For Yum! Brands Inc. (YUM)’s Taco Bell, thinking outside the bun means going gourmet.

The chain that once used a talking chihuahua to sell chalupas is working with Miami chef Lorena Garcia to win back eaters who have become accustomed to Chipotle Mexican Grill Inc.’s (CMG) style of Mexican fare. Menu items will include Chipotle staples such as black beans, cilantro rice and corn salsa, Greg Creed, Taco Bell’s president, said last month.

Taco Bell could use a boost. The chain has shrunk by more than 1,000 stores since 2000 and has been left behind as Yum expanded its KFC and Pizza Hut chains overseas. Chipotle, in the meantime, has been a stock market star, its shares tripling since the end of 2009.

“They have a tough road ahead to really reposition themselves as a direct competitor to Chipotle or Qdoba,” Mike Brumagin, a former Yum Brands senior project manager and Taco Bell store owner, said in an interview. Taco Bell has “always been about value.”

Taco Bell scored the lowest in food quality and atmosphere among limited-service Mexican eateries, including Chipotle and Jack in the Box Inc.’s Qdoba Mexican Grill, according to a September survey from Nation’s Restaurant News and consultant WD Partners.

Slow Growth

Taco Bell is also in a market that is growing slowly. Sales at so-called limited-service restaurants increased 1.9 percent to $195 billion in 2010 and Taco Bell was behind McDonald’s Corp. (MCD), Subway, Burger King Holdings Inc. and Wendy’s Co. in market share that year, according to Technomic Inc. The Chicago- based researcher hasn’t released 2011 figures.

Almost half a century old, Taco Bell was started by Glen Bell in Downey, California. PepsiCo Inc. (PEP) bought the taco restaurant in 1978, a year after acquiring Pizza Hut. Pepsi later bought the KFC fried chicken chain and spun off all three to become Tricon Global Restaurants Inc. in 1997. In 2002, Tricon became Yum Brands (YUM), now based in Louisville, Kentucky.

During the past decade, the brand has positioned itself as an affordable option for the young guy who “loves the lower price points,” said Peter Saleh, a restaurant analyst at Telsey Advisory Group in New York. Taco Bell has touted value meals with its “Why Pay More!” slogan and recently advertised a 12- pack of crunchy tacos for $10.

‘Younger Crowd’

Last year, the chain received negative publicity when Beasley Allen, a Montgomery, Alabama-based law firm, filed a class action lawsuit claiming Taco Bell didn’t use enough real beef in its food to label it as such. Chief Executive Officer David Novak called the claim “absolutely false” and said the restaurant’s seasoned meat is 88 percent real beef. Beasley Allen dropped the suit.

For a chain that made its name peddling cheap eats in the wee hours of the morning, a higher-priced menu may not appeal to the restaurant’s primary customer. The Taco Bell frequenter is an 18- to 24-year-old, value-conscious male, says Jeff Bernstein, an analyst at Barclays Capital in New York.

“It’s definitely targeted to a younger crowd,” he said.

Former franchisee Brumagin also is skeptical and says introducing somewhat fancier, higher-priced food could go the way of a healthy menu experiment in the mid-’90s that he called an “abysmal failure.”

Taco Bell is clearly taking cues from its higher-end rival.

“Chipotle is an opportunity because what it’s done has expanded the trial and usage of Mexican food,” Creed said at the investor meeting in New York Dec. 7. “It’s got people to believe they can pay $8 for a bowl or a burrito.”

Taco Bell can make food “every bit as good as Chipotle,” he said, and instead charge less than $5.

Hot Fritos

While Chipotle’s $7 or $8 burritos include ingredients such as naturally raised pork seasoned with thyme and juniper berries, Taco Bell’s menu now features the 99-cent Beefy Crunch Burrito that’s topped with Flamin’ Hot Fritos.

Steve Ells, a classically trained chef opened the first Chipotle in 1993. Since then, the company has grown to more than 1,100 U.S. locations while the menu has stayed relatively simple and consistent. Taco Bell has about 5,600 U.S. stores. While Chipotle’s shares more than tripled from the end of 2009 through last year, Yum gained 69 percent during the same time and the Standard & Poor’s 500 Restaurants Index rose 67 percent.

Yum advanced 2 percent to a record close of $60.92 in New York today. The shares rose 20 percent in 2011.

Other fast-food chains have successfully remade themselves. Oak Brook, Illinois-based McDonald’s gradually changed into a somewhat more adult and upscale restaurant by introducing McCafe espresso drinks and splashing its stores with earth tones, said John Kokoska, a managing director at BDO Consulting Corporate Advisors LLC in Atlanta who advises restaurants.

KFC Focus

Such an undertaking hasn’t been a priority at Yum, which has been more focused on expanding its KFC and Pizza Hut chains in China.

Since 2005, when Yum began reporting its China division separately, it has more than tripled revenue there while increasing store count more than 80 percent to about 4,200, topping McDonald’s 1,300 locations in the nation.

“Investors are in the stock as a play on China,” Jack Russo, an analyst at Edward Jones & Co. in St. Louis, said in an interview. Instead of a place for a quick, cheap meal, Yum restaurants in China are considered a nicer place for a family to go out for dinner, he said.

Taco Bell, meanwhile, hasn’t expanded much overseas. Yum has said it plans to sell hundreds of its U.S. stores to franchise owners. While the chain has stores in 21 countries, the U.S. accounts for 96 percent of its locations.

“It’s the tale of two cities,” John Gordon, principal at Pacific Management Consulting Group, a restaurant adviser in San Diego, said in an interview. Yum has “lost the capability to be able to run and work U.S. stores.”

Strategy Details

In the coming months Taco Bell will “be announcing further details” about the menu and strategy, Rob Poetsch, a Taco Bell spokesman, said in an interview.

Taco Bell in 2010 generated about $400 million in operating profit, about 60 percent of the company’s U.S. total and 23 percent of its global earnings by that measure.

Yum has sought to sell franchises back to U.S. store owners, in part to minimize its risk from rising raw-ingredient prices, Gordon said. In the quarter ended Sept. 3, U.S. restaurant margin narrowed to 12.1 percent from 14.4 percent last year, Yum said in a filing.

Turning around a fast-food chain with fancy new menu items can be pricey, especially for franchised store owners, said Kokoska, the BDO consultant.

“It might mean kitchen equipment where the franchisee has to cough up the cash,” he said. “It isn’t just a matter of buying better ingredients.”

Bob Watson has his eyes on New Jersey.

And why not? Watson, the chief executive officer of 5 & Diner, a restaurant company, sees the Garden State as ground zero for diners, and diners are what his company is all about.

“I know you’re crowded there,” Watson said. “You go to Red Bank, you can hit a diner in 10 miles in any direction. … But the fact of the matter is, we think our diners are a little bit different in that we think they’re kind of cool.”

So different that Watson hopes to open up 30 franchised diners, which in the 5 & Diner model are vintage 1950s retro, over the next five years around New Jersey, in areas such as Toms River, Freehold, Edison and Somerville. The family restaurants don’t serve alcohol.

He’s looking for franchisee candidates and locations in New Jersey, a state that many chain restaurants have shied away from over the years.

Sure, you know there’s a Ruby Tuesday’s, Five Guys or Subway nearby. But as a percentage of its overall restaurant base everything from delis and pizza joints to casual and fine dining, New Jersey has among the lowest concentrations of chain restaurants in the United States.

Of the state’s 20,339 restaurants, only 4,932, or 24.49 percent, are chains, restaurant companies with 10 or more locations, according to CHD Expert, a food service consulting firm based in Chicago. As a percentage, that’s fourth lowest in the U.S. Washington, D.C., is third, New York is second and Vermont is the lowest.

It’s different from other parts of the country where chain restaurants followed the construction of the interstate highway system and expanded from the 1950s through the 1970s, said John A. Gordon, principal and founder of Pacific Management Consulting Group in San Diego.

For one thing, New Jersey has a strong base of independent restaurants, including diners and those preparing Italian and ethnic food, Gordon said.

“We all know to get really good Italian food, that’s where you’ve got to go, really truthfully,” Gordon said.

As land became available for restaurants, local entrepreneurs picked up prime spots and developed a brand and loyalty, Gordon said. Chains such as McDonald’s grew. Casual dining restaurants such as Applebee’s followed, but they didn’t come in as many numbers as they did in other parts of the country, he said.

Costs are a major factor behind that, experts said. Rents and the price tag to build out a restaurant – filling it with a kitchen, tables, chairs and decorations – to get it ready to open are high, said Chuck Lanyard, president of the Goldstein Group, a commercial real estate brokerage in Paramus.

The cost of a liquor license, a scarce commodity in many towns because they are issued based on the size of the local population, can cost $250,000 to $1 million.

“When you take all those expenses in, people are less likely to look to open up in Jersey if they can look to open up in other areas where it’s less expensive,” Lanyard said.

The high costs are an added pressure to stay in business.

Franchisees have to pay a portion of its sales to a chain restaurant’s franchisor, said Stacy Gilbert, a partner at Citrin Cooperman in Springfield.

“You really have to have enough margin in the company to be able to do this and yet still walk away with a profit for yourself,” Gilbert said. “You can basically be running your business at a loss and still have to pay royalties.”

It leaves companies to wait for the right location to open.

“In New Jersey, there is just a lot of red tape when it comes to developing and getting stores open,” said Jack Koumbis, chairman of the New Jersey Restaurant Association. “The cost of it is almost prohibitive.”

For example, an Applebee’s may cost $2 million to $2.5 million to build, said Koumbis, chef and proprietor at The Assembly Steakhouse in Englewood Cliffs.

“If they are not doing $2 (million) to $3 million in that location a year, it doesn’t make any sense for them to do.”

It’s expensive to run or open a chain restaurant even without the expense of a liquor license.

The Five Guys chain first came to Parsippany in 2007, and it recently relocated from its storefront in the Pathmark Shopping Center in Lake Hiawatha to nearby Route 46 in Arlington Plaza. The restaurant is owned by Genco Development, a partnership of five local guys with exclusive franchise rights to Morris, Passaic and Sussex counties.

The move has given the crew a larger exhibition kitchen. Customers can place their order and walk down the line to watch it being assembled, or grab a table and enjoy unlimited free peanuts while they wait for their number to be called.

“Same Five Guys, new vibe,” says Brian McHugh, director of operations for Genco.

Part of the success of the company is the franchises are community-oriented, McHugh said. So when they made the move, “We wanted to make sure the move worked for our team,” he said. “Liliana Luna is one of our original crew members, and we found out that now it’s a little farther for her to walk to work.”

Chip Ohisson, Genco managing partner, added: “So we bought her a bike. She’s one of our key employees and we take care of our crew.”

Since the first location, Genco has opened franchises in Denville and Madison, and on March 28, they opened Five Guys’ 997th location at 246 Route 10 West in East Hanover, near Marshall’s and Dick’s Sporting Goods.

ChainRestaurantData.com – Restaurant Research LLC Think Piece

Contact: Phil Mangieri, Partner

Phone: 203-938-4703

February 23, 2011

Private Equity Firms, Corporate Management and Franchisees: A Cultural Stew

• Last week, we asked Trinity Capital for some color on current return benchmarks for private equity investments in the restaurant space. Please read Trinity’s comments here which we believe are particularly timely for all restaurant industry players.

• This week, we asked Pacific Management Consulting Group to add further insight into the cultural impact of private equity acquisitions in the restaurant space.

• According to Pacific Management, private equity firms, chain restaurant company management and involved franchisees have complex, mutually dependent relationships, and differences in business focus and economics that make for a complex cultural stew. All three groups must be engaged and work together for brand success, which is hard won.

• The private equity firm promotes operational improvement; and synergies via a “buy to sell” mentality to get their investment back and realize a trading profit. With a 4 to 7 year term focus, they utilize both operational value creation and leverage and financial engineering. The balance depends on the PE firm’s own expertise and focus. PE firm ownership doesn’t guarantee success, however.

• More conservative and risk adverse while publicly held, company management post purchase is relieved to be rid of the day to day sales comps pressure and perhaps that of impending refinancing hurdles. It now has the opportunity to think more broadly. But it typically must adjust to faster reaction mode, more frequent and vibrant oversight by the PE Board, and often higher debt service. Management stands to benefit from the PE ownership philosophy.

• Franchisees are initially hopeful at ownership change but generally in the dark otherwise on the potential risks and rewards of PE firm ownership. They are not part of the deal team and get no vote. Their culture remains individually focused, with margin, debt, and unit development concerns foremost. Their outlook is the longest term of all, the length of the franchise agreement. And they often have the vast majority of the invested capital. And they do almost 100% of the customer execution. Many have personal debt guarantees, thus view matters personally, but also stand to gain size efficiencies as they grow. Franchisees can benefit greatly if the brand’s chemistry, plan and execution comes together.

• About the Contributing Firm: Pacific Management Consulting Group is an analytically focused management consultancy, 100% focused on restaurants. The firm performs detailed sales, profitability, earnings and related economics projects work, and works for those who need deep business intelligence about the restaurant sector. The firm provides publicly traded chain restaurant financial and earnings analysis for investors, franchisees, other management consulting and earnings research firms; litigation support and new business startup planning. The firm passionately avoids conflicts of interest, to provide independent, creative and detailed perspective.

• FIRM CONTACT: John A. Gordon, Pacific Management Consulting Group, 5980 Mission Center Road, Unit A, San Diego, CA 92123, (619) 379-5561 www.pacificmanagementconsultinggroup.com

Published on Quick Serve Leader (http://quickserveleader.com)

An Arby’s Comeback: Insight Points to the Awakening of a Giant [Analysis]  

The recent acquisition of Arby’s by Atlanta-based Roark Capital has a flurry of pundits chomping at the bit. What does it mean to the QSR landscape? What are its next moves in its brand positioning?

Having spent the past couple of decades refreshing its look and revising its messaging, Arby’s, with more than 3,600 stores globally, appears poised to be the comeback kid. Same store sales posted a moderately strong increase of 4.4 percent in its most recent quarter, but the two-year blended results showed an approximate 3.5 percent decrease.

In the fast food category, the Wall Street darling has been McDonald’s, with its focus on beverages and the McCafé experience. Its results have been impressive. In its most recent quarter, the quick serve giant posted a surge in sales of 5.6 percent, on top of a 4.8 percent spurt last year, and EPS growth of 11 percent.

Competitors like Hardee’s and Carl’s Jr. have been on a tear and posting strong results. Same store sales at Hardee’s, a large sandwich competitor also offering roast beef, burgers and sandwiches, surged 9.6 percent for the most recent quarter. (The two-year quarter-over-quarter blended rate was approximately 4 percent.)

Hardee’s, with about half as many QSR units and once known for its own roast beef offering, has focused on premium burger experiences and a menu revamp of its own, as of late: A wider array of healthy options, including tirmmer and low-carb wraps, revamped design, and elements of its sister brand (Carl’s Jr.) in the lucky star.

Other competitors are in the national roast beef category, including Roy Rogers, Buona Beef, and Al’s Beef, to mention a few. Additionally, sandwich chains, such as Quiznos, Jimmy Johns and even Subway, also compete in the space, according to data from Technomic, a Chicago-based research and consulting firm [2].

Roark Capital Provides Opportunity, but Challenges Prevail

Roark Capital’s expertise in franchising will breed new life into Arby’s. The deleveraging of its related debt along with a contingent commitment from Roark for an additional $50 million in operating capital, according to the terms of its 81.5 percent purchase, will help Arby’s cash flow.

Along with Focus brand portfolio companies like Schlotzky’s and Cinnabon’s, Roark owns the McAlister Deli, Il Fornaio, and fast casual Corner Bakery concepts [3].

“Last year Arby’s renovated 100 restaurants,” says Arby’s Restaurant Group President Hala Moddelmog. “We’ll determine how to move forward with integrating ‘Arby’s It’s Good Mood Food™’ elements into the buildings,” she says.

According to an Arby’s representative, over half of the stores have been remodeled in the revised Pinnacle design. However, challenges loom for the brand when compared to Hardee’s and Carl’s Jr., both undergoing An Arby’s Comeback: Insight Points to the Awakening of a Giant [Analysis] http://quickserveleader.com/print/article/arbys-comeback-insight-points-… 1 of 4 1/19/2012 9:37 PM an integrated messaging and design overhaul. Burger King, another fast food competitor entrenched in its own redesign and experimentation with its hip ‘Whopper Bar,’ has combined elements of the messaging into its exterior. The burger chain, most known for its iconic Whopper, and recent ad campaigns spotlighting its ‘King’ and ‘Subservient Chicken,’ retained Interbrand Design Forum, a retail brand consultancy [4] based in Dayton, Ohio.

Interbrand’s clients include Au Bon Pain [5], Pollo Campero, Panda Express, and Papa John’s.

“The program related to the ‘Have it Your Way’ brand promise, which was focused on the product and the irreverent ad campaign that created an emotional connection with the brand’s target audience,” says Justin Wartell, Director, Brand Strategy, Interbrand Design Forum.

Wartell notes that remodel efforts need to be paired with broader updates to the complete brand experience. When all of the expressions of the brand communicate the same powerful message, a redesigned restaurant can serve as the “crescendo” of the brand experience when current or new visitors walk through the door.

He offers up lessons from the Burger King experience, saying there needs to be a willingness to be bold “not just in terms of what you do and say, but in how you rethink the history and heritage of your brand.”

“A big lesson is a willingness to be bold ─ not just in terms of what you do and say, but in how you rethink the history and heritage of your brand.” Justin Wartell, Interbrand Design Forum.

Franchise Engagement

Aside from growth opportunities, expertise in engaging the franchising community for an accelerated pace in its refresh program may come sooner rather than later. Franchising is what Roark Capital does best, along with bringing administrative efficiencies and cost savings to bear.

“Roark is well known for their expertise in franchising, restaurants, and brand building,” says Moddelmog. “We look forward to benefiting from their strategic view of our brand.”

But grow Arby’s will. Moddelmog notes that domestically, the concept will add 30 units before the year is out, and she’s pursuing the military trade channel aggressively. She points to Arby’s relationship with the Army and Air Force Exchange Services. “Through AAFES, we’re now reaching a strong consumer group—that of the military and their families,” says Moddelmog.

Internationally, a deal in Turkey with Tab Gida will see the opening of 100 stores, with 20 already open. After an integrated redesign and remodel effort, the sky is the limit.

Additional data from Technomic shows a dearth of stores in New England with only five in Massachusetts, and a lack of presence in the states further north.

For many foodservice franchisors, there has never been a better time to sell franchises,” says Mark Siebert, CEO of IFranchise Group [6], based in Illinois. He adds that the real estate landscape is much improved and has seen an increase in more open and flexible landlords.

In a recent interview with Quick Serve Leader, Jim Vinz, President of Corner Bakery, another portfolio company [7], noted that Roark has a way of ramping up growth for its restaurant companies and doing it with dignity. Most would bet on Roark.

Most franchisees want to see what is on the horizon and they felt that the direction previously did not demonstrate that Arby’s was up to the task,” says John A. Gordon, Principal at Pacific Management Group, a consultancy firm based in San Diego [8] that specializes in earnings, economic, and financial advisory services.

“Distressed franchisees must be coached upon and shown a viable exit plan. Smaller viable franchisees need to get bigger. Some underperforming markets should be closed,” he says. Gordon suggests that cash be invested in incremental advertising that is broad in reach, site review/selection, and the assessment of franchisee presence in select underperforming markets.

“A Roark-backed CAPEX (capital expenditures) and recapitalization funding pool seems necessary,” says Gordon.

Arby’s in a Good Mood

Brands should focus on understanding customers and what they desire, identifying key touch points and how they should be deployed, and using resources to help deliver against organizational business goals.

The current campaign of ‘Good Mood Food™’ for Arby’s may be the dealmaker. How the brand integrates its messaging into its design and roots through a commitment from top leadership will make all the difference with consumers.

“Burger King is a great example of moving in that direction,” says Interbrand’s Wartell. He says, “Restaurants, uniforms, packaging, web, mobile—they all delivered a new aesthetic that tied back to the heritage elements of the brand.”

Beyond the messaging, all bets are on the new design and how much Moddelmog can revitalize the brand with Roark’s perspectives and insight.

“You can spend a lot of money. Clearly, you don’t have to,” says Tom Kowalski, VP of Design for Interbrand Design Forum.

The exterior pinnacle design sends overwhelming fast food cues that are a turnoff to customers looking for a more up-scale fast-casual environment. Red window mullions, red canopies, and red plastic signs tell customers this is more of the same old slick plastic fast food experience, notes Kowalski.

The interior is actually more in line with what consumers are looking for. The palette is reminiscent of Panera, but lacks any distinctive personality. There is not much that expresses the unique qualities or brand attitude of Arby’s inside or outside the space. This is not another burger chain. Arby’s has a somewhat differentiated offer, but the experience is not cohesive or aligned with who they are.

But Arby’s strides are significant thus far under Moddelmog, and few QSRs have been this well positioned to succeed. The average check is higher than most because the brand doesn’t reflect a national all-day part strategy.

Hardee’s positioning with a late night menu, drive-thrus that are often 24 hours, and a cohesive breakfast strategy may be fine points to mimic as Arby’s comes out of its 1980’s cocoon and continues feeding off the momentum from its president’s initiatives.

Several of the initiatives contributing to positive sales and transactions include Arby’s new advertising campaign, ‘Arby’s. It’s Good Mood Food.™’, says Moddelmog. The Angus line of sandwiches and the value meal are additional boosters, she adds.

Copyright: Kandessa Media [9]. All rights reserved. Franchise & Licensing Copyright Kandessa Media. ©2012. All works published here except for shared media, licensed material or advertisements, are protected intellectual property of the publisher. All rights reserved. Kandessa Media, founded in 2009, is based in Boston. Source URL: http://quickserveleader.com/article/arbys-comeback-insight-points-awakening-giant-analysis Links: [1] http://quickserveleader.com/sites/default/files/arbys_pinnacle_2_-_kandessa_media_0.jpg [2] http://quickserveleader.com/technomic [3] http://quickserveleader.com/article/corner-bakery-cafes-double-heels-roark-acquisition-chaineyes-northeast [4] http://www.interbranddesignforum.com/portfolio/burger-king/ [5] http://quickserveleader.com/article/au-bon-pain-expands-cafe-remodel-program-strategizes-nationalmakeover [6] http://www.ifranchisegroup.com/ [7] http://quickserveleader.com/article/qa-corner-bakerys-president-vinz-brand-building-and-deliveringconsistency [8] http://www.pacificmanagementconsultinggroup.com/aboutus.html [9] http://quickserveleader.com/kandessa An Arby’s Comeback: Insight Points to the Awakening of a Giant [Analysis] http://quickserveleader.com/print/article/arbys-comeback-insight-points-… 4 of 4 1/19/2012 9:37 PM

Pie Fives All Around

Home > Business News > Chipotle Sec Filing Spells Out Some Soul Daddy Financials

Soul Daddy: A $3 Million Failure

by Coeli Carr Jul 05 2011

No one at NBC nor anyone involved with “America’s Next Great Restaurant” has wanted to talk about how much money went into opening (and then abruptly closing) three outposts of Soul Daddy. But a paragraph in an SEC filing by Chipotle helps to answer that question.

Failure to L(a)unch

In early May the four culinary professional judge-investors from NBC’s America’s Next Great Restaurant bet their own money on the winning contestant’s “Soul Daddy” concept. Less than two months later, all three restaurants they opened are shuttered. What went wrong?

Soul Daddy Serves Up the Competition

With a dash of baked chicken, a hint of fresh veggies, and a whole lot of respect, Jamawn Woods proved he had the right recipe to win the title of America’s Next Great Restaurant with his take on healthy comfort food SEC papers tell the story of Soul Daddy’s failure.

We know that the three Soul Daddy restaurants—the top prize on NBC’s America’s Next Great Restaurant food-reality show—have shut down. The question that remains, like an aftertaste following a meal that didn’t quite sit right, is about the financials.

No one at NBC nor any of the four judge-investors nor anyone else tied to the now-canceled show wanted to reveal. On Friday, in a story about the sudden failure of the restaurants, I spoke with an expert who ballparked the cost to open and operate restaurants in three cities at about $2 million. Turns out that estimate was 50 percent too small.

In a filing with the Securities and Exchange Commission, Chipotle Corp.—the “fast casual” chain of Mexican fare that was founded by Steve Ells, one of the four judge-investors—detailed its connection with ANGR Holdings, the company set up to operate the show winner’s restaurants.

The SEC proxy statement said Chipotle had invested $2.3 million in the holding company. It also said Ells personally contributed another $220,000 to the effort an amount Chipotle intended to reimburse Ells. Here’s the key section in the proxy statement:

Agreements with ANGR Holdings, LLC: We have agreed to be the prize sponsor for the network television program “America’s Next Great Restaurant.” In that capacity we have made agreed to make cash contributions totaling $2.3 million to ANGR Holdings, LLC, the entity that will operate the restaurants to be awarded as a prize on the program, in exchange for an equity interest in the entity. We have also agreed to provide a variety of corporate and administrative services to the entity in connection with its operations. Our founder, Chairman and Co-Chief Executive Officer, Steve Ells, serves as a judge on the America’s Next Great Restaurant program, and as part of the terms of his involvement with the program is a co-investor in ANGR Holdings. We intend to purchase Mr. Ells’s interest in ANGR Holdings from Mr. Ells during 2011 for $220 thousand, the amount of the cash contribution originally made by Mr. Ells.

A source close to the the show said the judges’ never revealed the level of their investments to the contestants, but this person said everyone was led to believe the four judges-investors—besides Ells, they were chef-entrepreneurs Bobby Flay, Lorena Garcia and Curtis Stone—had each contributed the same amount. So if Ells’ $220,000 is multiplied by four, that means quartet collectively ponied up $880K to launch the trio of Soul Daddy restaurants in New York, Los Angeles and the Mall of America in Minnesota. Chipotle’s contribution upped that amount to slightly over $3 mil.

These numbers generate more questions. If, as many experts in the industry agree that a minimum of $2 mil could have kept three Soul Daddy’s operating for about six months—and ANGR Holdings had about $3 mil at its disposal—then undercapitalization may not have been an underlying problem.

So if money wasn’t an issue in keeping the enterprise afloat, then what factors led to the closings? So far, none of the principals are talking.

Crumbs chain to capitalize on America’s cupcake craving

Crumbs, the gourmet cupcake chain with three New Jersey stores, is preparing to capitalize on America’s craving for cupcakes by becoming a public company.

The deal, announced this week, will give Crumbs the capital it needs to expand from 34 stores to more than 200 by 2014, with the potential for 600 or more Crumbs stores going forward. The company, now in six states, plans to expand first in the top 15 metropolitan areas in the country, focusing on cities such as Denver, Dallas and Seattle. Crumbs has stores in Ridgewood, Hoboken and Westfield.

THE RECORD FILE PHOTO

The deal with 57th Street General Acquisition Corp., a public company created for the purpose of financing the purchase of a private company, gives Crumbs owners and investors $27 million in cash and $3.9 million in 57th Street common stock, for a combined price of about $66 million.

Crumbs was created in 2003 by husband-and-wife team Mia and Jason Bauer. Mia Bauer first began baking cupcakes, brownies and other treats as a teen growing up in Demarest. The Bauers opened a bakery on the Upper West Side of Manhattan and quickly noticed that cupcakes outsold the other baked goods offered in their bakery.

The couple will continue to run the company after the merger, which is expected to close in March. After the deal closes, 57th Street will change its name to Crumbs Bake Shop and be listed on the Nasdaq Stock Market.

Mia Bauer, in a phone interview Thursday, said investment firms have been approaching Crumbs with deal offers for years, but the company waited for the right time and the right offer. “We knew that the time had come for us to raise more capital to expand the way we wanted to expand, and do it the right way,” she said. “We were fortunate in that we could take our time and find the right partnership.”

The decision to take Crumbs public has triggered talk of a “cupcake bubble” and raised questions about whether the treats are a fad or a lasting trend.

Mia Bauer said the company has heard and pondered that question ever since they launched the first Crumbs store in Manhattan in 2003. “It’s something we asked ourselves every single night – ‘Is it here to stay?’ And eight years later it’s hard to say it’s a fad,” she said. “It’s a category that’s been around forever, and what we did was revitalize it and make it fun and sexy and exciting. It’s part of the dessert culture now. To me it’s like asking somebody, “Are cookies no longer going to be popular?’ ”

The company served up cupcakes and sales statistics Wednesday at a high-powered investment conference in California. Analysts at the meeting pronounced the cupcakes delicious but said a stock based on the sweet snacks could be a tough sell.

“I don’t think the cupcake itself is a fad, but building a whole concept around it, that could be where the unsustainability is,” said John Gordon, restaurant analyst for the Pacific Management Consulting Group, who attended the ICR XChange investment conference where Crumbs made a presentation Wednesday. The reaction of analysts he spoke with about Crumbs, Gordon said, was, “Well, it looks interesting but it’s just such a narrow focus.”

“In this business, it is extraordinarily difficult to build a business based on a snack occasion, or what we call a single day-part occasion,” Gordon said.

The chain also will face tough competition from everybody else who is trying to grab the coffee and snack market, a category that includes Dunkin’ Donuts, Starbucks and dozens of other coffee chains, as well as independent coffee shops and bakeries.

Jason Bauer, in presentations to analysts and potential investors this week, said the company liked the 57th Street deal because it would raise capital and allow Crumbs to go public more quickly than a traditional initial public offering. He said there is a strategic advantage in being “first mover” in the cupcake category – the first chain to expand on a national level.

One statistic Jason Bauer said is especially attractive is Crumbs’ average transaction – the average amount spent per customer. “Our average transaction, $18 to $20, is off the charts,” he told investors during a presentation. “Our typical customer is not saying, ‘Let me have a cupcake and a cup of coffee.’ Our typical customer is saying, ‘Let me have six, let me have 12,’ and they’re bringing them somewhere.” Bauer also presented data showing Crumbs stores have sales throughout the day, with the bulk of the sales midday, but with healthy percentages in the early morning and evening as well.

Analysts who are deciding whether to invest in the company are focusing on Crumbs EBITDA – earnings before interest, taxes, depreciation and amortization – of $2.4 million to $2.6 million on revenue of $31.1 million in 2010. That level of EBITDA is “very thin” Gordon said.

E-mail: verdon@northjersey.com

A not so Friendly Chap. 11

By JOSH KOSMAN Last Updated: 12:36 AM, October 6, 2011

Posted: 12:36 AM, October 6, 2011

Sun Capital Partners is trying to have its Fribble and eat it too.

The private-equity firm has made a bid to repossess Friendly’s at a price presumably less than its $310 million in debt after it arguably just drove it into bankruptcy.

Sun, which bought Friendly’s in 2007, put the iconic ice cream and sandwich chain in Chapter 11 yesterday, and said it had reached a deal to buy it out of bankruptcy.

“I wonder if the bankruptcy judge will find Sun’s stalking horse bid a conflict of interest?” asked restaurant strategist John Gordon of the Pacific Management Consulting Group.

Sun, soon after buying the chain, separated its real estate, selling its headquarters and the land under 160 of its 512 restaurants for more than $40 million, Gordon said. Sun used the money to pay down some of the debt incurred from the purchase.

Friendly’s restaurants started paying higher rent.

Today, Friendly’s, without referencing how Sun split its assets, blamed higher rents as part of the reason it collapsed.

A source close to Friendly’s said, “I would encourage you to pursue that line of thinking,” when asked why the chain went bankrupt.

Company wide EBITDA (earnings before taxes, depreciation and amortization) fell from $45 million in 2006 to an estimated $13 million this year.

A Sun spokesperson declined comment.

jkosman@nypost.com

Today’s special: flounder

By JOSH KOSMAN Last Updated: 12:00 AM, October 5, 2011

Posted: 12:00 AM, October 5, 2011

Private-equity titan Marc Leder’s sprawling restaurant portfolio is beginning to give him indigestion.

The Sun Capital Partners co-founder, who has grown a 10-brand restaurant portfolio, including Chevy’s, Friendly’s, Boston Market and Souper Salad, into one of the largest in the US, is seeing his eatery empire crumble in the midst of a stagnant economy.

Sun’s Cypress, Calif.-based Real Mex operation, which controls over 200 restaurants under the Chevy’s, El Torito and other brands, filed for bankruptcy protection yesterday amid rising food costs and a restrained ability to raise prices.

One month earlier, SSI Group, owner of Souper Salad and Grandy’s, in which Sun owns a 45 percent stake, cooked up a similar restructuring recipe. Separately, Sun’s Friendly’s franchise is expected to file for protection this month.

On top of that, Sun’s Golden, Colo.-based Boston Market chain of 490 locations is struggling, and its 600-unit Captain D’s chain of seafood fast food is not doing well, according to restaurant strategist John Gordon of the Pacific Management Consulting Group.

Sun, with more than 2,000 restaurant locations, is not alone, as the entire restaurant sector is under pressure. So far this year, five chains with at least 100 locations each have filed for bankruptcy protection, according to research firm Technomic. Last year, that number was two. In 2009, it was one.

Leder has not let Sun’s faltering restaurant empire slow him down.

This past July he rented a Bridgehampton estate for $500,000, according to Page Six, and became the talk of the tony Long Island hamlet for holding parties in which guests cavorted nude in the pool and performed sex acts, while scantily dressed Russians danced on platforms and men twirled lit torches to a booming techno beat.

A Sun Capital spokesman declined comment.

jkosman@nypost.com

Analyst turns table on Biglari

Published December 14, 2011 by Geert De Lombaerde

Independent restaurant analyst and consultant John Gordon says Sardar Biglari may not want to crow too loudly about his track record in turning around Steak N Shake as he aims for a Cracker Barrel Old Country Store board seat. “One wonders if the maximum ‘Biglari effect’ has been realized already,” Gordon says in pointing out that free cash flow per unit was flat in the past year. Recall that one of Biglari’s main beefs with the management of Cracker Barrel is that the Lebanon-based chain hasn’t been able to boost guest traffic and profitability at the store level.

Analyst Viewpoint: Chipotle doesn’t follow conventional ‘fast food joint’ path to success

Oct 25, 2011 – Pacific Management Consulting Group By JOHN GORDON

Headlines are rewritten for editorial clarity. The original story and headline begin below.

Original Headline: Chipotle: Not Just A Fast Food Joint

SAN DIEGO, CALIFORNIA, October 24, 2011 (Pacific Management Consulting Group) – Many interesting notes are apparent from Chipotle’s (CMG) last two quarters earnings trend.

It’s amazing where they are: Two back-to-back quarters of plus-10% same-store sales gains in a weak economy. CMG is the highest earnings dollar per share generator in the entire restaurant space (Piper Jaffray 2011E, $6.85 EPS), now way ahead of No. 2 profit/share generator McDonald’s (MCD), its holding company parent until 2006. This despite: (1) no franchising (2) no expensive direct product TV support (3) no massive discounting or coupon programs, and (4) menu stability, no new menu products in 17 years (but many tweaks).

Even better, per its Q3 2011 earnings call last week, its “early peek” Q4 2011 same-store sale trend looks great, at approximately plus 10%.

As one would hope, units open and then build sales (at $1.4M AUV, to $1.975M, the system average). Reported good financial leverage from their type A sites is highly significant. The Type A is the so called “less than main at main locations” site strategy announced in 2010. Sales have been at par with the system and generate improved cash on cash returns as the store development CAPEX is less than traditional sites.

The number we are particularly watching is the number of new units, 155-165 in 2012, and international results. The oft-noted Chipotle “restaurateur” management plan is all about having good people in the company to handle the growth. The restaurateur program, while not unique to this industry nor perfect, is what good restaurants should do.

The new Shophouse concept is an interesting creative restaurant development but not worth much attention right now. The 100 basis points decline in restaurant operating margin to 26.3%, due to cost of goods sold and commodity inflationary issues (but still a restaurant space leader), is important but for now the runway for top line sales growth exists. Chipotle has a finite U.S. unit penetration, but the success of the Type A site suggest we don’t know where that point is yet.

Unlike Cramer Friday, we never thought Chipotle was a “fast food joint”, nor should the same standards apply. The bar should be higher.

John Gordon is principal and founder of Pacific Management Consulting Group (http://www.pacificmanagementconsultinggroup.com/), an association of service sector senior management experts providing research and niche earnings analysis, management consulting and advisory expertise in the restaurant sector.

All content is copyrighted by the original respective author or source.

Crumbs Cupcake Chain Has Successful Initial Public Offering

First Posted: 6/30/11 03:47 PM ET Updated: 8/30/11 06:12 AM ET LOS ANGELES (Lisa Baertlein and Mary Slosson) –

Investors in Nasdaq newcomer Crumbs hope to cash in on the cupcake craze. Will they whip up big profits or get creamed by another food fad?

Shares in Crumbs debuted at $13.10 on the Nasdaq on Thursday, giving the biggest U.S. cupcake chain a market value of $58.9 million. They rose to $13.30 in midday trading.

The gourmet cupcake pioneer, which got its start in 2003 on Manhattan’s Upper West Side, now sells 1.5 million cupcakes a month through 35 stores located on both U.S. coasts.

“We launch our brand where people work and we expand to where they live,” said cofounder Jason Bauer, whose goal is to “bring back the neighborhood bakery that disappeared in the ’70s and ’80s.”

Crumbs cupcakes aren’t your grandmother’s chocolate, vanilla and strawberry.

Its signature products are $3.75 cupcakes in flavors like caramel apple, chocolate pecan pie or red velvet. They are stuffed with fudge and other goodies, piled high with frosting and sold in sizes ranging from a dainty “taste” to a “colossal” cupcake that serves six to eight.

Bauer wants to open 200 stores by 2014. He said he can envision 500 to 600 outlets, but not 10,000.

He said Crumbs would not follow in the footsteps of doughnut chain Krispy Kreme, which crashed after an expansion binge.

“That was the downfall of the brand,” said Bauer, who added that Crumbs will not license its products or franchise stores.

SUGAR-FUELED FOOD FIGHT

The business of peddling cupcakes is so competitive that it has inspired a Food Network TV show called “Cupcake Wars.”

First-time cupcake sellers must carve out a profitable niche if they want to compete with icons like New York’s Magnolia Bakery — whose vintage-inspired frosted treats had a cameo on the popular cable TV show “Sex and the City.”

California-based Sprinkles, which also is opening stores around the United States, has deployed cupcake trucks to take its fare directly to customers. Other bakers have abandoned brick-and-mortar storefronts in favor of online sales.

Los Angeles blogger Tara Settembre, organizer of a popular cupcake meet-up group, says weaker operators are washing out.

“It got a little crazy,” said Settembre, who counts herself among the fans of Crumbs cupcakes.

Asked if she would invest in Crumbs, she said, “I worry about this bubble and now many (shops) they would be opening.”

Crumbs had a profit of around $34,400 on revenue of $9.7 million in the latest quarter. A year earlier, it earned almost $219,500 on revenue of $7.1 million. The year-over-year profit reduction was mostly because of expansion costs.

A so-called blank-check company bought Crumbs in May for $66 million. Buyer 57th Street General Acquisition used a public offering to raise the money for its Crumbs purchase, and Nasdaq gave it clearance to start trading on Thursday.

John Gordon, principal of Pacific Management Consulting Group, says there are enough wealthy and densely populated U.S. markets like Manhattan, Malibu and Beverly Hills to support as many as 250 Crumbs stores.

While moving into suburban U.S. markets could lower Crumbs’ average annual store sales from the current level of $1.1 million and threaten margins, emerging markets like China present ample opportunity for strong growth, Gordon said, Michael Yoshikami, president and chief investment strategist at YCMNET Advisors, is cautious about Crumbs, in part because he sees cupcakes as a discretionary item.

“I wouldn’t be investing … although I like their cupcakes,” Yoshikami said.

CUPCAKES ARE DEAD, LONG LIVE CUPCAKES

Like other growing food-service chains, Crumbs aspires to be the next Chipotle Mexican Grill, the popular burrito chain that moved upmarket with high-quality ingredients and now trades above $300 per share.

The difference between Chipotle and Crumbs is that burritos are a meal and cupcakes are dessert — while you need a healthy meal every day, you don’t necessarily need a daily cupcake.

Still, cupcakes have proven a resilient craze.

“I have predicted the demise of the cupcake so many times that I’m actually going to go to the dark side now and say the cupcake trend is not going to abate,” Dana Cowin, Food & Wine magazine’s editor-in-chief, told Reuters.

“It’s so big it’s spawning mini trends” like mini cupcakes, frosting shots and cupcake pops, said Cowin. She added that that macaroons, doughnuts and other treats that were predicted to trump the cupcake failed to knock it from its perch.

Settembre says it’s easy to explain the cupcake’s enduring popularity: “You can’t be unhappy eating a cupcake.”

(Reporting by Lisa Baertlein. Editing by Robert MacMillan)

http://pacificmanagementconsultinggroup.com/articles/cupcakeipo.pdf

Nine months on the job, and Red Robin Gourmet Burgers’ new chief executive is winning over investors and analysts.

Earnings are up, expenses down, and the 452-store gourmet hamburger chain is beginning to turn around years of lackluster financial performance.

New CEO Steve Carley cuts an imposing figure with a shaved head atop a 6-foot-1, 250-pound frame.

Yet, Carley is achieving results with a mild manner and a back-to- the-basics restructuring plan.

“I’m not an intimidating, mean guy,” the 58-year-old Carley said recently from his second-floor Greenwood Village office at Red Robin headquarters. “I’m just a guy who tells (employees) the score.”

The score was lopsided and unflattering.

Red Robin had posted three consecutive years of declining profits and a precipitous 69 percent plunge in its share price from 2005 through mid-2010.

Former CEO Michael Snyder resigned in 2005 after a Securities and Exchange Commission investigation found he had claimed $1.25 million in improper expense reimbursements.

Snyder was succeeded by Dennis Mullen, whose tenure was marked by declining profits and sagging stock.

Big shareholders were antsy, demanding changes in leadership and corporate governance.

Enter Carley. He was recruited in September after a nine-year stint as CEO of Costa Mesa, Calif.-based grilled chicken chain El Pollo Loco.

In a series of meetings with executives, employees and franchisers, Carley laid out some research he had compiled on Red Robin.

Customer satisfaction levels were lower than some peers in the casual-dining sector. Management and wage-earner turnover was higher than average.

“That sobered our team. It shook them up a little,” he said.

At the same time, Carley implemented a restructuring plan dubbed “Project RED.” The acronym stands for revenue growth, expense management and deployment of capital.

Components included introduction of a customer loyalty program to increase sales, cost-cutting measures designed to save $16 million to $18 million a year, and a capital expenditure plan that cuts back on new-store openings and increases corporate stock buy-backs.

Red Robin will use metro Denver as a testing ground for building smaller restaurants in urban locations — a change from the chain’s primarily suburban presence.

A key proposal for increasing sales includes what Carley calls “taking back the bar” with happy-hour promotions and drink menus.

He noted that the chain’s sales of alcoholic beverages as a percentage of total sales fell from 11 percent to 6 percent over the past decade. The restaurant industry average is 14 percent.

While Red Robin is popular as a destination for families with children, Carley said, “maybe we pushed the pendulum a little too far. We went from adult-friendly and kid-friendly to maybe too kid-friendly.”

Expense reductions in Project RED ranged from easy — $50,000 by switching from white to brown paper towels — to painful. The company in January cut 32 corporate positions representing 17 percent of the headquarters staff.

Red Robin’s first-quarter earnings showed signs of improvement, which analysts attribute to both Project RED and an improving economy.

Among earnings highlights:

• 5.2 percent growth in revenue to $281.5 million, compared with the first quarter of 2010.

• A 1.9 percent increase in company-owned same-store sales.

• A 76 percent surge in net income to $8.7 million.

Following the first-quarter earnings release in May, some equity research firms raised their ratings on Red Robin; others maintained ratings of “hold” or “underweight” — indications that the company may still face challenges.

“We believe the magnitude of improvement will be less significant in the coming quarters,” KeyBanc Capital Markets said in a research note.

“While we are encouraged by recent menu, marketing and cost-reduction efforts, we remain concerned by the challenging sales environment and commodity pressures,” analysts at Wells Fargo Securities said.

Red Robin’s restructuring will need to evolve, said John Gordon, whose San Diego- based Pacific Management Consulting tracks chain restaurants.

“Carley’s program, while it’s a good one and a solid one, is going to take time,” he said.

He said Red Robin will face significant pressure from competitors in the casual-dining sector and especially in the growing “better burger” category, including Denver-based Smashburger.

“Everybody and their brother is coming out with a gourmet, high-end burger,” said David Kincheloe of Denver- based National Restaurant Consultants. “It seems to be the thing these days.”

Steve Raabe: 303-954-1948 or sraabe@denverpost.com

Steve Carley file

What he does: Chief executive, Red Robin Gourmet Burgers

Age: 58

Hometown: Chicago

Education: Bachelor’s degree, University of Illinois; master’s, Northwestern

Residence: Pinnacle condos, near City Park

What he eats: Royal Red Robin burger

Home specialty: Pork shoulder barbecued over charcoal

What’s on his iPod: Classic rock, new age, blues

Wheels: Lexus 400 hybrid

What he reads: Stieg Larsson novels on Kindle

http://pacificmanagementconsultinggroup.com/articles/denverpost.pdf

Denver-based Quiznos is under financial pressure as sharpened competition, waning sales and debt woes weigh on its bottom line.

Analysts say the sub-sandwich company is struggling to pay its debt and could be headed for a reorganization. The chain has seen a sharp downturn in its number of stores and shrinking revenue from the outlets that remain open.

Privately owned Quiznos does not disclose financial metrics and releases almost no public information.

Yet analysts who follow the company say it is clear that the chain is nearing default on its loans and scrambling to restructure $875 million in debt.

“It’s one of the biggest restaurant collapses in American history,” said restaurant consultant John Gordon of San Diego-based Pacific Management Consulting Group.

In keeping with its private orientation, Quiznos through a spokesman last week declined to comment and issued only a brief statement about its finances.

“Quiznos has hired a financial adviser to assist in working constructively with its lenders to develop a proper financial structure for the company,” the statement said. “We expect these activities will not adversely impact Quiznos’ customers, franchise owners, employees or business partners. We fully expect this process to drive an outcome that will help the brand grow and prosper.”

The problems stem from a highly leveraged investment in 2006, competition from other sandwich purveyors and a protracted battle with the company’s franchisees over operating costs and profitability.

The result is an estimated 14 percent drop in sales last year and the loss of 600 restaurants — the steepest decline of any major fast-food chain, according to restaurant consulting firm Technomic Inc.

Sales in 2010 were about $1.55 billion, down from the 2008 peak of $2.02 billion, Technomic estimated. During the same period, stores declined from about 5,000 to 3,500 and likely are fewer than 3,000 this year.

“It leaves them in a precarious position,” said Darren Tristano, executive vice president of Chicago-based Technomic. “In all likelihood, their options are either a buyout, conversion of debt to equity, or bankruptcy.”

Growth took a hit in 2005 when Quiznos lost an important competitive edge — its exclusive status as a maker of toasted subs — after larger rival Subway began offering toasted sandwiches.

Further erosion occurred in 2008 when Subway introduced the $5 foot-long, and Quiznos’ counter-punch with the $4 “torpedo” failed to bring customers back.

Quiznos’ average customer check is $7.85 compared with Subway’s $6.90, according to Technomic.

“If they are successful in renegotiating their debt, they need to reinvent themselves with something that their competition does not offer,” said David Kincheloe, president of Denver-based National Restaurant Consultants.

Customer Mark Calvert said he hopes the financial struggles won’t have an impact on his neighborhood Quiznos at 13th Avenue and Grant Street — the chain’s first location in 1981.

“I love these sandwiches,” he said. “I’d go here over Subway any day.”

As Quiznos has fought to maintain market share, it has suffered lingering animosity from some franchisees who say profit margins are lean or nonexistent — due in part to a requirement that franchisees buy food at allegedly above-market prices from a Quiznos-mandated supplier network.

In 2009 Quiznos settled a franchisee class-action lawsuit by agreeing to pay up to $95 million.

The corporate debt problems are troubling to remaining franchise operators, said Justin Klein, a New Jersey attorney who represented franchisees in the lawsuit.

If Quiznos were to default on its debt and file for bankruptcy reorganization, “it would have a negative impact on the investment these franchisees have made in the company. It pretty much puts that investment into the toilet,” Klein said.

The Wall Street Journal, citing unnamed sources, reported in July that Quiznos had notified its lenders that it would soon violate loan terms. Doing so would put the company in default and could trigger a requirement for immediate repayment of its debt.

Much of Quiznos’ $875 million debt stems from a deal in 2006 in which a private-equity affiliate of JP Morgan Chase purchased 49 percent of Quiznos from a partnership led by Colorado investors Rick and Richard Schaden. The Schadens retained the remaining 51 percent.

Finding new investors, or persuading lenders to swap debt for equity, is an uphill battle for Quiznos, said Gordon of Pacific Management Consulting.

“The trends are ominous. They’re bad,” he said. “Quiznos continues to close doors, and same-store sales continue to fall. The issue is, when does Quiznos hit bottom?”

Gordon said that to his knowledge, Quiznos’ owners have not contributed $50 million in new capital that lenders have been seeking as a good-faith commitment to facilitate the debt restructuring.

A Quiznos spokesman declined to comment on the status of new investment by owners.

Without a capital infusion from the owners, Gordon said, “it’s not exactly a vote of confidence” in persuading lenders to convert their debt to equity in Quiznos.

Steve Raabe: 303-954-1948 or sraabe@denverpost.com

Side note

Just three years ago, it topped $2 billion in sales. Now, industry observers say the Quiznos sandwich chainled by Denver investors Rick, below, and Richard Schaden — is $875 million in debt, with sales down 14 percent and 600 stores closed last year. “It’s one of the biggest restaurant collapses in American history,” says restaurant analyst – John Gordon.

http://pacificmanagementconsultinggroup.com/articles/quiznosfinanceissues.pdf

A hedge fund that holds debt in Denver-based Quiznos would take control of the struggling restaurant chain under a deal set to go before creditors before year’s end, a source familiar with the deal said.

Avenue Capital Group, a New York fund owned by billionaire Marc Lasry, will convert its debt and a cash investment into 70 percent ownership of Quiznos if creditors approve the agreement, the source said. If they don’t, Quiznos’ owners will take the privately owned company into Chapter 11 bankruptcy protection.

The deal was reported Wednesday by The Wall Street Journal. The source who spoke to The Denver Post confirmed the details in that report and said the agreement will be announced Friday.

Quiznos is owned by Consumer Capital Partners, a Denver investment firm led by Quiznos founder Rick Schaden and his father, Richard, and CCMP Capital Advisors, a private-equity firm spun off from JPMorgan Chase.

The once-high-flying sandwich chain has been struggling in recent years under a heavy debt load, falling sales and intensifying competition from Subway and others. Sales fell 23 percent from 2008 to 2010, and the number of stores has plummeted from about 5,000 to possibly fewer than 3,000, according to restaurant consulting firm Technomic Inc.

The Journal reported earlier this year that the company notified creditors that it was in technical default on its loan terms, often a precursor to bankruptcy.

Observers said creditors may view the deal with Avenue Capital as preferable to bankruptcy, where they may get less.

“It is probably better and more efficient to have an agreement now rather than going into Chapter 11, which is very expensive,” said John Gordon, principal at Pacific Management Consulting Group in San Diego, who has advised Quiznos franchisees in their disputes with the company.

Even with the financing deal, Quiznos has a tough road ahead, said Gordon and David Kincheloe, president of Golden-based National Restaurant Consultants.

“They really need to do something to reinvigorate the brand,” Kincheloe said. “There are a tremendous number of competitors out there that didn’t exist when they started.”

Representatives of Quiznos and Avenue Capital declined Wednesday to comment on the deal.

The plan would reduce Quiznos’ debt load of $875 million by at least $281 million, the source familiar with the deal said. Creditors would be required to forgive debts and accept other changes to loan terms.

Consumer Capital Partners, also an investor in the Smashburger restaurant chain, and CCMP Capital Advisors, with investments in Cabela’s Inc. and AMC Entertainment Inc., may not get any return on their investments.

Creditors have until about the end of January to accept or reject the offer.

Avenue Capital manages assets estimated at $11.6 billion. Last January, it was ranked by Bloomberg as the 13th-largest U.S. hedge fund. Chelsea Clinton worked there for several years.

Greg Griffin: 303-954-1241 or ggriffin@denverpost.com

http://pacificmanagementconsultinggroup.com/articles/Quiznosrestructuring.pdf

Chick-fil-A model helps it lead

By Russell Grantham

The Atlanta Journal-Constitution

While many of its competitors have hit a wall, Chick-fil-A is on a roll.

The College Park-based chicken sandwich chain rang up the fast-food industry’s highest average sales per store last year — almost $2.7 million per shop — putting it ahead of industry giants such as McDonald’s, which posted $2.4 million.

At the same time, several of Chick-fil-A’s big competitors have stalled. While Chick-filA has been adding stores, rival KFC has been shrinking in terms of total units, as have Pizza Hut, Arby’s, Hardee’s and Dairy Queen, according to QSR, a trade magazine for quick-service restaurants.

So what is Chick-fil-A’s secret ingredient?

There may be several — some better known than others. There’s its well-known, never open-on-Sunday Christian mores, which have lent the company cult status among some customers and employees. Company officials tout the quality of its food and its focus on local communities, which builds repeat business.

But a less known key to Chick-fil-A’s success is its unusual approach to franchising, which is almost unique in the restaurant industry.

Boiled down, Chick-fil-A’s system allows the privately held company to be extremely choosy about who runs its restaurants, and to reward them well if they succeed — or get rid of them if they don’t. Because it owns all its restaurants — seemingly a contradiction in franchising — Chick-fil-A can move quickly into new products and markets. It can shift strong-performing franchisees to bigger stores or give them more responsibility — much like employees — while firing up their entrepreneurial zeal.

“I look at it as a great opportunity,” said Margaret Phillips, who nearly 30 years ago scraped together $5,000 to take over her first Chick-fil-A store in Daytona Beach, Fla. Then 23, she was already a Chick-fil-A veteran, having started at 16 in a shop in North DeKalb Mall. “They have shown us a lot of grace and love over the years,” said Phillips, who now runs a Chick-fil-A restaurant in Commerce.

Normally, companies use franchising to speed up their growth by tapping outside investors’ money to build additional outlets. Would-be entrepreneurs pay an up-front franchise fee and the costs to build and open a new outlet. They also pony up roughly 9 percent of sales to the company for advertising and rights to use its brand and sell its products.

To join a major chain like KFC, franchisees typically need to shell out about $1.9 million before opening their doors, according to Don Sniegowski, editor of Blue MauMau, an online publication that tracks the franchise industry.

But Chick-fil-A CEO and founder S. Truett Cathy turned that model on its head when he decided in 1967 to expand his business into a chain of restaurants.

The company bankrolls the entire cost of its new restaurants and picks the locations. The only cost its so-called “operator” franchisees shoulder up front is $5,000, but they can’t later sell the business or pass it on to their heirs. Chick-fil-A retains ownership of the restaurant, and takes a much bigger cut of each store’s revenues and profits than at most franchises. It gets 15 percent of sales, collects rent on the property, and splits the remaining profit with the operator.

The formula seems to have worked well for both sides.

Based on franchise disclosure documents and interviews with Chick-fil-A officials, the company’s roughly 1,100 operators took home operating profits of about $210 million last year, or an average of $190,000 each. Some make substantially more.

Meanwhile, Chick-fil-A collected about $841 million last year in rent, royalties and its share of operating profits from franchisee-operated restaurants — four times what the franchisees got. The company reported a $175 million profit for 2010 on systemwide revenue of $3.4 billion last year.

Company officials say Chick-fil-A gets 10,000 to 25,000 applications for roughly 60 to 70 new slots that open each year. The result is highly motivated “operator” franchisees like Phillips, Bob Garrett and Melissa Winkfield, whose metro Atlanta restaurants generate annual sales of up to $4 million each — two or three times the average fast food restaurant’s volume — despite being open only six days a week.

Chick-fil-A’s profit-splitting arrangement is a huge motivator for operators, who would not get a share of profits if they were traditional employees, said Russ Umphenour, head of Atlanta-based FOCUS Brands, where he oversees Moe’s and five other fast-food chains.

“If [you’re] thinking about every dollar that walks in the door, [part] of it will be mine, you start to look at the world differently,” said Umphenour, who calls himself “a huge Truett Cathy fan.”

Before joining FOCUS Brands, Umphenour tried a similar plan with many of the managers at his 775 Arby’s restaurants he operated before selling in 2005. In exchange for $5,000, the Arby’s managers got a 10 percent to 20 percent share of their units’ profits. Many of those operators later boosted profits by up to 25 percent, he said.

Still, only a few companies, including the 7-Eleven convenience store chain, Outback Steakhouse and the Shoney’s restaurant chain, have tried similar plans, say industry players.

“I think most companies are scared of it, because they think it will eat into their profits,” said Umphenour.

Chick-fil-A’s 2010 profit margin, which was 5.1 percent of its systemwide sales, was somewhat behind the 6.4 percent profit margin of industry kingpin McDonald’s Corp. last year. But industry experts say Chick-fil-A is beating most rivals in terms of sales and profits per store.

“I’m just amazed that there haven’t been more businesses doing this,” said John Gordon, with Pacific Management Consulting Group, a San Diego restaurant consulting firm.

By not depending on franchisees to build stores and maintain them, Chick-fil-A has grown slower, but has the power to upgrade restaurants, launch new products or change operators whenever it wants, he said. Older franchises such as McDonald’s, Wendy’s and KFC can’t do the same without risking a revolt by franchisees who don’t want or can’t afford to make such changes.

“The flexibility to operate what is essentially a 100-percent company operation is tremendous,” he said.

Chick-fil-A’s unusual approach has helped fuel its steady growth, despite the 2007-2009 recession, with systemwide sales rising from $2.3 billion in 2006 to $3.4 billion last year.

With total sales expected to hit $4 billion this year, it’s poised to displace Oklahoma City-based Sonic as the nation’s 10th largest fast-food chain in terms of revenues. Chickfil-A expects to add 92 outlets next year to its more that 1,500 locations, which includes about 1,000 free-standing restaurants and a smaller number of company-operated stores and units in malls, hospitals, airports and colleges.

Still, Chick-fil-A’s unusual franchising approach and pervasive Christian culture hasn’t been for everyone.

According to press reports, the company has been sued about a dozen times for employment discrimination, sometimes based on religion. According to Forbes, a former restaurant operator who is Muslim sued in 2002, alleging he was fired for not participating in a Christian prayer at a company training program.

Meanwhile, some states have challenged Chick-fil-A’s tight control over franchisees, alleging that they are employees rather than business owners.

Last year, a former franchisee in Delaware sued Chick-fil-A alleging wrongful termination of his restaurant agreement. He also sought unemployment compensation.

The case was settled after the former franchisee received $115,000 in net payments from Chick-fil-A and he “affirmed that … [he was] a franchisee and independent contractor” rather than an employee, according to Chick-fil-A’s franchise disclosure documents.

The company said it has withstood all claims that its franchisees are employees. Otherwise, in its dealings with operators, Chick-fil-A would have been subject to federal employment discrimination restrictions and other occupational rules that don’t apply to independent contractors.

“We work really, really hard to make sure it’s abundantly clear … that we meet all franchise laws,” said Tim Tassopoulos, Chick-fil-A’s senior vice president of operations. “It’s been the same for 40 years. It’s held consistent.”

And while there “have been some lawsuits” alleging discrimination, Tassopoulos said, the company doesn’t ask about operators’ faith or discriminate based on religion, race or other traits. Those lawsuits went through “normal legal resolution,” he said.

This much is clear. By the time new franchise operators walk into their stores for the first time, Chick-fil-A has spent a lot of time getting to know them. And odds are, the operators also enthusiastically embrace founder Truett Cathy’s blending of faith and finances.

When she was 21, Melissa Winkfield was working two jobs, as an assistant manager at a very large burger chain and as a cook at a Chick-fil-A. She ultimately chose to stick with Chick-fil-A because the other company was “all about the numbers,” she said. At Chick-fil-A, “the atmosphere was so different,” she said. The company’s philosophy is “to glorify God by being a good steward.”

Now 39, Winkfield operates a Chick-fil-A restaurant in East Point, one of the company’s highest-volume restaurants in metro Atlanta, with about $4 million in annual sales. She takes home well above the average operators’ income.

“We grew up in a low-income home. My parents are very proud of me,” said Winkfield. “It’s just been an awesome blessing.”

Bob Garrett, 47, likewise counts his blessings.

Before he joined Chick-fil-A, Garrett, of Lawrenceville, was a general manager at a family-owned truck-washing company. But after 18 years at that company, Garrett said he tired of the moves the job required. On the recommendation of a longtime friend working at Chick-fil-A, he decided to become a franchise operator.

A year and a half and 15 interviews later, Garrett took over an existing Chick-fil-A store in Lilburn. The chain later promoted him to open a new store in Hamilton Mill.

Then earlier this month, Garrett became one of roughly 100 operators who Chick-fil-A allows to operate two stores, opening a new store in Dacula.

At the Dacula shop on the eve before its opening, Garrett said he’s “humbled” to get a second store.

Outside in the restaurant’s parking lot, among about 70 tents, a crowd of people threw footballs and tossed flying discs, watched TV, listened to music and got ready to spend the night. The next day, the first 100 customers were to get a year’s worth of weekly meals from Chick-fil-A — now a tradition at new stores.

“This just completely changed my life,” Garrett said of joining Chick-fil-A’s operations. He hopes his two stores, with about 140 employees, will eventually tally $7 million in combined sales, and roughly double his income.

“I get to make more than I’ve ever made in my life, doing what I love to do,” he said.

Top-selling restaurant chains

Chick-fil-A tops the industry in terms of average sales per restaurant. And while industry giant McDonald’s has the second-highest sales per restaurant, the list is generally dominated by fast-growing regional brands or niche chains with a loyal following. Most national brands, such as Burger King, Wendy’s, KFC and Taco Bell (not shown) are slower-growing and generally have average per-unit sales in the $900,000 to $1.4 million range.

Source: QSR magazine

http://pacificmanagementconsultinggroup.com/articles/chickfila.pdf

Dining down, but hopes up

By Lori Weisberg, UNION-TRIBUNE STAFF WRITER Monday, March 8, 2010 at 8:31 p.m.

To no one’s surprise, traffic volumes at restaurants slumped in 2009, but industry watchers see faint signs of hope that business is picking up as consumers both nationally and in San Diego County start dining out more frequently.

NPD Group, a leading market research company, reported an overall 3 percent decline in restaurant visits in 2009 compared with a year earlier, though declines in the last three months of the year slowed following steep losses in the third quarter. All segments of the industry, from fast food to fine dining, saw fewer customers, but upscale restaurants suffered the steepest losses.

“In 2008, consumers appeared to trade down some full-service visits for fast-food visits. In 2009, they made fewer visits to restaurants overall,” said Bonnie Riggs, NPD’s restaurant industry analyst. “When consumers did visit restaurants, they favored lower-priced options.”

A combination of anemic traffic and only a modest growth in restaurant checks led to a decline in consumer spending at restaurants last year, the first such decrease since NPD began tracking the food-service industry in 1976.

Locally, restaurateurs acknowledge their industry was heavily affected by the prolonged economic downturn but say they are noticing a thawing in consumer spending. Some are even opening new restaurants.

“Last year was probably the worst we’ve felt it,” said Isabel Cruz, owner of five restaurants, three of them in San Diego. “Last year was when sales dropped for us somewhat at Cantina (in Pacific Beach), but this year it feels like it’s stabilizing. I can tell when I go out with my husband that it seems better.”

Cruz is confident enough that she’s opening yet another restaurant, Barrio Star, in the Bankers Hill neighborhood, where she plans to hew to the now-popular price cap of almost nothing over $20.

Although last year was notable for the number of higher-profile restaurants that closed, several restaurateurs are opting to open new dining spots this year, despite cutbacks in consumer spending and high unemployment.

“People still want to go out and socialize and have a good time and have a nice cocktail and feel like they got a good value. I’m talking about someplace that doesn’t feel like a bargain place,” Cruz said. “We really want to keep the price point under $20, and if you do that and it’s good food, it’s not worth cooking for me and my husband at home because it’s what I’d spend grocery shopping.”

NPD, in fact, found that lower food prices, while easing financial pressures for restaurant operators, also made the grocery store more appealing for consumers.

San Diego restaurant consultant John Gordon said that while local trends mirror what is occurring nationally, he sees evidence anecdotally of some modest improvements in the dining business.

“Restaurateurs are modestly encouraged with sales results in January and February 2010,” said Gordon of Pacific Management Consulting Group. “While the average ticket is down because of the need to discount, the traffic component has improved. Without question, there is a group of consumers, higher-income, who have less fear about the economy and are increasing their frequency of going out more, but this is all off a very low base in 2008.”

Tracy Borkum, owner of Kensington Grill and the newer Cucina Urbana in Bankers Hill, said she, too, believes business is picking up, though it may be some time before a return to normalcy. Borkum, who reinvented her former fine-dining restaurant Laurel into a casual, more affordable Italian eatery, has seen instant success, with a full house nearly every evening.

“I think there’s some optimism for the end of this year going into 2011, but I don’t think things will change in 2010 until the unemployment percentages improve,” Borkum said. “I do hear about all these different places that are opening, so obviously there’s some optimism, but people are still very cautious about price point and concept, and I think we exemplify what the community is looking for.”

A recent survey by the National Restaurant Association revealed some renewed confidence, but a return to economic health for the industry will be slow.

“Although the current situation indicators remained soft in January, the Expectations Index rose above 100 for the first time in nine months,” said Hudson Riehle, senior vice president of Research and Knowledge Group for the National Restaurant Association. “Restaurant operators are relatively optimistic about improving sales growth and economic conditions in the months ahead, and their capital spending plans rose to the highest level in five months.”