Panda Restaurant Group Inc., well known for its Panda Express fast food outlets, is going back to its roots sit-down dining.

The Rosemead-based family-owned company recently opened its first full-service Chinese restaurant in 15 years. Called Andrew's Panda Inn after the founder and co-chairman of the company, Andrew Cherng, the new restaurant at Universal City Walk is only its sixth such Panda Inn restaurant. Before its excursion into fast food, Panda years ago started with sit down restaurants.

Expect more. Panda is promising to put more emphasis on its full-service restaurants as a new path to growth.

"It is time to put some resources back into Panda Inn and see where we can go with this," said Cherng.

But this time, Panda is facing a big competitor.

Publicly-held P.F. Chang's China Bistro has proved since its emergence in 1993 that there is plenty of room for an upscale chain of Asian restaurants. While Panda Restaurant Group has dominated the Chinese fast-food space, its Scottsdale, Ariz.-based competitor has been rapidly expanding the number of branded full-service Mandarin cuisine locations and expects to bring in revenues of about $850 million this year.

For its part, Panda says it is not concerned.

"P.F. Chang's is helping us grow chain Asian," said Tom Davin, Panda's chief executive. "They came after Panda Inn and are much bigger now. They've now educated a lot of people about sit-down Chinese in a chain environment, which probably helps us. People are often surprised when I say that I wish them the best."

Chinese restaurants are something of an oddity. There are more Chinese restaurants in the United States than any other ethnic food segment, but most are independently owned and haven't been very successful at chaining. That's predominantly because Chinese cuisine is harder to do well than Italian or Mexican, said Randall Hiatt, the president of Costa Mesa-based hospitality consultancy Fessel International.

"There is a bit of mysticism about Chinese and I think that P.F. Chang's demystified it," he said. "They presented one of the first formats that got fine dining Chinese out of that independent restaurant genre."

One reason Panda isn't concerned about P.F. Chang's success, Davin explained, is that Panda isn't trying to do a similar large-scale rollout in the fine dining industry. The company would like to see the Panda Inn concept grow but in a selective and opportunistic way, he said.

"We aren't going to open 150 stores," Cherng said. "We will open a few at a time."

Growth engine

The five original Panda Inn restaurants are all profitable, each generating an average of $3.1 million annually. Still, that's but one noodle in a big wok; the company is expected to generate $1 billion in revenues this year.

"Our growth engine is Panda Express," said Cherng. "I view Panda Inn as an experiment slash possible growth engine."

Cherng handles many of the company's real estate transactions, and says he would like to buy the buildings that house the Panda Inn restaurants instead of leasing so that the company isn't negatively affected by inflation.

Panda Restaurant Group has been looking for the right spot to open a Panda Inn for at least three years, said Davin.

Universal City Walk was a particularly attractive location though it is leased because Panda already operates several Panda Express stores in the amusement park and City Walk, and a sit-down Japanese restaurant called Wasabi next door to the new Panda Inn.

When Shanghai & Mein, a sit down Chinese restaurant closed at City Walk, Larry Kurzweil, the president of Universal Studios Hollywood, approached Andrew about opening a Panda Inn.

The store opened at the end of last month and, like its counterparts, serves upscale versions of some items that are on the Panda Express menu, including orange chicken, as well as a number of unique dishes.

However, the new restaurant's d & #233;cor is slightly less formal than other Panda Innsbecause it is focused on the high volume of tourist traffic at the City Walk, said Peggy Cherng, Panda's co-chair and Andrew's wife.

(She is the largest shareholder in the company with 53 percent and appears first on the Business Journal's list of women-owned businesses, which begins on Page 19. She served as the CEO of the company from 1998 until Davin took over in 2004, during which time the company more than doubled in size from 250 locations to nearly 650.)

The new Panda Inn store has a modern d & #233;cor with a large open kitchen. But the restaurant's design is still a work in progress, Peggy Cherng said.

"The restaurant is inviting and energizing. We need to work on the dining room chairs and tables to kind of dress it up a bit, and we in the process of doing that. Also, our signage on the outside isn't exciting enough."

Panda Restaurant Group is scouting for sites for Panda Inns, especially in Southern California, where all the Panda Inns are now located, as well as in central and northern California, Nevada, and Arizona. No locations have been selected.

Entrepreneur mentality

Andrew Cherng opened his first restaurant a sit-down Panda Inn in 1973 in Pasadena with $60,000 that he secured from family, friends, and bank loans. His father, Chinese master chef Ming Tsai Cherng, was the chef. His mother assisted in the kitchen. His sister worked at the front, and his brother would stop in to do odd jobs because he was too young to be a full-time employee.

In his early days, Andrew Cherng would chase down potential customers in the parking lot when he saw them scared off by a long wait and offer them free drinks until a table was ready.

"At the time, it was related to the entrepreneurship mentality," said Peggy Cherng. "We don't want any customer to be unhappy."

The opportunity to do fast food came from an invitation. Some of the regular customers at Panda Inn were members of the Donahue family including UCLA player and coach Terry Donahue and his brother, the late Daniel Donahue, Andrew Cherng said. Daniel headed Donahue and Schriber Realty Group Inc. at the time, which owned the Glendale Galleria. He invited Andrew Cherng to open a restaurant in the mall.

Panda Express took off, and Andrew Cherng said he stopped opening Inns to focus on the fast food business.

When asked why he chose to focus exclusively on the fast-food restaurants, he said that there's only so much you can do. "There are always competing resources. It is not just financial resources, it is human capital as well."

Panda methodically expanded about one fast-food restaurant each year, although Andrew Cherng said one of his best years was in 1985 when the company saw an 80 percent growth rate, going from 5 stores to 9 stores.

Panda Express was concentrated in mall food courts until several years ago when the company started going a more expensive route and seeking out free-standing locations to set up shop. Of the company's 167 restaurants it plans to open this year, only ten will be in malls. Thirty-five will be in captive venues including college campuses. The remainder will be in free standing establishments with drive-through service.

"There aren't that many malls being built," said Davin. "We like the ability to do free standing. They are obviously more expensive, but you get the best ambiance and convenience."

Still growing

Panda Restaurant Group is projected to open its 1,000th Panda Express restaurant in September or October near where the company originally emerged in Pasadena.

"It is their goal to grow the company dramatically: double, triple, quadruple in the next few years. They have the potential to do that," said Aaron Noveshen, the founder of the Culinary Edge, a San Francisco-based restaurant consultancy that has worked with Panda on previous projects, but not on Panda Inn.

The company says it would like to be at $2 billion in revenues by 2010, and one day plans to open restaurants in all 50 states and abroad. Panda Express currently has limited locations in Japan and Puerto Rico.

Panda prefers to own and operate all of its own locations though it has licensing agreements for locations that require it, such as Dodger Stadium. It's only franchised stores are in Japan. More than 16,000 employees work for the company.

Panda has been able to sustain growth thus far without the benefit of cheap capital it could get by going public.

"There is always the attraction of money, but I don't think we need to go public yet," said Andrew Cherng. "There are always pro's and con's of being a public company."

Panda funded its new store openings entirely through internal cash flow until 1995, but since then it also has used bank loans. Banc of America Securities is its main investor and advisor, said Davin. Panda is awaiting a $75 million private placement through BofA Securities, which it will use to open new restaurants.

In a race for growth, private companies can be at a disadvantage. But given Panda's track record of steady growth and its considerable size, "I don't see capital as an issue," said Hiatt.

"I guess the only key thing they will face is carving out a niche that is different from the Panda Express down the street," he said.

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