Robust Restaurants

Robust Restaurants

HOSPITALITY by Mark Gordon | Managing Editor

Sales at Peach's and First Watch restaurants average $1 million per store. But growth plans for both lie in opening new stores nationwide.

If the growth of two Manatee County restaurant chains is based on executive-logged airline miles, then consider First Watch and Peach's booming.

Ken Pendery Jr., president of Lakewood Ranch-based First Watch Restaurants Inc., and Gary Hoyle, president and CEO of Bradenton-based Peach's Rise & Dine Restaurants, have been airplane fixtures the last six months as the executives lead ambitious growth strategies at their respective companies.

And even though Pendery and Hoyle, in separate interviews, downplay the competitive similarities between the restaurant chains, the companies are alike in several other key ways: Both serve breakfast, lunch and brunch only - no dinner hours. Both market themselves as having friendly, quick service at low prices. Both cater to an employee base that values having nights off. And finally, both tend to be located in strip centers and shopping plazas anchored by large retailers and grocery stores.

Therein end the similarities, though, as the growth patterns and strategies for each firm are vastly different. Peach's is embarking on a grow-by-franchise strategy, while First Watch is planning on expanding by opening corporate-owned stores.

PEACHES - 'compelling' financials

The impetus for Peach's to grow nationally through franchising got its start in a round of golf with Hoyle and Peach's founder Michael Luciano. Hoyle brought a history of successful entrepreneurialism to the budding partnership, as he'd previously worked in several businesses, including retail and restaurants, both in his native Ohio and Atlanta.

Hoyle's research into Peach's took two forms. Call it business and bacon: First he went through the books, to check things over, next he ate in the restaurants, to check out the food.

With the books, Hoyle liked what he saw. Stores had sustained growth reaching about $900,000 a year in revenue. Plus, there were no store closings over the 21 years Luciano had been in business, there was an above average return on investment and low build-out costs. For example, the average build-out cost to open a Peach's ranges from $350,000 to $400,000, depending on the market. That's as much as 50% less then the national average of $600,000 to $800,000.

Peach's also has what its chief operating officer and head attorney, Butch Velie, calls the "most compelling" aspect around: An average net profit per store of 18%, a "margin way above the industry average," of about 5%, Hoyle says, adding however that those numbers aren't a guarantee given to a potential franchisee.

On the food end, Hoyle liked what he saw, too, as well as what he ate. He immediately liked the homey "grandma's kitchen" feel of the restaurants, which was brought out with old-style tablecloths and a Southern charm decor. The menu is a mix of hearty breakfast and simple, comfort-food-like lunch fare. "Everything has been methodically driven to attract the masses," he says.

Centrally located

Once satisfied with the focus and quality of the restaurants, Hoyle and Luciano went ahead with a growth plan. Franchising was the chosen path from the beginning.

"The restaurant industry is dominated by franchises," Hoyle says. "It's been an effective growth strategy. It helps you grow exponentially without raising capital or going public."

There are other reasons Hoyle backs franchising. He likes that a franchisee puts "his own neck on the line" when opening a store, so the hope is he will be more passionate and detail-driven then a manager working for the corporate office. Also, Hoyle says franchisees backed by a proven corporate entity are as much as four times more likely to succeed then lone mom-and-pops.

Finally, even though Hoyle says the company isn't fixated or infatuated with numbers, growing by franchising is the surest way to increase the vitality of the Rise & Dine brand. With that growth, Hoyle says, the company will get bigger economies of scale, stronger purchasing power and a greater ability to recruit and retain top employees.

The franchise fee is $35,000 for a single store and $87,500 for three, in addition to a 5.25% royalty fee and a monthly marketing fee. Hoyle says finding potential franchisees has not been difficult; the trick is to find passionate and committed operators, as opposed to investors. "We've turned down 25 to 30 owners who had the money and wherewithal, but just weren't right," he says.

The Peaches growth plan is focused on central locations that could serve as training areas for future franchisees. Statewide, Orlando and the Fort Myers-Naples market will be getting stores. Nationally, the expansion is taking place in Columbus, Ohio, first, with the Denver area a future target.

In 18 months, Hoyle says the plan is to have about 20 successful franchises operating, with another 50 to 100 going though the process of selecting sites and getting permits ready. Last month, the company signed a development deal with Columbus-based restaurants equipment entrepreneur Mike Stasko to open 50 Peach's across Ohio. "It's a great concept," says Stasko, "and I'm getting in early."

FIRST WATCH - steady growth

First Watch's Pendery has no problem with a franchising strategy in theory. It's just not right for the company right now, he says, acknowledging that he and the company might change their minds in the future. If and when the company goes the franchising route, the model will be one that creates "mini-First Watch companies," Pendery says, with at least eight stores in a given market.

Pendery and his staff have turned down hundreds of offers and feelers to franchise - at least an inquiry a day, executives say. The company even set up a page on its corporate Web site that details its current philosophy, including an e-mail address to send information, in case the company changes its mind.

"We look at it every year," says Pendery, "but our focus now is to develop our managers, our people and our ability to execute our goals."

It's easy to see why franchisees are trying to crash the First Watch party: In 2002, the 62 stores spread over nine states crossed over $1 million a year in revenues, on average. Average revenues per store were $1.1 million in 2004 and Pendery expects it to be $1.2 million this year - growth that has taken place with virtually the same number of seats in the restaurants. Company-wide, revenues will be about $60 million in 2006 and are projected to be more than $90 million in 2007.

Still, eighty-sixing franchises doesn't mean First Watch doesn't have an ambitious growth strategy. The chain opened five new restaurants in 2005 and is opening 14 this year. The goal is to get to 25 stores a year for three or four consecutive years. "We feel like we have to build our way up to it," Pendery says. "We couldn't just wake up one day and say, 'we can do 25.'"

Pendery says the 25-stores-per-year number is manageable, given the company's finely tuned management structure. There is a regional vice president who oversees five regional managers, which in turn supervise five restaurants.

The growth is also managed by the financing First Watch receives. Until 2004, it had mostly borrowed for growth through banks. Late that year, the company received funding from Greenwich, Conn.-based private equity firm Catterton Partners. Neither company disclosed the amount of the funding. Catterton, one of the biggest consumer industry financiers in the country, has investments in several other companies and brands, including the P.F. Chang's restaurant chain and a group that has co-ownership of the New Jersey Devils hockey team.

Signs of growth are all over First Watch's corporate office, too. Custom made maps of markets First Watch is in hang from walls in the conference room. The map for the St. Louis area, for example, has markers for the company stores, as well as markers for all the restaurants First Watch considers competitors.

The company is focusing its growth on metro areas east of the Mississippi River, hoping to be in a maximum of two time zones. New markets it's shooting for include Fort Lauderdale and surrounding South Florida areas, Cleveland and Washington D.C. Last year, First Watch sold its only two stores operating west of the Mississippi, in the Oakland area.

Three meals

Past a map of where First Watch wants to be, there are challenges to the growth strategy.

First, the location of each restaurant is essential. It's even more of a priority for First Watch than other businesses, because the store is only open 7.5 hours a day, so they need to maximize their potential customer base. The company sees it as three meals a week: breakfast, lunch and brunch, and "we can't miss one of them and be as successful," says Pendery.

Some of finding the right spot is science, as the demographics of an area, including income and population increases, are factored in. The company also looks to be in shopping plazas that are close to businesses and homes, in order to get the leisure-type breakfast customers and the working lunch crowd.

The other form of finding a spot is more of an art. Pendery and his staff drive around potential locations, from Orlando to Ohio, scoping out possible spots. Sometimes, it just feels right, they say.

Another challenge to growth, from a broader perspective, is the national economy. Both a soft market and boom times represent potential problems, Pendery says, but he thinks First Watch has a tougher time in a better economy. His reasoning: In slow times, people will still go out for a $7 breakfast, but in good times, "we struggle to find a place [to open] that meets our standard, because someone is already there."

WHAT WOULD YOU DO?

Peach's Rise and Dine Restaurants and First Watch Restaurants Inc. are using competing strategies to grow nationally. Peach's is using a franchise strategy, while First Watch is expanding by opening corporate-owned stores. Which do you think is the best method? Which has the best chance of succeeding, both in the short-run and long run?

Send your thoughts to the Review. E-mail Mark Gordon at [email protected].

A Forest Gump-like life

Gary Holye, a veteran entrepreneur charged with leading the franchise growth of Peach's Rise & Dine Restaurants, has led somewhat of a Forrest Gump-like business life: Like the fictional Hollywood character, Hoyle has often found himself in the presence of business titans and other celebrities.

There was the time he happened to be at an exclusive golf course in Columbus, Ohio and ended up playing a round with Dave Thomas, the founder of the Wendy's fast food chain. (Thomas gave Hoyle some franchise advice: pack extra details in the operations manual, so that everyone in every store is clear about the message and the way to do things).

Then there was the time Hoyle ended up eating dinner with Woody Hayes, the legendary Ohio State University football coach. Hoyle sat a table with Hayes and some other Ohio State fans the night before a game once -Hoyle got to see the sometimes volatile side of Hayes' leadership skills up close.

Hoyle has been involved in at least 15 businesses, in roles from consulting to managing. A former minor league baseball player, Hoyle started his own paving business as a teenager, work that eventually led to relationships with some other well-known Ohio and national executives, including Jim Trueman, the founder of the Red Roof Inn motel chain and Wes Bates, president and CEO of the Stanley Steamer Carpet Cleaner chain.

Hoyle even spent a short time in the entertainment industry in Los Angeles, where he worked with Burt Ward, the original Robin in the Batman TV series.

-Mark Gordon

Fending off the competition

Ken Pendery Jr., president of First Watch Restaurants Inc., says that while he monitors what his competitors do - what company chief doesn't? - he and his staff, down to the individual restaurant mangers, aren't fixated on what others are doing.

Still, Pendery's list of competitors to First Watch, the breakfast-lunch-brunch industry king, is big. Some of the chief competitors are literally dotted out on maps hanging in a conference room in the company's Lakewood Ranch-based corporate headquarters. That list includes Denny's and Starbucks, as well as various regional chains.

Pendery says overall, there are three groups of competitors to the First Watch throne, including:

• Restaurants with a similar business model. Locally, in the Sarasota-Bradenton market, that includes Peach's, the Serving Spoon and Broken Egg, while nationally, the only one is Houston-based Le Peep. Individual mom-and-pops fall into this group, too;

• Recognized breakfast spots that are open longer hours. This list includes Friendly's, Bob Evans and Cracker Barrel;

• Anyone going out to lunch, from a local burger joint to the burger-heavy fast food chains.

-Mark Gordon

Growing pains

While restaurant chains First Watch and Peach's steamroll ahead with expansion plans, a competing national chain is tweaking some of its approach to Florida.

Wilbraham, Mass.-based Friendly Ice Cream Corp. is temporarily shutting down one if its Sarasota-area stores for two to three months - the same store that set corporate-wide records for both opening day and opening week sales when it debuted in January 2003. Current owner Carmine D'Ariano is selling the store to David Buchman's Central Florida Restaurants LLC, which already owns a dozen Sunshine State Friendly's, 11 in Orlando and one in Bradenton, near Lakewood Ranch.

Current and former investors with the Sarasota location, on University Parkway and Lockwood Ridge Road, attribute the quick and drastic sales drop to on-going roadwork that has tied up the already heavily-traveled intersection. The restaurant finished third in total sales for all Friendly's nationwide in 2003, but "road construction has basically killed them," says Joe Sandor, an original owner of the restaurant who sold his interest in 2004.

In addition to the sales drop, D'Ariano, a former New Jersey businessman who had retired to Longboat Key, was looking to retire altogether from the business, while Buchman was seeking to add another restaurant to his group.

Buchman says he intends to close the restaurant for up to three months so he can renovate the inside and outside, updating it to match the more modern looking Friendly's in other parts of the country. Despite the construction concerns, which could be a factor for several more years, Buchman says the location - less than 10 miles from Lakewood Ranch and downtown Sarasota - is still a winner.

The temporary shutdown of the Lockwood Ridge location comes less than a year after the Friendly's on Tamiami Trail in Sarasota, also owned by Sandor and D'Ariano, permanently closed.

-Mark Gordon