Quiznos Moves Toward Bankruptcy Filing

February 28, 2014

Sandwich chain Quiznos is preparing to file for bankruptcy-court protection within weeks as it contends with unhappy franchisees and a $570 million debt load, according to people with direct knowledge of the matter.

Quiznos has been negotiating with creditors for weeks on a restructuring plan that would streamline its trip through bankruptcy court, these people said, but a deal hasn’t yet been reached.

The chain’s move toward bankruptcy comes two years into a major turnaround effort that included an out-of-court debt restructuring and a management shake-up. While a Chapter 11 filing would give the company much-needed flexibility on leases and unattractive contracts, the company must repair its damaged relationship with franchise owners who say they’re being squeezed out of business by the high cost of operating a Quiznos outlet.

“If a brand wants to succeed, its franchisees have to succeed,” said Darren Tristano, executive vice president at restaurant consulting firm Technomic Inc.

Thousands of Quiznos locations have shut down in recent years as the company’s competitors have opened new locations at a rapid pace. Quiznos’s world-wide store count now stands at about 2,100, while its chief rival, Subway, has 41,000.

Founded in 1981, Quiznos was considered innovative at the time with its toasted subs. But its sales have suffered as Subway offered a $5 foot-long sandwich starting in 2008 and new competitors such as Potbelly Corp. PBPB -0.84% and Jimmy John’s Franchise LLC moved into the crowded sandwich market.

In its heyday in the mid-2000s, Quiznos stores, on average, rang up $425,000 in annual sales; since then, that figure has dropped to around $300,000 for the top-performing stores and to far less at the weakest stores, according to people familiar with the matter.

Quiznos franchisees say they’re struggling to stay in business. In addition to the fees the company charges them to use its name, store operators must also buy most of their supplies and ingredients from Quiznos’s distribution business.

Franchisees long have complained that the subsidiary charges more than what they would pay to purchase those goods elsewhere.

Mr. Tristano said the fees Quiznos collects from franchisees—7% in royalty fees and another 4% for advertising—is higher than the industry average of 6% in royalty fees and 2% for marketing.

Fabian Andino opened a Quiznos franchise in 2006 in Port St. Lucie, Fla. It wasn’t long before he realized that he was paying higher prices for items like tomatoes through Quiznos’s distribution business. To save money, he bought produce from local farms but said the company charged him weekly penalty fees for not placing minimum food orders.

A person close to the company said it didn’t assess such penalty fees, but that franchisees who wanted to receive rebates for food costs were required to place minimum orders.

When Quiznos decided to offer delivery service in 2008, he recalled, franchisees were told to pay $10,000 to the company in return for signs and decals for their delivery cars and in-store inserts.

“They marketed it as though it would be the magic wand that would save the operation, but I knew it was another ploy Quiznos was using to raise more funds for them,” Mr. Andino said. “I refused.”

Mr. Andino said the company withdrew the payment request and supplied him with the materials free of charge. He said he couldn’t make his Quiznos business work and closed his store in late 2009.

“Quiznos did not have the proper name recognition or great marketing,” said John Medici, a 71-year-old retired warehouse manager in Longwood, Fla., and onetime Quiznos customer. “You have to give people the impression that your food is better than the food down the street.”

Steven Raposo said he spent a total of $350,000 to open a Quiznos franchise in Norton, Mass., in 2005. He said he and his family soon realized they wouldn’t be able to bring in enough money to cover expenses and put the franchise up for sale. They sold the business less than a year later for about half the price.

Mr. Raposo said his annual sales would have been about $600,000, but he was still facing monthly losses of between $3,000 and $5,000.

“It sounds like we were doing a lot [of business] but there was actually no profit because of food costs and labor,” said Mr. Raposo, a practicing chiropractor.

To address franchisees’ concerns, Quiznos management cut food and supply prices last summer, a person close to the company said in December. The company has also tried to improve store operations in the U.S. by making sure restaurants were clean, adding new menu items and removing slow-selling ones.

But so far, Quiznos’s turnaround efforts haven’t met expectations and the company has missed key performance targets, according to people familiar with the matter. The company also has a high debt load for its size, in part the legacy of a 2006 leveraged buyout.

Quiznos missed a loan payment at the end of 2013 and has been operating under a forbearance agreement with its lenders, which delays a potential default, as it negotiates with creditors including Fortress Investment Group FIG +1.87% LLC, Oaktree Capital Management and Avenue Capital Group, which is also its majority owner.


QSR Value Promotions go Beyond Price in 2014

January 27, 2014

picRestaurant chains such as Burger King, Pizza Hut and Taco Bell add to their value strategies in the new year.

 Burger King’s January offer

Value is often top of mind in early January among restaurant customers who have resolved to save or better manage their money in the new year, but restaurant brands looking to capitalize on this show that enticing value strategies are about more than just low prices.

While some chains have moved up their well-known value promotions opportunistically into January — notably Subway, which is running its $5 foot-long campaign as “Janu-ANY” — others have introduced new value plays that de-emphasize prices in favor of new-product news or brand highlights like anniversaries.

“Today’s consumer mind-set around value really has shifted, or drifted, further away from price point,” said Darren Tristano, executive vice president of Technomic Inc., a Chicago-based market research firm. “Prices have been set [in consumers’ minds] by Subway’s $5 foot-long or some very meaningful milestones like $5 and $8 at Little Caesars for the Hot-N-Ready.”

As such, operators ought to consider looking beyond price points to signify value, Tristano said, whether it is the service experience, customization, culinary credibility, ingredient variety, or special preparations like slow-cooked barbecue or rotisserie chicken.

“There are so many ways you can maximize value, but it always comes down to differentiation,” he said. “What can you do differently from competitors or from consumers trying to cook this stuff at home?”

In the quick-service segment, where much of the marketing emphasis consistently has been on value for the past several years, the largest chains are approaching their messaging through the lens of new-product news.

Miami-based Burger King rebranded its value menu as King Deals, a tiered value menu starting with items for $1, including current limited-time offers the Rodeo Burger and the Rodeo Crispy Chicken Sandwich. The menu has 20 items at those lower price points at Burger King’s domestic locations, which comprise about 7,400 restaurants in the United States and Canada.

Wendy’s has added two sandwiches to their Right Price Right Size value menu

Also, from Jan. 6-29, Burger King will offer a free small coffee to any customer who purchases a breakfast sandwich.

Wendy’s, the Dublin, Ohio-based chain of about 6,500 units, also added spicy sandwiches to its Right Price Right Size value menu, which it debuted last year just after New Year’s Day. The Spicy Chipotle Crispy Chicken and Spicy Chipotle Jr. Cheeseburger sandwiches are priced at a suggested 99 cents.

Irvine, Calif.-based Taco Bell, also a Yum! Brands Inc. subsidiary, rolled out two value promotions before the new year, including the Grilled Stuft Nacho and the BCS Taco 12-Pack, both of which debuted Dec. 19.

The nearly 6,000-unit brand called out the $1.29 price point for the Grilled Stuft Nacho in the commercial that began running in December, but convenience and portability have been the main emphasis in the ad and its complementary social-media campaign. Taco Bell is managing a social campaign under the “#DoingStuff” hash tag, where people take photos or videos of themselves doing anything while eating a Grilled Stuft Nacho.

The BCS Taco 12-Pack carries a $12.99 price point and lets consumers choose 12 tacos from among the brand’s crunchy-taco flavors.

The price war continues for major pizza chains, but both Pizza Hut and Papa John’s Pizza have added a different angle to their start-of-year marketing campaigns. Both are tying a limited-time, low-price offer to a brand anniversary, allowing them to easily end the promotion without setting an expectation for a repeat performance every year.

“Cheaper isn’t always better,” Tristano said, “and for restaurant operators, it’s not a viable long-term and sustainable strategy.”

Plano, Texas-based Pizza Hut, a division of Louisville, Ky.-based Yum! Brands Inc., is offering 50 percent off medium and large pizzas ordered online at menu price for its Hut Lovers loyalty club members. New members of Hut Lovers may sign up and immediately redeem the offer, which will run through Jan. 10.

The impetus for the promotion is the anniversary of the first Pizza Hut order taken over the Internet, in Santa Cruz, Calif., in 1994. The chain of 14,000 restaurants worldwide has resurrected its original online-ordering hub from that year, PizzaNet, which the brand said produced the first thing ever purchased from the Internet.

“We want to celebrate the fact that before consumers could buy books, clothes, music or vacation packages via the Internet, they could place an online order for a Pizza Hut pizza,” Carrie Walsh, chief marketing officer for Pizza Hut’s U.S. division, said in a statement.

Pizza Hut’s commercial promotes the deal by harkening back to 1994 with one of the most popular songs of that year, “The Sign” by Ace of Base.

Louisville-based Papa John’s is taking customers back a decade further with its deal to celebrate its 30th anniversary. Through Jan. 26, consumers can add a large one-topping pizza for 30 cents, with the purchase of a large pizza at regular menu price. Papa John’s has 4,300 restaurants worldwide.

Fast-casual chains and value

Technomic’s Tristano noted that fast-casual concepts by and large do not run aggressive promotions in January or throughout the rest of the year, but those chains nonetheless could bolster their value perceptions through product news like other limited-service brands have done.

“You could conclude that brands like Jimmy John’s or Firehouse Subs don’t compete with Subway — their quality is a step above and their prices are $3 above — but the reality is consumers use both,” he said. “Consumers go higher in price one day, then look for low prices the next day to balance it out.”

Reconsidering ways to provide more value could be the way fast-casual brands make better inroads at the dinner daypart or with certain demographic groups, like women or Hispanics, Tristano added.

Women tend to look for smaller portions, which fast-casual brands could offer, even at a slightly higher price point, he said, while Hispanic customers tend to focus on family occasions when dining out. Both look for bolder, spicier flavors, he said.

“You have opportunities for more social occasions by offering a family-oriented package … or options for sampling and sharing,” Tristano said. “You don’t see as many parties of three or more in fast casual, and that might be the way for [those restaurants] to continue their momentum.”


Hearty Appetite for Fast Casual

November 7, 2013

The Potbelly restaurant on State Street still hummed with customers, long after a recent lunch hour had ended.

Tyler Andersen, a 20-year-old accounting student at nearby Harold Washington College, paid $10 for chips, a drink and a Wreckingball, a fusion of the restaurant’s popular Wreck sandwich — made with roast beef, turkey, ham and salami — and a meatball sandwich. He said he prefers dining at Potbelly over other sandwich shops like Subway and McDonald’s.

“I’d rather spend one-fifty or two dollars more because I like the product better,” Andersen said. As for fast food, “I can’t justify paying six or seven bucks. I’d rather spend 10 bucks here than four bucks at McDonald’s.”

Whether investors will retain their appetite for Chicago-based Potbelly remains to be seen.

Shares more than doubled in value in their debut Oct. 4, rising from $14 apiece to close at $30.77. Not bad for a company that started out in 1977 as an antique shop on Lincoln Avenue and began offering sandwiches to increase sales. It now counts 280 company-owned shops in the United States.

But shares have slipped since then; they closed Monday at $26.21, down nearly 6 percent, or $1.60 a share. Analysts point to a report over the weekend by Barron’s that questioned the shares’ lofty valuation.

Potbelly competes in the fast-growing restaurant segment known as fast casual, where made-to-order offerings like a Subway sandwich, Panera salad or Chipotle burrito are drawing busy, money-strapped consumers from more expensive casual dining restaurants like Chili’s and Olive Garden as well as less expensive restaurants like McDonald’s and Burger King.

“The millennial generation really likes fast-casual restaurants and are willing to spend a few more dollars,” said Darren Tristano, executive vice president at food industry research and consulting firm Technomic. “They are not as frugal as Gen X or boomers.”

Tristano said the fast-casual sector represents $35 billion in annual sales and has quickly grown, even through the recession. Tristano expects a 10 percent annual growth rate for the sector to continue for at least the next five years. The typical Potbelly check averages between $8.50 and $12, compared with $3 to $8.50 at a fast-food restaurant, according to company documents.

Company officials declined to comment.

Analysts had been comparing demand for Potbelly’s initial public offering to that of Colorado-based Noodles & Co., also in the fast-casual sector. Shares of Noodles & Co., the first U.S. restaurant IPO this year, also more than doubled in value in their trading debut in June. The stock was priced at $18 and closed Monday at $48.30. Noodles serves globally inspired noodle dishes ordered at the cash register.

Francis Gaskins, director of research at Santa Monica, Calif.-based Equities.com and founder of IPOdesktop.com, said he expects Potbelly to use the net proceeds from its offering to grow into a national brand. Potbelly operates in 18 states and the District of Columbia.

“I personally think it’s got to grow into its valuation,” Gaskins said. “If they can’t open profitable stores on a consistent basis, that’ll be a problem for the stock.”

Gaskins said the challenge for Potbelly will be to distinguish itself from the myriad sandwich chains with which it will compete as it expands.

R.J. Hottovy, senior restaurant analyst for Morningstar, notes that Potbelly is in a market saturated with sandwich competition “and that is something investors have to be mindful of.” Aside from well-known brands Subway and Quizno’s, there’s Jimmy John’s, Jersey Mike’s, Schlotzky’s, Jason’s Deli, Firehouse Subs and smaller chains.

This year Potbelly plans to open 32 to 35 shops, the company said in a regulatory filing. That compares with 31 stores in 2012 and 21 in 2011.

Revenue in 2012 rose 15 percent to $274.9 million, up from $238 million in 2011. Aided by a tax benefit of $16.9 million in 2012, net income was $24 million. That compares with earnings of $7.2 million in 2011.

Potbelly prides itself on its ambience. A potbelly stove usually is prominently displayed, and live music is provided at most stores during lunch. Its rustic decor is reminiscent of its roots as an antique shop.

Customers in the Potbelly on State Street listed ambience as a factor that draws them back.

“It’s open, and they play music, and it’s really relaxed and has cool stuff on the wall,” said Karen Chavez, a vegetarian who usually stops at Potbelly’s once a week. She says she picks up a Potbelly meatless sub and a canned drink for $5. Cookies and shakes also are a draw, she said.

“I feel like the ingredients are better and the options are better,” she added.


Ciro’s Chris Dorman: A Story Behind Every Cocktail

October 15, 2013

rpdormancirosimg4938 304Tasty food is always a draw, but some of today’s restaurant-goers are looking for a taste of eras gone by.

Storytelling is increasingly important to the restaurant experience, said Darren Tristano, a restaurant analyst with Technomic Inc.

Chris Dorman, beverage director for SoHo Hospitality Management, described how history influences cocktails at Ciro’s Speakeasy and Supper Club, the Prohibition-themed lounge in South Tampa.

Dorman joined SoHo about two months ago after relocating from New York City, where he was involved in several restaurant and nightlife concepts with historic themes.

Tampa Bay Business Journal: What attracted you to Tampa Bay?

Dorman: Tampa had an interesting cocktail culture that was growing already. Tampa is one of those places where they’re into the culture. People understand what they’re doing and are trying to push it forward. Down here, a few [places] I see doing that consistently are Sidebern’s, Fly Bar & Restaurant and Anise Global Gastrobar.

TBBJ: What are some of the new ideas you’re rolling out?

Dorman: We’re going to get more seasonal than we’ve been in the past, where every six or seven months you’ll find new cocktails on the menu based on what’s in season. One new cocktail is called the “Flapper’s Delight.” It’s a gin-based cocktail [that] comes in a classic cocktail champagne flute … We have another cocktail called the “Special Delivery.” During the Prohibition, people’s liquor bottles were painted white to look like milk. At 9 a.m., you were having milk delivered. It goes back to having a story behind the cocktail.


Starbucks Sets its Sights on Panera

October 9, 2013

StarbucksLogowithspaceatbottom 304The success of fast-casual chains such as Panera Bread Co. and Chipotle Mexican Grill is causing competitors ranging from Starbucks to KFC and Taco Bell to look for ways to copycat their results.

With its latest menu additions, Starbucks has been moving deeper into Panera’s territory, Investor’s Business Daily reports.

Starbucks added new bakery products to its offerings following its acquisition of the La Boulange Cafe & Bakery fast-casual chain, and now the company is rolling out salad bowls and sandwiches at its coffee shops.

“They definitely intend to be more competitive with Panera,” Darren Tristano, executive vice president of foodservice research firm Technomic, told IBD.

Panera Bread Co. reported fiscal second-quarter net income of $51 million, up 15.6 percent from last year’s quarter. The company’s total revenue for the fiscal second quarter ended June 25 rose to $589 million, up 11 percent from the second quarter of fiscal 2012.


Family Restaurants a Casualty to Casual

October 8, 2013

Gene_Kasapis_Sr_and_Gene_Jr.jpg&MaxW=620&v=201310071326When Gene Kasapis Sr. opened the first Ram’s Horn restaurant in 1967 in Greektown, family dining was one of the largest segments of the restaurant industry.

Since reaching an apex six years ago, sales at Southfield-based Kasapis Bros. Inc. have been declining, falling from $44.8 million in 2007 to $35.6 million in 2011.

But Kasapis Sr. and his son Gene Kasapis Jr. are hoping a modern restaurant design and an updated menu will become prototypes for change as the once-thriving restaurant chain looks to regain its popularity.

Like many family restaurants, Ram’s Horn has battled increased competition from fast-casual chains, burger joints and sandwich shops — even family-friendly taverns.

The elder Kasapis said sales are slowly getting better, but he also attributed local economic conditions as an added challenge.

“Are we picking up? Yeah. But are we anywhere near we were in 2007? No,” Kasapis said. “Every recession, we come back stronger than before. In our 50-year history, this is the longest recession.”

Kasapis said he has a simple solution for the declining sales: “More people need to get back to work.”

There are 19 Ram’s Horn restaurants, seven of which are corporately owned.

While Kasapis Sr. said he has no plans to begin selling alcohol at any of his Ram’s Horn locations, the chain is fighting back with new menu items and a new décor for its locations in Livonia and Dearborn.

The new layout features open ceilings, new carpet, new lighting and flat-screen TVs.

Kasapis said the new design costs between $300,000 and $550,000 per location, adding that the company will retrofit existing restaurants with the new décor as needed but is in no hurry to do so.

“We are trying to make our restaurants more appealing to younger people,” Kasapis Jr. said. “We have to change with the times.”

Conversely, Joe Vicari, president and CEO of Warren-based Joe Vicari Restaurant Group, which includes four Country Inn restaurants, said he saw a 10 percent spike in sales during the height of the recession at his Country Inn restaurants, but it was short-lived.

“That has since settled,” Vicari said. “Sales from this year over last year have been flat.”

Vicari said average weekly sales at the family restaurants range from $30,000 to $35,000, about the same as when he opened his first Country Inn in 1987.

“When you take into consideration increased operating costs, we should be doing $40,000 or more in sales per week,” he said.

Vicari was once a Ram’s Horn franchisee and owned two restaurants, but said he ended his relationship with the brand in 1997.

“It was good to get involved with Ram’s Horn when they were at their peak,” he said. “I learned a lot about the restaurant business from them, but as I got older and wiser, I wanted to go out on my own.”

Darren Tristano, executive vice president of Chicago-based food industry research firm Technomic Inc., says there is more to deflated family restaurant sales than a stubborn economy.

In fact, Tristano said, sales are declining across the board in the family-style restaurant segment of the industry.

The main culprit, he said, is the emergence of fast-casual restaurants and changing consumer tastes.

“Family dining has been flat for a decade,” Tristano said. “Casual dining, and fast casual dining, hit a growth spurt in 2005 and that momentum has continued.”

Tristano said the fast-casual segment will generate about $35 billion this year while family-style dining will generate about $40 billion.

But Tristano said those numbers can be deceiving.

“Fast casual has been a small segment that is quickly growing, while family-style dining has, on a nominal basis, been flat,” Tristano said. “In fact, when adjusted for inflation, family dining has been down.”

Tristano said family dining peaked in the 1990s, before fast-casual restaurants like St. Louis-based Panera Bread Co. and Denver-based Chipotle Mexican Grill Inc. entered the marketplace, which proved more attractive to younger diners.

“What family dining is facing is, you have older generations continuing to age and younger ones that feel too young to go to them,” Tristano said. “There has to be a shift in the category to get relevant to younger consumers. So far, that has not happened.”

Jason Nies, owner of The Hills City Grille, grew up around the Ram’s Horn brand; his father was a franchisee.

Nies said he saw the decline in family dining and decided to stay away from the segment when he began planning the first Hills City Grille, in Rochester Hills.

“I saw that trend going down 10 years ago,” Nies said. “The clientele was getting older and moving on, so I felt like it was a segment that was on the decline versus one on the rise.”

Nies opened the first Hills City Grille in 2007 as more of a tavern than a family restaurant.

But when he opened a second location, in a former Ram’s Horn in Troy, he did so with family diners in mind.

Troy’s Hills City Grille is a hybrid; it serves breakfast, lunch and dinner but each part of the day is geared toward a different segment of the population.

Nies said breakfast attracts older guests, while lunch fills up with stay-at-home moms and business professionals.

Nies said the strongest part of the day is dinner, when young parents with children make up more than 60 percent of his customer base.

After 10 p.m., Hills City Grille turns into a bar complete with live music and craft drink specials.

“Where are families going? They are going to the taverns and places with similar atmospheres. Places that serve beer and wine with dinner,” Nies said.

Nies said he expects sales at the restaurant to reach $1.5 million this year.

“It’s pretty unique to be able to hit all of the dayparts effectively and have a venue that permits that,” he said.


Così CEO Carin Stutz resigns

June 28, 2013

carin-stutzmainCompany names executive chair Stephen Edwards president, CEO

Carin Stutz has resigned as chief executive of Così 18 months after taking the top post at the long-struggling brand.

The Deerfield, Ill.-based company’s board of directors has named executive chair Stephen Edwards president and chief executive.

“On behalf of the board,” Edwards said in a statement, “I would like to thank Carin for her service to Così. We wish Carin well in her future endeavors.”

Edwards and the board indicated that the 124-unit fast-casual chain’s first priorities under the new management structure would be to shrink its cost structures by focusing on unit-level profitability and exiting unprofitable locations, preferably through refranchising.

Accelerating franchise growth had been a key goal for the company when it raised $12.8 million last year in a secondary-rights offering to shareholders, which it completed on July 9, 2012.

“Our franchise partners have proven that they can operate successful restaurants under our brand,” Edwards said. “Our focus will be to give these partners and other entrepreneurs like them the tools they need to grow the Così system. … Così is a great brand. Our mission is to create a business model that builds on the strength of our brand while generating profits for our shareholders. And to do so quickly.”

The company’s first-quarter earnings, which it reported last month, reflected franchisees’ outperformance in Così’s uneven operating results. For the April 1-ended quarter, franchisees’ same-store sales decreased only 1.3 percent, compared with a 6.6-percent drop in company-owned restaurants, leading to an overall 4.5-percent decrease for the chain’s entire system.

Così Inc.’s first-quarter net loss widened to $2.74 million, or negative 15 cents per share, compared with $1.13 million, or negative 9 cents per share, a year earlier.

In that filing, the company reported pockets of success, including several franchised locations and an aggregate same-store sales increase in the New York City market, where reimaging efforts and a program designed to improve unit-level operations had started to return positive results. The company’s home market of Chicago also had been completely remodeled, and one downtown location served as a “pop-up” unit last winter, where an extensive new menu was tested.

Darren Tristano, executive vice president of Chicago-based Technomic Inc., acknowledged that Così had fallen behind competitors in the bakery-café segment, but still characterized Stutz’s resignation as a “sudden decision.”

“I had just spoken to Carin during the NRA Show and she was excited about the direction Così was going,” Tristano said. “So her decision is evidence that this is a very competitive segment of the industry, not just in bakery-café or sandwich, but, in general, breakfast. Even with a good product and good locations, it’s been difficult to build profitability.”

With more transition in leadership, Così’s path back to profitability and growth will probably be a little longer, he added. The sustained focus on refranchising could bring much-needed capital to Così Inc. and allow it to focus on building the brand rather than running restaurants, Tristano said.

“This decision can help narrow down what Così focuses on,” he said. “I don’t think it has to do with the menu, because they have a good product and their pricing is competitive and the décor is appropriate.

“They still have to tweak the service format and better understand what dayparts they want to own,” he continued. “I think it very likely comes down to service when competing with Panera Bread and Corner Bakery.”

In addition to Stutz’s resignation, Così layed off some administrative staff, which the company said would result in annual savings of approximately $1 million.

Così operates 74 company-owned locations and franchises another 50 restaurants in 16 states, the District of Columbia and the United Arab Emirates.


Burger Chain Hopes for Fuller Plate: Umami Looks to Feed Growth with Equity Investment

May 31, 2013

Umami Burger started small. Its first restaurant was a cramped joint that didn’t have enough tables, enough parking or even a license to serve beer.

But now the chain wants to go big. It’s closed that first shop, a hole-in-the-wall location on La Brea Avenue south of Wilshire Boulevard, and just got a big chunk of money to continue its expansion, eventually going international.

Adam Fleischman, founder and chief executive of Umami Restaurant Group, told the Business Journal last week that his company accepted $20 million from Fortress Investment Group in exchange for a minority share of the business.

Saul Cooperstein, chief strategy officer for Umami, said the money will be used to fund nationwide expansion for the chain in major urban markets such as Las Vegas; New York; Washington, D.C.; Chicago; and Philadelphia.

“The Fortress investment will really allow us to focus on expansion operations instead of capital for the next few years,” he said. “We look at being able to build consistently at least 10 to 15 restaurants a year, each year, into the future.”

The 13-unit burger chain expects to almost double its footprint in 2013, starting with six restaurants currently in development in Burbank, Irvine, Oakland, Palo Alto, Miami and New York. Los Angeles International Airport will open a seventh restaurant for the chain this year at its upgraded Tom Bradley terminal. The company will also expand its fast-casual concept, U-Mini, which debuted in Westwood last fall.

Earlier this month, Umami closed its original location on La Brea when its four-year lease expired, sacrificing any sense of nostalgia for its origins in favor of opening restaurants in larger, more prominent locations.

Fleischman said the 985-square-foot restaurant, which had space to seat only 60 people and lacked a liquor license, no longer fit the company’s vision for its restaurants. He hopes diners who used to eat at the original location will go to the chain’s flagship that opened at the Grove in the Fairfax district late last summer and can seat 185.

“I’m not really tied to any particular location,” he said. “The potential is so much more exciting, the fact that maybe one day we can open in Japan and in Paris and in London.”

Second investment

The Fortress investment was the second for Umami since it was founded in 2009. In 2011, L.A. hospitality group SBE Entertainment Group LLC and investment firm Nimes Capital together invested eight figures in the restaurant group. The money, which came from companies headed by brothers Sam and David Nazarian, paid for the chain’s California expansion.

Cooperstein, who worked for eight years managing business development, strategy and acquisitions for SBE before joining Umami in late 2012, initiated the deal with Fortress last fall. He had worked with Fortress on the company’s past investments in SBE.

“Fortress is one of the relationships I built while I was at SBE,” he said. “They’re truly opportunistic lenders and they have a lot of expertise in the restaurant industry.”

Fortress, which is based in New York but has an office in Century City, employs 979 people and manages assets worth more than $50 billion, mostly in real estate holdings. The investment company helped SBE finance the acquisition of West Hollywood’s Abbey Food & Bar in 2006.

Fleischman said Fortress’ investment in Umami came just as the restaurant company was getting low on expansion funds.

“During the fourth quarter last year we saw that we were using our money quicker and that we were going to run out of money at some point around the first of the year,” he said.

Umami executives declined to disclose the percentage of the company Fortress acquired. Fleischman remains majority shareholder.

The company also declined to disclose revenue, but Fleischman said the chain’s top performing restaurant sees annual sales of about $4 million.

The restaurant company employs 635 people but expects to hire about 400 more as restaurants open before the end of the year. An executive team of 35 works out of the company’s 6,000-square-foot headquarters in the Fairfax district alongside SBE.

Cooperstein said that the way the deal was inked, Fortress won’t have a say in the details of Umami’s expansion plans.

“They have confidence in management to execute on the business plan,” he said.

Under the most ambitious scenario, Fleischman said the company could open 100 to 150 restaurants across the country in the next five years. Then, once the chain has established itself on the East Coast, it would look to expand internationally.

But while Umami’s growth plans are expansive, they’re not as aggressive as other chains that compete in the “better burger” restaurant category. Denver chain Smashburger, which was founded in 2007 and sells burgers for between $4 and $7, has more than 100 restaurants open in the United States, including one that opened last fall in Culver City. Similarly priced burger chain Five Guys in Lorton, Va., has opened more than 1,000 restaurants since 2006. Umami, known for its malt liquor tempura onion rings and signature burgers made from meats ground on site, charges between $10 and $14 for its burgers. Its Ahi burger is $15.

Competition

Darren Tristano, executive vice president at Chicago market research firm Technomic Inc., said it’s not likely Umami will ever grow as fast as its lower-price competitors.

“Umami has a unique flavor profile and they have put a lot of culinary innovation behind the branding,” he said. “But because of their narrow focus – toward affluent, upper-income consumers who consider themselves foodies–you’re not going to see them expand like a Five Guys. Umami will have fewer broad opportunities to grow within each market.”

Jerry Prendergast, a restaurant consultant in Culver City, said the chain will need the Fortress investment to grow as quickly as it plans to do without franchising, especially when it comes to landing prime real estate.

“Truthfully, it’s tough to find good locations, even in this market,” he said. “Umami doesn’t go into second-rate locations, but they’re well-funded so they can take the time to do it right.”

The partnership with SBE goes a long way to help the chain get the locations it wants, he added.

“SBE already had the machine set up,” he said. “There was already a well-established, well-funded, experienced team of people to help with development who had their tentacles in with real estate brokers all over the country.”

The company will focus its expansion efforts in New York and Miami this year and expand into other urban markets in 2014.

Fleischman said his hometown, Washington, is high on the list.

“D.C. is still prospective, so we don’t know exactly where we want to be, but I’m pretty familiar with the areas there that would work for us,” he said. “I think it’s a great city for restaurants.”


Pointed Complaints at Quiznos

May 30, 2013

More Franchisees Take Aim at the Denver-Based Sandwich Chain, Claiming Corporate Greed is Shortchanging – and Closing – Stores

Quiznos’ long-standing friction with disgruntled franchisees has surfaced again in a new round of lawsuits.*Since December, 10 suits have been filed in Denver District Court, alleging that the Denver- based sandwich chain has treated its restaurant owners unfairly.*The claims are similar to those in a long history of related legal actions — that the company has taken actions to increase corporate profits at the expense of franchisees who are struggling to break even.*Analysts say the new legal disputes signify more problems for a chain already beset by declining sales, store closures and stiff competition in the sub-sandwich sector.*The latest lawsuits come three years after Quiznos agreed to a $95 million settlement with 6,900 class-action franchisees who said the company overcharged them for supplies and failed to provide adequate marketing support.

In the new round of lawsuits, store owners claim Quiznos continues to overcharge by forcing them to buy food at marked-up prices from a Quiznos-affiliated supplier.

“The hidden mark-ups, which are the keystone of Quiznos’ scheme, have generated massive profits for Quiznos while simultaneously driving its franchisees to financial ruin,” one of the lawsuits says. Most of the suits contain similar or identical language.

The lawsuits allege that Quiznos management increased the use of coupons for free and discounted food — costs that are absorbed by restaurant owners — in order to make the franchisees buy more food at marked-up prices from Quiznos’ supply affiliate.

Denver attorney Jeffrey Cohen, representing the franchisees, said he would offer no additional comment.

Quiznos issued a brief statement and said it would not comment further.

The statement reads: “We believe that these lawsuits are completely without merit. Quiznos management team will not allow these lawsuits to distract us from our mission. We remain committed to delivering a premium product and experience to our guests, and helping our franchise owners grow their sales and profits.”

Named as defendants in the suits are a number of Quiznos corporate entities, including its franchising arm; the supply affiliate; the company’s majority owner, investment fund Avenue Capital Group; and former owners Richard E. and Richard F. Schaden.

Franchisee John Portrera of Petoskey, Mich., a longtime critic of Quiznos’ management, said he shut down his restaurant Dec. 31 after 4 1/2 years because of mounting losses and resulting personal turmoil, including a divorce.

“What they’re doing is criminal,” he said. “I lost my savings. I lost my wife. I cashed in my life insurance policy. I lost everything, but now I’m so happy just to be out of it.”

Portrera said that even though his restaurant was rated highly by Quiznos in categories such as customer satisfaction and cleanliness, he lost about $400,000, including his initial investment and operating losses.

Disputes between franchise companies and their franchisees are relatively common, but few have the persistence and animosity as Quiznos’.

For example, Burger King restaurant owners sued the parent company in 2009, arguing that they were losing money by being forced to sell some menu items for $1. The suit was settled 17 months later, with both sides saying they would collaborate on future pricing decisions.

Analysts say Quiznos’ friction with franchisees has created a debilitating spiral of store closures and declining revenue.

“The sales decline and the heavy couponing have really made it tough for franchisees to make a profit,” said Jonathan Maze, an analyst and writer for Franchise Times magazine. “Quiznos charges a lot of money (to franchisees) for its food.”

University of Denver finance professor Mac Clouse said some restaurant chains with franchise supply agreements use their buying power to acquire food at low prices, and then pass the savings on to franchisees.

Yet the lawsuits claim that Quiznos has taken the opposite approach — using economies of scale to negotiate low prices for bulk-food purchases, then reselling the food at higher prices to restaurant owners.

Quiznos is privately owned and is not required to report financial results to the Securities and Exchange Commission. However, some of its performance metrics can be found in franchise disclosure documents that the company is required to file in some states.

The documents show that Quiznos collected much more money from selling food and supplies to franchisees than it took in from royalties based on sandwich sales.

The supply company, American Food Distributors LLC, which Quiznos describes as an “affiliate,” had 2011 revenue of $225.3 million. Quiznos’ franchise operation, QFA Royalties, collected 2011 royalties and fees of $73 million from franchisees.

The disclosure documents show that the chain’s number of stores fell from 4,381 in 2009 to 2,834 in 2011, a decline of 35 percent over two years. At the peak in 2006, there were more than 5,000 outlets.

Total revenue for QFA Royalties has plunged 41 percent in two years, from $123 million in 2009 to $73 million in 2011. Net income declined by a similar margin in that period, from $47.7 million to $28.4 million.

“Quiznos has struggled, primarily because they’re in an intensely competitive market,” said Darren Tristano, executive vice president of food-service analysis firm Technomic.

“It’s always been a difficult relationship between the parent company and the franchisees,” he said. “It seemed as though they had gotten past that (with past settlements), but now they’re battling again.”


Trendier Fare Takes Bite Out of Casual Dining

May 24, 2013

os-os-olive-garden-changes018.jpg-20130302Casual dining is in the throes of a midlife crisis.

A quarter-century ago, consumers feasted on fried appetizers, unlimited breadsticks and big desserts at Applebee’s, Olive Garden and Chili’s. Today, many Americans are trading those restaurants in for cheaper, faster fare or splurging a bit for a trendier experience.

Midpriced, sit-down restaurants – known as casual dining in the industry – have seen on average about 2 percent fewer customer visits each year since 2008. That translates into a total drop of almost 600 million annual visits, to 6.4 billion in 2012.

“They’ve been around quite a while and … many of them have not stayed as relevant in meeting consumers’ wants and needs of today,” said Bonnie Riggs, a restaurant analyst with research company NPD Group.

The world’s largest casual-dining company, Orlando, Fla.-based Darden Restaurants, has been hit especially hard. Company executives cut sales and earnings expectations last month, acknowledging to analysts their major brands such as Olive Garden and Red Lobster have suffered because they’ve been too slow responding to major shifts in how Americans eat out.

“It is clear to us that given our current business situation, we are indeed in a new era,” Chief Executive Officer Clarence Otis told analysts.

Other companies have experienced similar turbulence. Earlier this month, Applebee’s and IHOP owner DineEquity reported declining traffic at both brands for its fourth quarter, while Chili’s parent Brinker International toned down its profit forecast.

“We know casual dining is not the bright, shining star that it used to be,” Brinker Chief Executive Officer Wyman Roberts told analysts.

Tony Roma’s has dwindled from 157 U.S. restaurants to 40 during the past decade – though the company says it’s still opening new eateries.

The industry is trying to reinvent itself with lower-priced meals that are quicker and more healthful. Darden, for example, said last week it plans to speed up Olive Garden’s lunch service, jump on culinary trends more quickly, attract younger diners with more technology and lure back lower-income customers with good deals.

The economy has played a major role in slowing sales. American budgets are taking one hit after another – most recently from increased payroll taxes and rising gas prices.

Americans cut their dining-out budgets dramatically during the economic downturn, from which many in the middle class haven’t fully recovered.

“Many consumers have had to adjust to having less … and spending less,” said a recent report from NPD Group, noting that nearly 75 percent now consider their spending cautious. So when they eat out, they are often finding cheaper alternatives.

“It’s a lot of money” to dine out at Red Lobster or Romano’s Macaroni Grill, said Jhonatan Arias, 26, of Altamonte Springs, Fla. “If you have the money to sit down and splurge, then we go to a place like that.”

Arias and his girlfriend usually eat dinner at home, and he often grabs fast food for lunch. He recently took a noontime break at Tijuana Flats, one of the “fast-casual” chains that have gobbled up customers at a steady pace.

Visits to those restaurants, which include brands such as Chipotle, rose by 8 percent last year compared with 2011, according to NPD Group.

Fast-casual restaurants sell fare that’s a step up from fast food. But customers still order and pay at the counter, making meals quicker and cheaper than at sit-downs.

“It’s quick. It’s easy. It’s less expensive,” said Fraley Sadlo of College Park, Fla., who frequents Tijuana Flats and Einstein Bros. Bagels with her two young sons.

Applebee’s is borrowing a page from the competition’s playbook, testing a lunchtime express service in its hometown of Kansas City, Mo. Customers can order and pay at kiosks, so they don’t have to wait for servers to bring checks when they’re done.

If that test is successful, analyst Mark Kalinowski of Janney Capital Markets expects Darden and other companies to mimic it. Darden wouldn’t say whether it is considering the idea, although company leaders say Olive Garden is trying to “streamline” takeout.

The more-established chains are getting squeezed by lower-end competitors, but newer, “polished casual” restaurants also are posing a threat. They are a tad more expensive but have more sophisticated food, decor and drinks.

Places such as the Cheesecake Factory appeal to younger, more affluent diners who “want something new, contemporary, more social and more exciting,” said Darren Tristano, executive vice president of research company Technomic.

In recent years, Darden has begun looking to a stable of these newer brands to fuel growth. Its Specialty Restaurant Group includes newly acquired Yard House, an upscale bar and grill, and Seasons 52, launched in 2003.

The older chains will find themselves at a fork in the road, Tristano said, where they’ll have to either morph into something more upscale or become quicker and cheaper.

Those who stay with the traditional model risk losing customers such as Sadlo, the mother who visits fast-casual places with her kids.

For date night with her husband, she moves up to more-expensive, often independent restaurants.

“We don’t do the sit-down chains,” she said. “They’re middle-of-the-road.”


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