vongerichten wound up selling Spice Market to Catterton. The restaurant became the backbone - and an early revenue stream - for Culinary Concepts, which had been created to manage the rollout of the Spice Market concept and other projects then still in discussion. Chu, who had been looking for a hotel partner to provide a pipeline for the expansion, brought Starwood (HOT, Fortune 500) into the deal. The total valuation of the new company was $68.8 million. According to a Starwood 10-K filing, Starwood contributed $22.5 million for a 32.7% stake. In return for a majority stake in Culinary Concepts and some cash upfront, Vongerichten and Suarez made a commitment to work nearly full-time on launching new restaurants. The original plan called for opening as many as 50 by the end of five years. With the hotel company planning some 250 new hotel openings over five years, the partners were asked to develop not just Spice Markets but also a whole battery of restaurant concepts based on existing properties in the Vongerichten collection.
"When Starwood came along, they said, 'What about other things?'" says Vongerichten. "We mentioned Prime in Vegas, which [grosses] $19 million a year. That was very attractive to them. So we agreed to do a couple of steakhouses." Vongerichten and Suarez are also developing Italian, Japanese, "global diner," and basic bistro templates. A pizza joint called Co. that Suarez and Vongerichten recently bankrolled in New York may soon join the roster.
Having the right partner - be it a hotel or a backer - can make the difference between a celebrity chef's having a hit or a flop. Iron Chef Masaharu Morimoto is one cautionary tale. In 2005, at the urging of a former manager at his Philadelphia restaurant, Morimoto helped launch Pauli Moto's Asian Bistro in Tyson's Corner, Va. - the first of what he hoped would become a national chain. Undercapitalized and poorly managed, the restaurant - the only branch ever opened - closed after barely a year. "In retrospect, that [venture] was a mistake," he said recently, through a translator. "I will be reluctant to be involved in future projects where I don't have more control."
Hotels, too, may be cooling on celebrity chefs. Although the Ritz-Carlton chain recently began swapping out all its restaurants for branded-chef venues, some restaurant experts think the trend has peaked. "Generally speaking, [the chefs] are more interested in creating sales than they are in balancing sales with profit. Hotels are seeing the tradeoff is not worth it," says Bob Puccini, a restaurant consultant in San Francisco and a former executive with Kimpton Hotels.
For a celebrity chef with global ambitions, there are three basic avenues for growth: leasing, licensing, and managing. Vongerichten and Suarez have tried all three. They have licensed the Jean-Georges name to a restaurant in Bora Bora (essentially acting as consultants). They have negotiated long-term leases for the real estate of their New York restaurants. They have also brokered deals to serve as long-running managers for restaurants in Houston and elsewhere.
These days, Suarez and Vongerichten are primarily pursuing management deals because those types of deals don't require them to put up any of their own capital. According to Suarez, the company is putting no money down on 95% of the restaurants going forward, negotiating 10-year contracts that provide them with management fees of 5% to 7% off the top, along with incentive fees as high as 25% of profits.
Thankfully for them, most of those management deals were inked well before the hotel business cooled. The lineup of openings - Mexico City, Washington, Boston, Barcelona, Milan - is still on schedule for 2009. In some cases, like Barcelona and Milan, the final concept has yet to be finalized. Still, the trickle-down sting of occupancy rates - projected this year to be at their lowest since 1971 - may spell trouble for 2010 and beyond.
"The obvious uncertainty," says Matt Avril, president of Starwood's hotel group, "is what will be the rate of addition to that pipeline as we go forward, just given the way the capital markets are." A filing cabinet stuffed with blueprints in Culinary Concepts' Manhattan office documents the few - Austin, Aspen, Dubai - that are already on hold.
Existing restaurants in Vongerichten's empire, meanwhile, are feeling the pinch. Sales at the flagship Jean Georges in New York - one of 15 restaurants Vongerichten and Suarez continue to operate independent of the new venture - were down 10% in the fourth quarter of 2008 from the previous year. One way the partners are fighting back is by luring diners with recession-ready $35 prix fixe dinners at all their New York spots and haggling with landlords when leases come due. (Suarez recently renegotiated a 40% reduction in the lease for Vong, one of their older New York spots.)
"November was really a disastrous month for everybody," says Vongerichten. "We reacted right away by introducing a menu at night for $35; we started offering half-glasses of wine; we started to notice excess fat. 'Who is this guy polishing glasses at lunch for room service? We do 20 covers for lunch for room service - get rid of him.'"
In the end, Suarez and Vongerichten may be better positioned than most to ride out the recession. The eight New York restaurants that they own outright are fully paid off. According to the chef, revenue was down just 1% overall in 2008 for their restaurants outside the Culinary Concepts portfolio. New York restaurant consultant Clark Wolf thinks that Vongerichten has another advantage in a recession that many high-end restaurants don't: "He serves breakfast. He serves lunch and dinner and all the times between." Unlike some of his high-end brethren, he is amortizing costs and generating sales throughout the day, not just at dinner.
To make sure that Vongerichten is never again accused of serving "fishy, liver-filled condoms," he has designed a system so that a Jean-Georges dining experience is consistent whether you're eating in the Buckhead section of Atlanta or in Baja, Mexico.
Recipes are laid out in excruciating detail in centralized "bibles." New executive chefs spend six weeks in New York rotating through kitchens where they shadow chefs at the mother ships. In the weeks before a new restaurant opens, one or more of Culinary Concepts' four chef trainers parachute into the new cities, where they oversee the transition from work in progress to functioning restaurant. Vongerichten eventually shows up too, leaving the kitchen at his three-star baby under the watchful eye of his brother or his 26-year-old son. "It's easier for me to travel," he says, "with those two blood-related guys watching my back."
The restaurants are not pure carbon copies. Some effort is made to integrate local ingredients into the mix - and adjust price points to fit their clientele. Prices at the Spice Market that opened in Atlanta last year are 25% lower than at the New York original. Dishes, drawn from a master list of 3,000 recipes, are tweaked to local tastes. A case in point: On the night before the Vancouver outpost of Market is scheduled to open, Greg Brainin, a 10-year veteran who develops recipes for all the new projects, walks in clutching a treat from the produce market on Vancouver's Granville Island. "This can be in a sashimi dish," he says, peeling back the dark skin from a mangosteen to reveal the sweet white wedges inside the Southeast Asian fruit. "One of my favorite foods," says Vongerichten, popping a wedge into his mouth.
The following night the first dinner for paying customers goes smoothly. After a champagne toast in the kitchen, the chef asks the staff, "Where are we eating? I'm starved." With the Vancouver team in tow, he heads out to a late-night Japanese dive, ordering the whole menu several times over - along with endless big bottles of sake and Japanese beer.
These days he's comfortable having crossed the line from artist-chef to entrepreneur. And if Culinary Concepts were to be sold, there's a clause in the current agreement that would allow Vongerichten to remove his name from the restaurants. "If Pizza Hut comes to us tomorrow and says, 'We want to buy Co. to be a high-end pizza place,' I'd be okay with that," he admits. With Vancouver launched, his next stop is Doha, Qatar, but first he knocks back a triumphal hit of sake and says, "Next."