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Chain LeaderEditorial Archives2005 — July — Cover Story

Kitchen Remodel
Rick Rosenfield and Larry Flax renovate California Pizza Kitchen with inspiration from its high-end sister.

By David Farkas

Co-CEOs Rick L. Rosenfield (l.) and Larry S. Flax have increased sales and revenue at California Pizza Kitchen by diversifying the menu and introducing a prototype modeled after their LA Food Show concept.

California Pizza Kitchen’s demographics typically include higher-income and college-educated customers.

California Pizza Kitchen’s prototype features granite counters, contemporary lighting and a mix of tables and booths—all elements of LA Food Show.

If you had been sitting recently in LA Food Show, an upscale restaurant in Manhattan Beach, Calif., you might have noticed two youthful-looking men in their 60s holding court in a corner booth while picking at plates of roasted chicken. Rick L. Rosenfield and Larry S. Flax, both former U.S. assistant attorneys for Los Angeles and currently co-CEOs of California Pizza Kitchen, were describing their successful turnaround efforts at the 170-unit chain they founded in 1985.

CPK’s comparable sales rose a striking 9.3 percent in the first quarter, the largest quarterly increase since the duo returned to active management in July 2003 and well above analysts’ forecasts. Revenues grew 12 percent, to $110.3 million. Rosenfield and Flax credit menu diversification, remodels and a new prototype inspired by LA Food Show for the gains.

You might also have heard Rosenfield’s rich baritone more often than Flax’s scratchy bass. It’s Rosenfield, along with Australian-born CFO Susan Collyns, who talks to analysts during quarterly conference calls and serves as the company’s primary spokesman. In typical fashion, Rosenfield, who met Flax in 1969, takes charge of the conversation.

“There is no question that new menu items drive our business. We have industry-leading comps, and we know those are not driven by advertising,” Rosenfield explains. The company in fact has only begun to invest in broadcast media, testing radio in Los Angeles, where it is headquartered. California Pizza Kitchen, however, raised prices significantly: 5.3 percent in the first quarter of ’05 and 2.2 percent in December. Still, first-quarter traffic was up a respectable 3.1 percent. Rosenfield claims research shows there is 11 percent, or about $1 per item, of pricing elasticity.

More Than Fancy Pizza
The chain has always been perceived as at the posh end of casual dining despite an $11.96 check average. The reason: trendy-sounding pizzas, modeled after those created by California chefs who experimented with nontraditional toppings and light and tender crusts. Rosenfield and Flax opened their first unit in Beverly Hills, not far from Spago, where Wolfgang Puck topped small pizzas with duck sausage. California Pizza Kitchen’s less exotic toppings—barbecued chicken, grilled vegetables, pad thai—were immediate hits with mainstream America, and the chain grew quickly.

“Larry and I have always interpreted trends,” says Rosenfield, adding that the pair used to spend more time on pizza. Today, although pizza accounts for a third of a unit’s sales, it doesn’t play a large role in the turnaround.

The spotlight instead is on Asian-influenced appetizers and salads. The company has added several to June’s new menu. One of the trendiest is Hawaiian Poke Martini, made with seared ahi tuna, a dish rarely seen in casual dining.

In a defensive move, the chain added lettuce wraps and fried calamari with Thai dipping sauce. “We found we could put them on our menu, and you avoid that veto factor. If you just want to go for lettuce wraps somewhere, we’ve got them,” declares Flax, 62, who oversees culinary, marketing and operations.

In early June, Ryan Seacrest, a top-rated Los Angeles disc jockey and host of ABC’s American Idol, casually mentioned the new products on his popular morning drive-time show in a way that might have made unsuspecting listeners believe he was unscripted. He wasn’t. Nor are three other Los Angeles radio personalities who chat up the chain on their shows. While it’s hard to believe CPK has yet to use broadcast media in Southern California, its most penetrated market with 39 units, Rosenfield, 60, insists customers “wouldn’t like to see CPK in TV commercials.”

Rosenfield and Flax are hoping the DJs’ “testimonials” will broaden the chain’s base, helping to shift the daypart mix away from lunch and toward the more lucrative dinner. Today, lunch and dinner each gobble up about 41 percent of sales; takeout and delivery account for the rest.

Besides adding trendy appetizers, the company is promoting a beer, wine and spirits program, showcased in the new prototype, the first of which opened in Irvine, Calif., last August. Currently, alcoholic-beverage sales account for 6 percent of total sales, well below casual dining’s average of 12 percent to 15 percent. Rosenfield and Flax won’t reveal the six prototypes’ food-to-beverage ratios except to say they are pleased so far. Think Equity analyst Nicole Miller estimates the percentage of alcohol sales in the prototypes and remodeled units, which feature a fully stocked bar, could reach double digits.

Mixed Reviews
In an April conference call, Rosenfield boasted to analysts that the new prototype and remodeled units were “doing exactly what we expect,” noting the weekly sales average at the prototypes opened by the end of the first quarter was $88,865. That figure compares to $65,872 for the 94 “legacy” units opened before 2002, the highest-grossing comparable stores in the system. Rosenfield pronounced the achievement an “all time record for us,” though admitting the new restaurants were still in a honeymoon phase. Restaurant margins at the new stores remained low, 7.2 percent, due to expenses associated with higher store-opening costs.


California Pizza Kitchen

Los Angeles
147 company, 30 franchised
2004 Systemwide Sales
$220 million
2005 Revenues
$474.2 million*
Average Check
Average Unit Volume
$3 million; $3.2 million, prototype
Expansion Plans

15 company units in ’05, 20 in ’06

*JMP Securities estimate

Miller believes the new restaurants will ring up $3.2 million in annual sales on an investment of roughly $2 million. The so-called “legacy” units average $3 million.

Investors have rewarded the company, which went public in August 2000, offering 5.3 million shares for $20 each. In early June, a share of CPKI was changing hands for $25, $2 off its 52-week high and 9 percent more than it was worth at the beginning of the year. The stock has appreciated 26 percent since Rosenfield and Flax grabbed the reins in July ’03 from Fred Hipp, whom they blame for a host of ills. Their list includes picking poor sites, failing to keep facilities repaired and opening units too quickly. Says Hipp, now CEO of AMF Bowling Worldwide: “We transformed the company between 1997 and when I left. From a success-rate standpoint, EBITDA levels went from $7 million to north to $42 million.”

Analysts who track the company and report their findings to First Call expect California Pizza Kitchen to post earnings of $1.15 a share in ’05 and $1.32 in ’06 as sales roll in from additional units. Rosenfield and Flax slammed the brakes on expansion in ’04 after sales at units opened in ’02 and ’03 failed to reach $58,000 a week—the level required for a 20 percent return on investment. This year the company will open 15 new restaurants, most in existing markets; 20 units are scheduled for ’06.

Investment analysts remain skeptical, however, with five of 10 neutral on CPKI. One who recommends holding the stock worries, for instance, that the units closed for remodeling combined with this year’s pre-opening costs may hurt sales and earnings. An analyst with an “underperform” rating frets that ramping up openings could make site selection problematic. Another who is “neutral” on the stock wonders why the first quarter’s same-store sales and price hikes didn’t significantly boost store-level margins, now 12.6 percent. Collyns blames bad weather, remodeling costs and expenses related to new store openings.

Raymond James analyst Bryan Elliott, who rates CPKI a “strong buy,” predicts: “Real shareholder value is what happens with the new prototype that was modeled after LA Food Show.”

Borrowed Looks
On a cloudless morning in Huntington Beach, at a new 225-seat California Pizza Kitchen, Regional Vice President of Operations Kenny Hom is giving a tour of the slick freestanding prototype, located on a pad at a remodeled strip mall. “We’ve been working on this [real estate] deal for years,” Hom says. The company also has a prototype for inline locations, he adds.

Inside, there are granite counters, modern lighting, a mix of tables and booths, and a flat-screen TV in the bar—all features of LA Food Show, which Rosenfield and Flax opened in early 2003 with a $2 million investment from CPK. The sum represented a 25 percent stake, the company reported at the time, allowing it access to CPK’s operations, including recipes; employees and managers; and administrative and support services.

Last April, the company paid Rosenfield and Flax nearly $6 million for the remaining shares. Rosenfield insists the amount, determined by outside auditors, was fair. In any case, the deal had to be done to avoid suspicion that the two were boosting LA Food Show’s value using CPK resources, he adds.

Back at the LA Food Show-esque Huntington Beach prototype, Hom boasts about the site: “You’ve got the traffic, you’ve got the great corner location, and you have the demographics you’re looking for.”

Still, he admits he was nervous at first. “We did a lot of research and homework. But until you’re in it and it’s real time, you can’t really learn and understand the efficiencies we are looking for,” Hom says.

California Pizza Kitchen’s demographics typically include higher-income and college-educated customers, according to a modeling study by the Buxton Co. in Fort Worth, Texas. Suburban customers, the study shows, will drive 17 minutes to a CPK, while urban customers allow 13 minutes. The Buxton model also tells Rosenfield and Flax sales they can expect from each household in a trade area, allowing them to target customers with freestanding inserts, often announcing a new unit, new products and sometimes a deal. They won’t, however, reveal household spending ranges in CPK’s best and worst markets.

Grab and Grow
Rosenfield and Flax also want to give some households the option of grabbing a quick bite at ASAP, an express-pizza parlor the two launched in LAX in 1996. Today, Host Marriott operates 19 airport units. The rest, run by the company, are being overhauled as fast-casual restaurants.

The latest iteration, a sleek-looking, 3,000-square-foot unit boasting 37 items and a drive-thru, opened in May in affluent Redondo Beach. Observers put volumes in the $1.2 million to $5 million range. Another ASAP unit is scheduled to open later this year.

The men believe ASAP will eventually compete with Panera Bread Co. and Pei Wei, and in June they demonstrated their faith by naming Tim Gleason, a veteran CPK executive, vice president of the concept.

Rosenfield and Flax, whose egos are not small, declare that they have finally figured things out. “When we got into the business, we were so naive that we thought we’d be successful because we had a good concept. Twenty years later, we fully understand it’s not about the concept,” Rosenfield opines. “It’s about the product, the people and the ability to replicate.” You heard him.

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