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Chain LeaderEditorial Archives2004 — April — Cover Story
Northern Exposure
Huddle House, a chain of Southern roadside diners, is rolling into new territory.
Philip Greifeld, CEO, Huddle House
CEO Philip M. Greifeld, in a Locust Grove, Ga., Huddle House, is aggressively expanding the chain outside the Deep South.

Huddle House CEO Philip M. Greifeld is boasting about the Big House Breakfast—a mountain of carbs and cholesterol—when he suddenly remembers his own no-tie order. “Can’t go in the restaurant with a tie on. That’s my rule,” he declares, tugging off a navy blue cravat before entering a company-run Huddle House on a warm February afternoon in Locust Grove, Ga.

Even without it, Greifeld seems out of place in the 62-seat family-style diner. He’s still wearing a striped shirt, suit pants and tasseled loafers. And his clipped East Coast accent is a dead giveaway he’s not from around here. The 42-year-old executive grew up in Long Island, N.Y., and went to college upstate. Yet the boyish-looking executive is right at home. He greets employees by name, thanks customers and privately counsels a waitress about a “personality issue.”

“When Phil went to Atlanta, we joked that we might have to get him an interpreter,” says Thad Jones, a vice president at Charlottesville, Va.-based Quad-C, the merchant bank that bought the Decatur, Ga.-based chain for an undisclosed sum in 1994. “He’s a Yankee, and Huddle House isn’t a Yankee concept.”

Huddle HouseStill, claims Jones, a Huddle House board member, “Employees and franchisees appreciate that Phil has done a good job and is passionate about the brand.” Yet Greifeld has also managed to rankle some franchisees with aggressive growth plans.

Sales Up
There’s no arguing that under Greifeld the company’s top-line growth has been very good. During his five years as chief executive, same-store sales at the 375-unit chain have remained positive year to year. He expects comparable sales to increase a respectable 4.3 percent for franchised units in the current fiscal year, which ends April 30, though keep in mind he raised prices 3 percent last fall. All but 16 of the 349 franchised Huddle Houses are comparable. He is also predicting systemwide sales will grow to $190 million, a 5 percent gain and slightly below Huddle House’s compounded rate of 6.3 percent since he took over in late 1999.

Huddle House’s track record is buoying Greifeld’s confidence that the 24-hour concept can be more than a regional player. In fact, he expects that franchisees will operate some 500 units by 2007 in the South, Midwest and West.

Huddle House, Inc.
Decatur, Ga.
2004 Systemwide Sales
$190 million (company estimate, fiscal year ands April 30)
26 company owned, 349 franchised
Average Unit Volume
Average Check
Expansion Plans
30 to 35 franchised units in '05

His plans are ambitious. In the coming fiscal year, franchisees will add 30 to 35 Huddle Houses, the most ever. Although the chain added 27 units the year Quad-C acquired it, new unit openings have averaged 14 per year since then. The company added 24 franchised units in the current fiscal year. Greifeld talks about signing deals for eastern Texas, Virginia and Missouri. He’s looking for operators in Ohio, Indiana and Illinois.

Huddle House’s unit economics offer an attractive return on investment, says Greifeld. Total investment costs average $600,000. New stores average $650,000 in sales. “The sales-to-investment ratio is meaningless,” he argues, citing a 23 percent food cost—low by any standard.

Eighteen months ago the H2O Hospitality group signed an agreement to open at least 35 Huddle Houses in Virginia within five years. It has opened seven so far in places like Farmville, Appomattox and Blackstone, in keeping with Huddle House’s strategy of staying in small towns where there is less competition from full-service chains. Greifeld doesn’t mind duking it out with fast feeders because the concept, he insists, is in a niche by itself.

Huddle House’s wide menu, full-service platform and $5.99 check average ranks below Cracker Barrel and Denny’s yet above fast food. “Everybody lumps us in with family dining, but we’re different. We deliver quality,” he maintains.

Huddle House financial performance

Richmond, Va.-based H2O, former owner of convenience stores, didn’t consider other restaurant franchises. Principal Dick Riley says he talked to several successful franchisees and hourly workers. “We were very knowledgeable in the 24-hour-a-day business and this type of customer and employee,” he says, adding the group was looking for 20 percent returns. “We jumped at it.”

But growth outside the Deep South is allegedly getting expensive for some franchisees, who say expansion to Virginia, Kentucky and possibly Texas is costing them money. They argue Huddle House, which self-distributes products from a warehouse attached to Decatur headquarters, charges more than an outside broadliner to cover the increasing overhead.

Courthouse Steps
Why not buy, then, from an independent broadliner? Franchisee Ken Johnston says compliance requires purchasing many logoed items, among them waffle batter and coffee, from Huddle House. Johnston, who operates three units, and other franchisees representing about 90 restaurants have filed suit for $6 million in overcharges in an Atlanta federal court charging the company with restraint of trade.

Huddle House prototype
The new Huddle House prototype features stainless steel, almond and green tiles, and red vinyl.

“Our contention is that you can’t be competitive and still run stores as far away as these,” explains Johnston, president of Huddle House’s franchise association and a franchisee for 31 years. “[Self-distributing] worked well 30 years ago and times have changed—and maybe we have to change.”

Riley labels the charges “frivolous.” H20 was aware of the lawsuit when it signed on as a franchisee. “We did research into pricing, and [Huddle House] is right on target with other broadliners,” he says.

Greifeld, who acknowledges the company derives 25 percent of its profits from distribution, denies the company has done anything wrong. “A clear analysis tells us, our customers and our operators that our practices are fair and honest, our pricing highly competitive even against our direct competition, and our quality and service unbeatable,” he says.

Veteran franchisee Eldon Carmichael, who runs 22 units in Georgia and Florida, says he would have to buy large amounts of a product to get a good price from an outside distributor. “Huddle House will ship you one box or a half box. That’s a plus,” he says.

Huddle House
Huddle House franchisees will open 30 to 35 units this year, the most ever for the chain.

“I don’t know if you provide better service, but you can make your own rules when you’re your own customer,” says Captain D’s Seafood CEO Ron Walker, who has used both in-house and outside distributors. “It might be tougher for an outsourced distributor doing exactly what you do. To arrive at exact times, for example, or make special runs.”

At press time, Greifeld planned to file a motion for summary judgment, asking the court to dismiss the case.

Greifeld, meanwhile, needs to attract new franchisees capable of executing multiunit deals if he is to grow the company into a valuable entity with a cash flow capable of commanding a respectable multiple. Although he won’t disclose EBITDA, he says it’s growing by “double digits.” Jones acknowledges the company “delivers debt pay-down and consistent earnings.”

Debt was piled on when a group of investors, including Greifeld, Jones and senior management, acquired Huddle House in early 2001 for an undisclosed sum. Today Greifeld and Jones insist the company is not for sale—not yet. “If that day comes—and I am a realist, it will come—my job is to continue to elevate the Huddle House brand,” Greifeld says.

Lighten Up
Since 2001 Greifeld has been doing exactly that, updating the menu with lighter items, softening its image and tidying up operations. He credits the effort for the 4 percent compounded growth in average daily sales—$1,479 for the current fiscal year—since he took over in ’99.

“Focus groups are stunned when they see our new menu,” claims Vice President of Marketing Ron Rumley. “They say, ‘I would go there today.’” “I,” as in women and families. For years Huddle House was the domain of the working man with an appetite. That Big House Breakfast that Greifeld is so proud of features three eggs, three slices of bacon, toast, grits, biscuit and gravy, and costs only $4.99. It served its purpose, lifting the check average from $2.99 to $4.99 (without coffee) after its introduction five years ago.

The thinking at corporate has changed since then. “Our new customer profile includes women and church people,” says Rumley, a former marketing executive at Shoney’s. “We are seeing more children in our new areas.”

The chain is using a mild-mannered spokesman to drive home the point. Atlanta actor and radio personality Tom Clark landed the role of a friendly, hard-working Huddle House manager. “He’s perfect, a bit of blue collar,” Rumley says. A hit last year, Clark appears again in a new series of ads that began airing on Lifetime, CNN and ESPN in 19 markets last month and continues through June.

To counter consumer perception that the chain is merely a morning specialist, Huddle House offers deep-fried foods like chicken tenders as well as breakfast items like strawberry waffles.

Rumley meanwhile is encouraging franchisees, who already contribute 1 percent of sales toward advertising, to cough up another 1 percent “to deepen the reach” locally.

The company began introducing lighter menu items two years ago, after research showed Huddle House was perceived as a breakfast specialist only. Current TV ads are promoting new salads, for example. “We are more than a breakfast house,” Greifeld says as he steps inside the Locust Grove eatery. “You go to Huddle House for grilled chicken sandwiches, burgers, chicken tenders and the new Lite House salads.” The morning daypart still accounts for about 40 percent of unit sales.

The Waffle House across the street isn’t deemed competition, except perhaps at breakfast. Greifeld boasts Huddle Houses offer customers far more selection, including deep-fried foods like chicken tenders. “We have a real menu, they have a placemat,” he says.

The Locust Grove unit is one of Huddle House’s new prototypes. A franchised unit on the same site was razed to make way for it. Most of the company’s 26 restaurants are take-backs. “Part of the growth in company stores came after we implemented a lot of policies and procedures,” he explains. “If there’s a store in a community that isn’t doing the plan justice, sometimes we have to make the painful decision.”

New Look
Used as a training store, the spacious restaurant is slightly larger than the standard 1,700-square-foot prototype. Tweaked over the past three years, a prototype Huddle House is now a snappy-looking roadside diner—all stainless steel, almond and green tiles, red vinyl and mahogany.

When Greifeld rehabbed the first one, next to a truck stop north of Macon, Ga., the customer base abruptly shifted toward women, families and seniors, he says, who arrived during the second shift, lifting lunch and dinner sales.

Huddle House cites a 23 percent food cost—low by any standard.

Remodeling a unit currently runs as high as $150,000, say franchisees. So far, only 55 restaurants have been redone.

“It’s a real concern for operators,” explains Carmichael, who has three prototypes among his 22 Huddle Houses. “If you only have a short period of time to recoup your investment, I’m not sure [remodeling] is a good use of your capital.”

Greifeld, who admits 55 isn’t such a great number, worries that the 40-year-old system’s older stores, which look dated, could hinder the brand’s momentum by confusing customers.

Company officials contend sales at revitalized units climb significantly. Rumley says he has seen increases of $600 a day. Franchisee Carmichael, however, estimates daily sales rose about $100.

Despite its challenges, the chain has admirers. “Phil has done a good job at Huddle House, which has a box that works,” declares Neil Aronson, a principal of Atlanta-based Roark Capital Group, owner of Carvel Corp. “We’ve expressed an interest in the company, but it’s not for sale.” Patience.

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