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October 1, 2010
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Serving Workers Serves Customers

Texas Roadhouse finds that the path to success focuses on investing in its employees

By Susan Gosselin

Kent Taylor, Founder/Chairman, Texas Roadhouse

When Kent Taylor sketched out the idea for his first Texas Roadhouse on a napkin in 1992, he had no idea that he’d one day be commanding a publicly traded chain of 340 restaurants in 46 states, with plans to expand internationally, starting with Dubai.

“Most people I presented my ideas to back in the early days thought I was crazy … my restaurants were too small, or the concept wasn’t right,” Taylor said. “I learned to just keep trying, rejection after rejection, until I found a group of investors who believed in what I was trying to do – provide legendary service and from-scratch food in a chain system.”

The dozens of bosses, private investors and venture capitalists who laughed at him then are surely not laughing at what is now one of the nation’s fastest growing chains, with more than $934 million in sales in 2009 – and net income of $47.5 million up 24 percent, even in the midst of a historic recession.

Through a franchise deal with M.H. Alshaya Co. of Kuwait City, Texas Roadhouse will develop 35 restaurants in eight countries during the next 10 years. The first will be in Dubai, but the company is actively pursuing other deals to open Texas Roadhouse concepts in Mexico, the Middle East and Asia.

According to G.J. Hart, the current president and CEO of Texas Roadhouse, the new restaurants in the Arab countries will be 10 percent smaller than a standard American unit, and will not serve alcohol or pork, in accordance with local cultural norms.

“A lot of people would look at this and think, why expand in the Arab world first? The truth is, the deal in Dubai was just the one that got done first,” Hart said. “We’re just really fortunate to have a partner like Alshaya. They have the money to invest in doing things right, and the experience to pull it all off.”
Hart said the biggest reason to partner with Alshaya was its tremendous track record, having built a half billion dollar company by bringing top American brands like Starbucks, The Body Shop, H&M Department Stores, PF Chang’s China Bistro and Amigo’s Mexican Food to the Middle East. The company also focused primarily on smaller-sized units in towns and suburban areas in these countries, just like Texas Roadhouse has done in the United States.

But despite the excitement around the international openings, Hart said the United States will still be the company’s primary growth engine. He said the company believes it can build up to 800 stores in the United States, while still maintaining its small-town focus.

“We’re not looking for our international business to make a big impact soon. We know we have to do it slowly, and do it right … in a methodical, educated way,” Hart said.

This approach prompted Parents Magazine to name Texas Roadhouse one of its Top Family Restaurants in 2008. It also has made the chain’s stock – ticker symbol TXRH – a favorite among analysts, who currently all rate it from Hold to Strong Buy. Values the past year – a tumultuous one for the overall market – have ranged from $9.27 to $16.20 and spent last month above $14, putting the company’s market capitalization just above $1 billion. The analysts consensus expects a one-year price of $17.

The making of ‘legendary service’
While he knew his core concept was right with the Roadhouse, Taylor admits he spent the first few years working to cut construction costs, improve food quality, tighten operations and find the right locations. By 1994, the company had three successful restaurants, and three others in Florida that closed down in less than a year. To this day, Taylor keeps some of the wall mountings from those closed restaurants in his office, to remind him of the investment he lost.

“I made some big mistakes, but I wouldn’t change anything if I could go back and do it all over again,” he said. “Every time I screwed something up, I learned something important or met an important contact that helped set us off in the right direction.”

Texas Roadhouse became successful, and Taylor even found himself in the position of turning down would-be investors so he could maintain financial control of his company as it grew. By the 10th anniversary in 2003, there were 162 locations. He took Texas Roadhouse public in 2004, but kept majority ownership.

The school of hard knocks taught Taylor a few lessons that have helped keep the company growing, including: concentrating on dinner only during the week to consolidate sales and improve scheduling; sticking to a solid, basic menu without expensive promotional items; locating restaurants in high-traffic areas in smaller rural towns with lots of young families; making everything on site daily, from butchering each steak by hand to making croutons; and, above all, investing in your people.

In fact, it’s fair to say Texas Roadhouse has some of the most generous compensation packages in the casual dining industry … if you’re willing to “buy in.” In the Texas Roadhouse system, Hart confirmed, today all general managers (called “manager partners”) are asked to invest $25,000 in the company before taking their post. Most managers are recommended after having at least one successful year in the Texas Roadhouse system. They then receive a $45,000 salary, along with 10 percent of whatever net profits the store accrues over the year. After a few successful years, stock options are added. Training for managers takes 18 weeks, minimum.

Managers are then considered the key, go-to partners in the business.
“They’re our front line,” Hart said, “and they participate in nearly all the decisions we make.”

Hart spends a lot of time with the managers and the company’s 31,000 employees, doing two, 25-city “town hall” tours a year with the managers, getting their feedback on upcoming decisions and testing new ideas. In return for all this effort, Hart says he has a management force that feels heard and empowered, which has led to increasingly lower operating costs, lower staff turnover and units that serve 50 percent more customers per hour than the national restaurant average – about 5,000 a week.

During the height of the economic meltdown in 2008, CNBC called Texas Roadhouse on the mat for what it considered lavish spending on the company’s annual manager/top employee meeting it was having, featuring a week of festivities, entertainment and charity projects in New York City. Company executives came on air to respond.

“We wanted our employees to have a lifetime experience with their spouses that they wouldn’t be able to get on their own,” said Hart. “Supporting them now is more important than ever.”

In addition to meetings about the future of the company and operations, the company pours considerable investment into its Meat Hero Awards, which recognize each store’s on-site meat cutters, each of whom spends the workweek cutting an average of 300 pounds of meat in a 32-degree room. The ones who consistently cut the best steaks to the most exact weight are eligible to go to the conference and compete for bragging rights and a $25,000 prize – the largest in the company. The real payoff? Lower turnover, higher expertise, and dramatically less food waste.

Dave Dodson, director of communication at Texas Roadhouse, was brought on to help the company implement an employee recognition program administered through OC Tanner Co. Tanner’s program gives managers a whole toolbox of recognition programs to choose for their site. When employees are recognized, they can pick from a huge array of prizes on the Tanner website, ranging from gift cards at major retailers to electronics to cash.

“Retention has improved considerably with double-digit decreases in turnover. Guest complaints have been declining as well in recent years, too,” Dodson said. “There’s a lot we do to make that happen, but this recognition program is an important piece of the puzzle.”

And executives take it very seriously. In fact, when Taylor heard a management trainee suggest cutting the programs to save money, he sent the manager back through six more weeks of training. “He obviously didn’t get what we’re about,” Taylor said.

A circle of giving
Hart said he’s especially proud of the emphasis the company places on giving back to the community.

Each of the company’s 21 departments adopts a nonprofit group and does one or two major service projects a year, such as painting and renovating Louisville’s Center for Women and Families or raising money for St. Joseph’s Children’s Home in Louisville.

When more than 1,100 employees and spouses attend the annual, weeklong meeting, the entire group spends 25 percent of that week in pursuit of a major charity project in the host city. At the 2008 meeting in San Francisco, Texas Roadhouse donated $1 million in materials and labor for Habitat for Humanity, while attendees worked to frame 12 homes for veterans returning from Iraq and Afghanistan. They also prepared care packages for the USO, donated furniture to a housing project medical center and served meals for the homeless.

Andy’s Fund, named after the company’s mascot, Andy Armadillo, is funded by donations from employees paychecks and paid out whenever employees have special needs. For instance, when a Texas Roadhouse in Indianapolis burned down from an electrical fire last February, all 120 employees were offered positions at surrounding units while it was being repaired. Employees under financial duress during this time received dispensations from the fund, such as the server who received $500 from the fund to fix her car so she could drive to her new assignment.

When the restaurant re-opened this summer, 100 of the 120 employees were able to come back – an unheard of number in an industry known for high turnover.

“When you focus on your employees, the employees focus on your customer, and you get that Legendary Food, Legendary Service we talk about all the time. At the end of the day, it really is that simple,” Hart, said.

And as for mistakes, Taylor says no organization is ever through with those. “But when they come up, you can bet we’ll be there blocking and tackling like we always do. It’s part of the growth process,” he said.

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