Out of a Pinch

Out of a Pinch

ENTREPRENEURS by Jean Gruss | Editor/Lee-Collier

Tony Phelan was a successful restaurateur in Texas when the oil bust shattered his life. But he rebuilt a stronger chain in Southwest Florida.

Tony Phelan was once living high.

The Texas restaurateur's chain of five Irish-themed restaurants based in Wichita Falls, Texas, rode the oil boom of the late 1970s and early 1980s. Times were so good at O'Phelan's Irish Pubs that a customer once tipped a waitress with the keys to a new Buick Skylark.

Phelan owned three airplanes, which he used to skip all over north Texas to visit his restaurants. He was a big shot with the Texas Restaurant Association, eating lunch with the Dallas Cowboys football team one day and going on hunting trips to New Mexico the next. "I once fired a girl over 17 cents," he says.

Then, the price of oil collapsed in the mid-1980s, Texas' oil boom was over and Phelan went broke.

Listening to Phelan's story, it's hard not to see the similarities to the real estate downturn that's affecting all sorts of businesses, from auto dealers to restaurants. But Phelan's story is instructive for anyone who wants to protect a business from a significant downturn.

Starting over, a humbled Phelan moved his family to Bonita Springs with his only possessions in a trailer and two cars, one of which was later repossessed. But starting over as a waiter, he eventually built a chain of successful seafood restaurants called Pinchers Crab Shack. "The greatest thing that happened to our family was going broke," he says.

Phelan built a new company based on the personal and professional lessons he learned from the Texas bust. Chief among them was to keep overhead low to survive the economy's ups and downs. It's these kinds of lessons that will help restaurateurs facing slumping sales in this real estate downturn.

Phelan, 58, expects his Pinchers Crab Shacks to break $20 million in sales in 2008. "And we don't owe a dime," he says.

Texas hotshot

In Texas, Phelan says he made the mistake of thinking that his successful restaurants were simply the result of his superior skills as a restaurateur.

Indeed, Phelan developed an expertise turning around underperforming restaurants for Bennigan's and Steak & Ale. He did the same thing when he started his own chain of restaurants, acquiring a poorly run operation.

But Texas' oil boom was really the main reason why O'Phelan's Irish Pubs were doing so well. When the oil bust occurred, the restaurants couldn't stay afloat. One-third of the population of Wichita Falls vanished, for example. "All my friends moved away," Phelan says.

The sales couldn't keep up with the high rents Phelan had agreed to pay during the boom. What's more, some of the restaurants were 200 miles apart and Phelan had to buy an airplane to shuttle between them. While he was busy with the Texas Restaurant Association, he wasn't paying as close attention as he should have to his business. "I didn't sweep the floors in Texas," Phelan says.

From 1985 to 1988, Phelan dismantled his Irish-themed restaurants, selling all the equipment. He liquidated his personal retirement accounts and held a garage sale to sell the family's possessions. Phelan's attorney and accountant advised him to file for bankruptcy protection, but he refused. "I did not file bankruptcy," he says proudly. "I feel I did the right thing. I sleep at night."

Phelan, his wife Kathleen and son Grant packed the few belongings they had left and headed for Southwest Florida. "If we have to start over, let's start over in paradise," he told his family.

Starting over in Florida

The first job Phelan got when the family reached Florida was as a waiter at the Dock at Crayton Cove, an upscale waterfront restaurant in Naples. Phelan worked a successive series of jobs, eventually becoming a restaurant manager.

But Phelan wanted another shot at building his own restaurant. "All I had was a dream," he says. "I couldn't afford to buy somebody." A bout of prostate cancer didn't stop him.

In his spare time, Phelan bought, repaired and resold used restaurant equipment. He kept some of it for himself. He also scoured the dumpsters.

He once carried off a stack of two-by-four boards he found dumped near a construction site and stashed them in his garage. On another occasion, he carted off pallets made of oak. "We had our future restaurant in our garage," says Phelan, a fan of Jimmy Buffett's music and business acumen. His son, Grant, quips that the garage is still full of cast-offs.

During that time, Phelan became an artist in his spare time, cutting steel barrels and sculpting sea creatures out of them. He got good at this.

"I had pieces that sold for $5,000," he says.

But the life of the artist is a lonely one and Phelan missed the camaraderie and hustle-bustle of owning a restaurant.

Second chance in Bonita Springs

Phelan got his second chance when he opened the first in Bonita Springs 10 years ago. It was a little 4,000-square-foot place, but the rent was right: $2,900 a month. Phelan was determined not to overpay for rent, a mistake that led to his downfall in Texas.

One of the main reasons why restaurants fail is because they're paying too much for rent, Phelan says. New malls are particularly challenging because they tend to charge so much that it takes huge sales to overcome that hurdle. A positive review in the newspaper boosted annual sales at the first restaurant to $940,000.

Another mistake Phelan was determined not to repeat was taking on too much leverage.

The restaurant space he rented already was equipped with the proper plumbing and ventilation installed by the previous tenant.

He hired an 86-year-old carpenter to take all the cast-off wood he had collected and stored in his garage to build the interior of his restaurant. He decorated the Florida-themed restaurant with the sculptures he had made. In all, he spent just $17,000 to decorate and equip the first Pinchers. The first menu had seven choices.

While Phelan was rebuilding his restaurant business, his wife Kathleen took a job as a teacher and worked as a seating hostess at a Red Lobster restaurant. "For three years I didn't take a salary," Phelan says, crediting Kathleen for keeping the family afloat.

When Phelan opened the second Pinchers in 2000, he had saved more wood pallets and used restaurant equipment. While Phelan's son Grant took over running the Bonita Springs restaurant, he worked side-by-side with the carpenter to open the second restaurant on McGregor Boulevard in Fort Myers.

With a deep aversion to debt, Phelan opened subsequent restaurants with nothing but small bank loans for the real estate. "We self-funded," he says.

As Phelan opened new restaurants in Fort Myers Beach, North Fort Myers and Sarasota, he decided not to get overextended geographically.

Sarasota's as far north as the chain will go, he says.

The seventh restaurant will open in December in Naples and that will represent the southern boundary.

Phelan had made the mistake in Texas of separating his restaurants by too many miles and had to buy his own airplane to get from one location to the other. It's critical for the boss to make sure the service and the food is up to his standards. Phelan makes what he calls regular "table visitations" where he talks with customers at their tables to gauge their mood and whether they're satisfied.

Crab shacks in Cincinnati

Customers and others have urged Phelan to expand his chain to other cities. The restaurants are located in tourist areas and visitors from cities such as Cincinnati and Atlanta want a Pinchers in their own town.

Phelan has resisted expanding because he remembered big distances were part of his undoing back in Texas. So the family has hired a restaurant consultant to evaluate what their next step should be.

Options may include franchising or taking the company public. But first, Phelan says the goal is to develop uniform systems to allow the company to grow without losing control. These details can be as minute as how the French fries should be seasoned.

Phelan is also developing a group of managers who will be trained to carry the Pinchers gospel far afield. He's thinking of ways to give them an opportunity to own a portion of the business in a new territory.

Phelan says he's become a better manager after his Texas experience. He certainly won't fire someone over 17 cents again. Managers get a percentage of their restaurant's profits and they get more time off than managers at other restaurants.

But how successful can a Florida seafood restaurant be in landlocked, freezing Cincinnati? Phelan quickly points out that Buffett routinely sells out half a dozen shows in that town.

Still, Phelan says he's going to be careful not to repeat past mistakes. "We don't want a failure," he says.

Fill' er up ... with fryin' oil

In his quest to keep overhead low, Tony Phelan figured out a cheap way to keep his gas tank full with recycled vegetable oil from his Pinchers Crab Shack restaurants.

Phelan converted his fleet of six trucks and his own car to engines that could run on oil used to fry shrimp and fries. He spent $5,000 to install a filtration system that cleans the oil and then he pumps it using an electric pump into engines that run in combination diesel fuel.

The 60% vegetable oil and 40% diesel fuel combination costs him $1.80 per gallon. It costs him $2,500 to convert an engine.

The system has more than paid for itself. Phelan and his employees drive hundreds of miles to pick up fresh seafood from fish and crab markets on Pine Island and deliver them to restaurants from Sarasota to Naples.

REVIEW SUMMARY

Entrepreneur: Tony Phelan

Company: Pinchers Crab Shack

Key: Restaurateurs need to be ruthless about keeping overhead low, because survival depends on it.