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StockTalk:
TMF Interview With Rainforest Cafe President Kenneth Brimmer
With Yi-Hsin Chang (TMF Puck)
and Brian Graney (TMF Panic)

May 27, 1998

Hello and welcome to another edition of StockTalk with Brian Graney and Yi-Hsin Chang. With us this week is Kenneth Brimmer, president of Rainforest Cafe <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %>. Rainforest Cafe operates a chain of 18 themed restaurants that combine animatronic creatures with a tropically inspired menu to create the experience of dining in a rainforest. The restaurants also include retail stores selling Rainforest Cafe-related merchandise. Mr. Brimmer has been involved with the Hopkins, Minnesota-based company in several capacities since its inception in 1994 and was appointed interim president in April 1997. The "interim" portion of his title was removed on May 4.

TMF: Thank you for taking the time to talk with us, Mr. Brimmer, and congratulations on your appointment as president.

Brimmer: Thank you very much.

TMF: What was the reason for the year-long "interim" period?

Brimmer: I think the board certainly wanted to take a look at a variety of candidates who were available, and we did that during the year-long period. Also during that period, we made some changes to our internal organization. We promoted Greg Carey to chief operating officer. Greg has a great operations background. I think the board concluded that my strategic and financial background combined with the rest of the talents on our entire management team were a great fit and concluded that it made sense to go forward with me as president.

"Because we are so popular in the first year, we get a reputation which says that hey, that restaurant is so busy, I don't want to go spend time in line, and that hurts us just a little bit."

TMF: Rainforest Cafe recently opened an outlet at Disney's new Animal Kingdom park. How does the company select where and when it will open a new store? And going forward, what is your schedule for opening new restaurants?

Brimmer: We have a multi-faceted real estate strategy. Starting from the top side, our business plan is to open eight to ten units per year. Those units fall into three general categories. First is what we call an "icon" unit, and that would be like the unit at Disney's Animal Kingdom or at Lake Buena Vista [at Walt Disney World], or at MGM Grand [Hotel and Casino in Las Vegas]. We are negotiating for a unit at Times Square [in New York]. We would expect to open only one of those types of units each year. Then, we go to our more traditional mall units. That would be a unit like at Mall of America, where we opened our first unit, or the Woodfield Mall in suburban Chicago. Those are just traditional shopping malls. We like that environment -- there's a lot of traffic there, and we've had success in that environment. We would open basically seven to eight of those a year.

A subset of that mall unit is a whole new trend in retailing, which is a more value-entertainment mall. Those are best typified by the Mills Corp., where it is a somewhat discount center in an enclosed mall. We have several locations open in Mills Corp. centers, such as Sawgrass Mills in Florida, Grapevine Mills outside of Dallas, Arizona Mills, [and] Gurnee Mills. We are opening in Ontario Mills, which has been one of Mills' very best projects, in Ontario, California. That will be our next domestic unit opening. And it's not just Mills that is doing these value centers. We have a unit which has started off great for us in West Nyack, New York, in a center called Palisades Center, that has certain components which make it similar to a Mills Corp. mall. Basically, we look to locate units where there are a lot of people.

One other strategy besides the malls would be our traditional urban entertainment locations, which would be much like where other "eatertainment" concepts would locate. That would be a downtown Chicago-type unit. We haven't surfaced a lot of attractive opportunities in that, but we expect possibly a San Francisco or another major metropolitan area might be where a downtown urban entertainment location might surface.

TMF: You are opening quite a number of new stores, but there are four that have been open for more than 18 months. Recently, you reported that same-store sales at those four stores increased 1% in the first quarter. That followed a well-publicized 11% drop in same-store sales in Q4 of 1997. How do you intend to keep customers coming back to Rainforest Cafe after they have been there once?

Brimmer: First of all, we plan for a decline in same-store sales only with regard to the fact that we open at capacity and we do open, in most of our markets, with a pent-up demand for our product. That creates very long lines [and] a great deal of enthusiasm around the opening. We open at a high volume, and certainly we expect to "comp-down" somewhat in the second year. Now, our comp-down is to a level that exceeds amounts that anybody else is doing in terms of revenue. Where we might open at a $12 to $13 million rate, a 15% down-comp in the second year would still put us in excess of $10 million. It is a plan for decline and one that still yields a very attractive return on investment.

"I think the year 1998 on the retail side is transition. We are going to see some progress. And hopefully as we get into 1999, there will be even more productivity."

Having said that, as we were a young company, we basically didn't do any marketing other than locate where a lot of customers already were. Effective June 15, we will be adding a vice president of marketing to our organization and [will be] beginning to develop some marketing plans which will specifically be designed to drive that second-year business and drive additional repeat business into our units. That will include database marketing, VIP clubs, and other types of things. Frankly, one of the problems that we've had is that because we are so popular in the first year, we get a reputation that says, "Hey, that restaurant is so busy, I don't want to go spend time in line," and that hurts us just a little bit. So, I think as we develop some specific marketing programs to address this, it will allay some of those fears that the consumers might have and bring them back in for a second visit and a third visit in years two and three.

TMF: On our message boards, there have been discussions about your retail operations. How is the retail aspect of Rainforest Cafe doing and what are you doing to improve sales?

Brimmer: In the second half of 1997, Ercu Ucan, our vice president of retail, really took a clean look at everything we were doing in retail. He took a look at what was working and what wasn't working. I think part of the reason your participants on the message board are mentioning it is because we've been fairly candid in discussing retail. We haven't been completely satisfied with the productivity of our retail space, which still is highly productive. In the traditional mall area, it's been in the range of $400-plus per square foot.

What we did was say, "What is working and what isn't working?" What we found was that all of our units are not the same. I just described all of the differences in units. A retail customer in a Disney World unit where there are tourists, or at an MGM unit where they are purely a tourist, are looking for different items than somebody who goes to Woodfield mall 15 times a year and shops there regularly. So the biggest change we've done is stratify our units into different categories. There is some crossover. For example, Mall of America has both the strong, local repeat customer and a strong tourist customer. Where we have strong, local repeat business, we basically created a product mix which has more gift items. We've found [consumers have responded positively] to fun, creative kinds of gift items. We have de-emphasized the traditional adult T-shirt item with just a logo on it because, basically, there's not as much demand for that product.

The other thing that we have done in the retail area is to take a look at our price points. I already described that we have a number of our units located in value malls like the Mills Corp. malls. We took a hard look at what we were charging in those units and have put product in those malls that has more attractive price points. So, we are trying to drive more business that way. And I would say that at least the early indications are that these strategies are working. It does take more time in the retail side of our business to source new product, then actually get it in the stores, then get the results and evaluate the results. And if it works, we order product in sufficient quantities to get it out there in a meaningful way. So, I think the year 1998 on the retail side is transition. We are going to see some progress. And hopefully as we get into 1999, there will be even more productivity on the retail side of our business.

TMF: How else does Rainforest Cafe plan to leverage its brand name to increase your company's reach and add customers in the future?

Brimmer: One of the key things that we can do to leverage our brand name would be to open units internationally. As Rainforest's brand becomes more well-known in the United States in traditional tourist locations, with people visiting us every day at Disney [and] MGM, we become an attractive product to people who want to develop Rainforest Cafes internationally. We'll be opening our next international unit in Vancouver this June. [In] four short years, we've been able to develop Rainforest Cafe into a global brand.

Beyond that, we are beginning to at least study -- and we've talked a little bit about this with investors -- the possibility of smaller units. Once the Rainforest brand is cemented in the mind of the consumer as a place they want to visit, it allows us to open up perhaps a smaller format. Our typical units today are 15,000 to 20,000 square feet in malls. If we could open up a 10,000- square-foot unit in a mall, which would be accomplished as an attractive investment for us, that would leverage our brand into many, many more locations in the United States. I think that's probably, along with the international side, the two best opportunities for us to leverage [our] brand.

TMF: Well Mr. Brimmer, I'm afraid that's all the time we have. Thank you so much for your time. A reminder to Fools everywhere that The Motley Fool will be hosting a live auditorium chat on AOL with Mr. Brimmer and CFO Mark Rabinow on June 4.