Competition | October 2017 | By Kevin Hardy

Pei Wei Begins its Solo Act

After a split from P.F. Chang’s, Pei Wei is ready for a bold future dedicated to its brand.
Pei Wei currently operates about 200 traditional, domestic units, 20 nontraditional locations, and a handful of international outposts. Pei Wei
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Pei Wei Asian Diner’s relocation to North Texas was as much a psychological move as a practical one.

The 200-unit fast-casual brand announced in August a headquarters move from Scottsdale, Arizona, to Irving, Texas, as part of its split from P.F. Chang’s China Bistro. 

“It certainly makes it more real to be reformulating in a different city and a different state than having moved just down the street,” says Pei Wei CEO John “J” Hedrick. “It has certainly been a significant cultural and organizational rebuild and shift.”

That rebuild included an overhaul of the executive team: Hedrick was tapped as chief executive in February. And the Pan-Asian concept has seen a new CFO and CMO, as well as changes among IT and HR executives in recent months.

While the brand new team is essentially starting from scratch, Hedrick says leaders are bringing new energy to the company. They hope to maintain a familiar experience for guests, while also rethinking every part of the Pei Wei operation.

“Everybody’s opting into the brand where it is right now. None of us are looking into the rear-view mirror at the past,” he says. “We’re challenging everything, while keeping the great parts of our heritage. Everyone is looking through the windshield. No one is looking through the rear-view mirror, because we don’t have a rear view mirror.”

Pei Wei’s split from P.F. Chang’s was not an ownership shift. It continues to be owned by Centerbridge Partners, the private equity firm that bought both brands in 2012 for $1.1 billion. Yet, the move purposefully created two separate teams to oversee the concepts.

“The thought process is that a large number of people were supporting both brands at the same time and the needs to maximize a polished casual business and the needs to maximize a fast-casual business are significantly different,” Hedrick says. “It makes sense and creates value for both brands.”

This is a common refrain within the industry, says restaurant consultant John Gordon, principal at Pacific Management Consulting Group.

“This trend of having two or three brands within a single restaurant holding company can be difficult inside corporate,” he says. “The basic issue is that the bistro is competing for capital, people and attention with the fast-casual entity, Pei Wei. This same argument has been made several times in the past.”

Gordon says private equity firms often sell off assets about seven years after a purchase, a cycle that correlates with investor expectations for returns. He suspects Centerbridge, now five years into its purchase, is nearing a possible sale of one or both of its brands. A split could help it distinguish the financials of P.F. Chang’s and Pei Wei and position either brand for an exit.

“This is a strategy for Centerbridge to break the two out because it’s very possible that the bistro has different sales and profit trends than does Pei Wei right now,” Gordon says. “It’s very possible. We don’t know at all what those numbers are. Private equity means private, right?”

As for Pei Wei’s move to the Dallas metro area, Gordon sees that as a no-brainer.

“The spin-off of headquarters is very symbolic and very telling,” he says. “Dallas is a vibrant restaurant headquarters market. If I was a young guy working corporate staff positions, Dallas would be the place I would want to go because there’s just so many brands to go to.”

With private ownership, Gordon says it’s difficult to judge Pei Wei’s financial health from the outside. But Gordon, who frequents Pei Wei locations in San Diego, says “there’s nothing fundamentally broken with the brand.” He has anecdotally witnessed high turnover, but said the brand delivers on flavor and appears to attract diverse demographics.

He wonders whether the concept might gobble up some of the smaller Asian brands in the crowded fast-casual space. That could help it build long-term sustainability and gain footing in new territories.

“Brands that are in this kind of middle place, they have to look more creatively at the rest of this competitive space,” he says. “If there’s too many darn restaurants, what do we do about it? We’ve got to take some of them out. Yes, it’s expensive, but it’s cheaper in the long run.”

But for now, Pei Wei leaders seem to have a fairly long to-do list.

First, Hedrick has his eye on speed: Pei Wei’s average ticket time is about 7 minutes. And that average includes wide swings in prep times: during rushes, orders can take as long as 12 minutes.

“While I believe that that is acceptable, I don’t believe it’s exceptional. And I would like us to be below 6 minutes. The bigger challenge is the variation,” the CEO says. “We have a very chef-driven, complicated menu.” But: “We are fast-casual—the first word is fast.”

With 45 percent of consumers ordering meals to-go at Pei Wei, Hedrick says the brand will rethink the size and layout of its stores, which typically run about 3,200 square feet.

“How do we reduce the friction of our take-out experience? How do we build a building that’s optimized for both take out and dine in?” he says. “I don’t see materially changing the consumer experience in that we’re not going to serve food off steam tables. We’ll always be wokked fresh for you. But there are ways using technology that we can reduce the friction of a to-go transaction and right-size space in kitchens and dining rooms.”

Hedrick also wants Pei Wei to do a better job of marketing and explaining the care that goes into each made-to-order dish. When he came to the company, he was surprised to find out how much scratch prep work occurs in kitchens.

“We essentially have an in-house butcher in every restaurant. We’re bringing in whole veggies and slicing them,” he says. “The amount of handcrafted care that goes into the food was very surprising to me. But … I don’t know if we’re doing a great job telling the consumer how much care and attention goes into their dish.”

In the last two years, Pei Wei has closed 22 underperforming stores and opened 12 new locations. The brand currently operates about 200 traditional, domestic units, 20 nontraditional locations, and a handful of international outposts. Hedrick expects modest growth in the coming months as executives prove out their strategy. 

“We’ll have moderate growth,” he says, “with plans for accelerated growth in 2019 and 2020.”

The new leadership team has already refreshed the menu, cutting out some SKUs that were similar to other dishes. And Pei Wei on Oct. 4 rolled out its version of General Tso’s Chicken, one of the best selling Chinese menu items in America. Going forward, Hedrick says customers who loved Pei Wei at its 2000 inception should still feel at home at one of its stores in 2020.

“We’re going to keep the essence of the brand the same it’s always been, yet we’re going to hold ourselves to a higher standard of excellence in developing that consumer experience,” he says. “I think that we will keep a lot of the heritage of who Pei Wei is. It’s an exceptionally strong brand, consumers love the food. We have to make sure that as fast-casual gets more mature and our competition increases we are best-in-class fast-casual.”