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R&IEditorial Archives2002November 1 — Business

Follow the Leaders
Restaurants and Institutions tracks the tasks and trials of six top foodservice CEOs whose companies stand at the crossroads

Like Atlas bearing the weight of the world, the shoulders of CEOs are similarly burdened, carrying their companies to the peaks of success.

Challenges abound for these corporate leaders, but those who rise to the occasion can be duly rewarded. Such is the course for today’s chief executives, whether their business is commercial or noncommercial, public or private, large or small.

Restaurants and Institutions profiles six foodservice CEOs who might best be described as mavericks and change agents, highly driven to strengthen and solidify their companies. For some concepts, this means earning the No. 1 spot in their segments or increasing market share. For others, it’s a focus on growth, with new markets and higher unit volumes. Still others look to take their companies in new directions, rebuilding old brands and extending their reach into other industry segments.

With both corporate and personal success hanging in the balance, the future looms large for these CEOs.

Amid a torrent of recent changes—including the company’s pending sale to a consortium composed of Texas Pacific, Bain Capital and Goldman Sachs—Burger King CEO John Dasburg is the calm in the eye of the storm.

The 59-year-old executive, who joined the company in April 2001, has remained focused through an onslaught of distractions. His objective: to boost Burger King’s share of the U.S. hamburger-restaurant market to 23% by 2004. It’s an ambitious plan for the No. 2 burger chain, which saw its share drop to 18.4% last year from 18.8% in 2000 and 19.6% in 1999.

Dasburg believes his goal are realistic, banking on positive momentum expected from recent Burger King initiatives such as the introduction of the Chicken Whopper and new 99-cent BK Value Menu to help drive them. At mid-year, Dasburg proclaimed Burger King sales to be “very strong and meeting our expectations, indeed exceeding our expectations.”

A slate of new menu items and a $300 million annual advertising war chest are among the strategies Dasburg is banking on to help grow average annual per-store sales to $1.25 million from about $1 million today. Sales of two Back Porch Grillers burgers introduced in June lacked enough sizzle to become permanent additions as initially planned, but the BK Veggie sandwich added in March is hanging on.

Building franchisee relationships will be crucial to this forward motion, Dasburg says. In recent years, Burger King franchisees—who operate more than 90% of the chain’s 11,000-plus restaurants—have voiced displeasure with various aspects of the company’s corporate policies. Dasburg’s efforts to address these concerns, such as discontinuing a development strategy giving exclusive territories to designated anchor franchisees, appear to be resonating among the ranks.

“John is a very strong, dynamic leader who has had a very positive influence on the system,” says Joseph Langteau, president and CEO of Westchester, Ill.-based AmeriKing Inc., which owns 370 Burger King stores. “He is a proven leader who has worked in turnaround situations before.” Prior to joining Burger King, Dasburg was CEO of Northwest Airlines.

For his part, Dasburg views his post at Burger King as a welcome challenge. “I believe this is one of the greatest brands in the world,” he says. “We are all confident that we will be able to carry our momentum into the coming years and win back share.”

Swimming among sharks doesn’t frighten Lawrence Honig. The CEO since April of foodservice’s sixth-largest contract-management company, he knows that global conglomerates such as Compass Group PLC, Sodexho and Aramark, each with annual North American revenues exceeding $4 billion, continue to increase their market shares.

A veteran of the trench warfare among retailers, Honig, who previously was chairman, president and CEO of St. Louis-based Edison Brothers Stores, believes he can keep Volume Services America (VSA), with revenues of $543 million in 2001, strong and independent in a changing business world.

“Contracting is a very aggressive industry and our competitors are very clever,” says Honig. “In retail, the venues are set. In foodservice management, we are competing for the venue, so we have to be good retailers as well as managers.”

The result of the 1998 merger of contractors Volume Services and Stamford, Conn.-based Service America Corp., VSA has 128 accounts, from professional baseball, football and basketball arenas to convention and civic centers. Honig says his charter is to improve quality while growing the company’s business in those highly competitive markets.

Honig understands that he still has much to learn about foodservice management, but says he is encouraged by what he has he has seen of VSA. “Determining what businesses we pursue and which area of those [contracts] we are better at are the fun parts of my job,” he says. “We are facing more opportunities than we can utilize.”

Any time may be a good time for IHOP, but there’s no doubt that breakfast is prime time for the 1,000-plus-unit chain.

If it aims to move forward in the family-dining segment, however, analysts believe the 40-year-old concept must extend its popularity into other dayparts.

Enter Julia Stewart. Named CEO in April, Stewart has launched an extensive evaluation of IHOP’s business model, with a goal of creating a strategy for long-term growth to be launched in 2003.

“As an American icon, IHOP has an opportunity to relish its history and heritage, but at the same time we must appropriately make changes to take [the brand] to the next level,” she says. In Stewart’s mind, the next level means one thing: moving up one spot to dethrone Denny’s as the No. 1 family-dining chain. The question is how integral lunch and dinner dayparts will be to making that jump.

“It’s really hard to take the pancakes out of IHOP; nor do they want to. Except what you do have are relatively empty restaurants the rest of the day,” says Mike Smith, restaurant analyst with New York City-based Fahnestock & Co. “If [Stewart] can be successful in gearing their menu to attract people to other dayparts, that will be a big plus for them. It’s also a big challenge.”

In another significant project, IHOP is working with New York City investment banker Salomon Smith Barney to evaluate various aspects of its business model and balance sheets. It will be up to Stewart and her team to decide how to address the recommendations.

“She’s got a tough decision once Salomon Smith Barney finishes the appraisal process,” says analyst Dennis Joe of Sidoti & Co. in New York City.

Overall, Joe says, Stewart is a good fit for IHOP, with her casual-dining background and recent success as president of Overland Park, Kan.-based Applebee’s International.

Her experience should help Stewart work toward IHOP’s nearer-term goals, which include boosting comparable-store sales 1% to 2% and increasing average sales per unit 2% to 3% in 2002. In addition, the company plans to open nearly 100 new stores this year to add to its more than 1,000 units.

“At some point you’ve developed out the United States. But I don’t think that’s any time on the near horizon. There’s still tremendous opportunity for us in this country,” Stewart says.

Del Taco employees just can’t shake the spirit of CEO Kevin Moriarty. Like a specter, he haunts his restaurants almost daily, keeping an eye on the business from the heart of the action.

“We’re restaurant operators,” says the 54-year-old Moriarty, who joined the 408-unit quick-service chain in 1990. “We live in our restaurants every day. We don’t hang around the office.”

Del Taco is thriving under his hands-on approach. Since taking over company ownership and management, Moriarty and his team have effected a turnaround for the once-struggling brand. Now the nation’s No. 2 Mexican chain, Del Taco is poised for its next challenge: expanding eastward to build a platform for growth.

“Their long-term goal is to be national, and I think they are quite capable of that,” says analyst Rod Guinn, managing director of the restaurant group at Boston-based FleetBoston Financial Corp. Units now are concentrated in Western states.

He views Moriarty as a prime candidate to accomplish this goal. “What there is at the company today is due to the efforts of Kevin and more importantly perhaps to the team that he built,” Guinn says.

Del Taco unit volumes have more than doubled (up 116%) since Moriarty came on board and now approach $1 million. On top of this success, the company says it has posted same-store sales growth for 12 consecutive years.

Del Taco does face challenges in the months ahead. The emerging fast-casual segment poses a potential threat, although Moriarty says competing concepts such as Wheat Ridge, Colo.-based Qdoba Mexican Grill and Dublin, Ohio-based Wendy’s International’s Baja Fresh so far have not adversely affected business.

Internal issues exist as well. In March, several former African-American employees filed a civil suit accusing the company of bias in favor of Latino employees. A Las Vegas couple also filed a lawsuit in May, alleging that Del Taco’s hot nacho cheese severely burned their 4-year-old daughter. The company declined to comment on the ongoing litigation.

Regarding his designs on the No. 1 spot, Moriarty is pragmatic about catching up to the competition.

“We’d love to get to 7,000 restaurants, but when we do they might have 10,000. We have to be realistic,” Moriarty says. “I want to be the No. 1 brand [for customers]. That’s more important to me.”

Andrew Puzder isn’t one to shy away from a challenge. He proved that in September 2000 when he took charge of CKE Restaurants, a company struggling to manage its core brand—977 Carl’s Jr. units—and Hardee’s, which it had acquired two years earlier.

Puzder has led CKE out from under a $300 million debt, but tough challenges remain. The 2,313-unit Hardee’s system’s performance has improved, but the concept still needs help. And CKE’s acquisition of Santa Barbara Restaurant Group (SBRG), where Puzder previously served as CEO, has compounded the task of simultaneously building—or rebuilding in the case of Hardee’s—multiple brands.

Puzder did not anticipate that he would have a hand in restaurant operations when he became CKE’s CEO. “I figured the operators would be focused on restaurant issues,” Puzder says. “I had to turn their focus to QSC [quality, service and cleanliness].”

Signs that a Hardee’s turnaround may have begun include increased same-store sales throughout its 2,390 units for four fiscal quarters (through the quarter ended May 20, 2002). Having Hardee’s units sell the Six Dollar Burger item that proved successful at Carl’s Jr. gave Hardee’s sales a boost.

With tougher year-to-year sales comparisons through the summer, however, Hardee’s growth has slowed: Through Sept. 9, 2002, its year-to-date sales were off 0.9% versus 2001. Still, Puzder announced that he remains “optimistic that our comprehensive plan for the brand will deliver a compelling value proposition for our guests and bring them back into the stores.”

CKE’s acquisition of SBRG brought 34 Green Burritos, 100 La Salsa Fresh Mexican Grills and 27 Timber Lodge Steakhouses into its portfolio. CKE has been co-branding Green Burrito with some of its Carl’s Jr. burger restaurants in Southern California for several years. Puzder now plans to co-brand Green Burrito with Hardee’s in targeted markets.

Puzder says CKE will continue increasing franchises, mostly Hardee’s, both as stand-alones and co-branded with Green Burrito. La Salsa has yielded steady sales, with its 1.4% improvement year-to-year through September exceeding both Carl’s Jr. and Hardee’s.

There are certain foods the world craves, Frank Belatti understands, and he wants AFC Enterprises to be their dominant seller. One such food is fried chicken, AFC’s bread and butter. AFC has two of the world’s five largest chicken concepts in Popeyes Chicken & Biscuits (second-largest behind KFC), and Church’s Chicken (fourth). Add the aromas of freshly baked cinnamon rolls from its Cinnabon chain and coffee from its Seattle’s Best and Torrefazione Italia coffee concepts and AFC is a company whose stated—and trademarked—business model is to be the “Franchisor of Choice.”

Through the first two fiscal quarters of 2002 (ended July 15, 2002), AFC’s systemwide sales were 5.7% ahead of the previous year. Net income from continuing operations was up 43.3%.

All AFC chains reported positive same-store sales gains for 2002’s first half, but each concept also was hit by sales declines outside the United States. Always up for a challenge, Belatti still is targeting international markets. “In emerging economies, fried chicken is a stable food. It is a highly sought and highly consumed product,” offers Belatti. New advertising and franchising strategies are being implemented to boost sales in Asian markets.

Belatti’s continuing emphasis on franchising encompasses both new-unit growth—194 of 197 openings by all AFC concepts during the first half of 2002 were franchises—and conversion of units from company-owned to franchise locations. During this year’s second quarter alone, 106 company stores were converted and 300 commitments were made for franchised-unit openings.

Belatti, who earlier in his career was president and COO of Arby’s, understands the competitive marketplace in which AFC’s brands operate, but sees the competition as affirmation of quick-service restaurant popularity. “We want to be in a market that is not going to go away,” he says.

Domestically, Belatti will continue strengthening the positions of all AFC brands in their niches. The strategy includes a makeover of Popeyes’ brand image to focus on its Cajun-influenced menu and its recently opened store in Monterrey, Mexico, the first of 19 planned in the country. The next step in AFC’s growth plan, Belatti says, is to begin franchising its Torrefazione Italia cafe concept.

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