Planning a Fuddruckers Comeback

Aging Fuddruckers is inching back to its former glory by widening its appeal.

By David Farkas, Senior Editor -- Chain Leader, 1/1/2004

Early last month, Fuddruckers headquarters was merrily trimmed—poinsettia, Santa, wreath, stockings—in anticipation of Christmas. The decorations shared space, however, with a large banner adorned with bright red numerals—188204—on a yellow background. Hanging above employees, it was a constant reminder of management’s chief goal: lifting average unit volumes to $1.8 million (18) by Aug. 2 (82) of this year (04).

It means each of the company’s 114 restaurants (94 more are franchised), which average $1.5 million, will have to generate $300,000 more in the current fiscal year, ending Sept. 30. The effort bears watching. Aging chains like Fuddruckers rarely can recapture their original excitement.

That’s something Fuddruckers President Bryce King is keen to figure out. “When a chain comes off track, how does it get back on?” he muses, leaning back in his chair in his small, spartan office in Austin, Texas, which he has occupied since he and British entrepreneur Michael Cannon acquired the chain from Unique Casual Restaurants for $42 million in late 1998. Raising unit volumes will help fund new growth and marketing. King estimates an extra $300,000 in sales could boost the company’s operating margin by as much as 60 percent.

The 50-year-old executive plans to accomplish that by continuing to broaden the menu beyond its longtime signature product, the hamburger. In-store promotions now hawk milk shakes, and freestanding inserts advertise things like jerk-chicken sandwiches. The owners also want to add flair to units with a new prototype that encourages customers to see the restaurant as more than a burger joint.

Spend Money to Make Money
King and Cannon have already spent $15 million to put the gourmet burger chain back on course, refurbishing the majority of company stores with a decor featuring ’60s rock icons. They’ve overhauled the menu, adding salads, platters and ostrich burgers. The chain is developing a new prototype dubbed “the smart look” in Lakeline, an Austin suburb. Curiously, the new look is an update of Fuddruckers’ original “market” format, which had all but disappeared.

Majority owner Cannon, 65, made a considerable fortune using a similar approach in the United Kingdom. To wit: buy a distressed pub chain, refine it and peddle it to an eager bidder. He personally collected more than $100 million, for instance, selling his Magic Pub chain in 1996 to Greene King, a pub and brewing group.

Buying Before Building
King Cannon, the partnership formed in 1998 to acquire a restaurant chain, also expected to expand Fuddruckers through so-called “bolt on” acquisitions of distressed chains, not new units.

“Michael’s experience was to buy old, make it better and sell, as opposed to trying to build new units, because of the inherent difference in risk profile,” King explains.

Their attempts to buy Au Bon Pain and Roadhouse Grill ended in failure. And the sputtered buy-’em-fix-’em-and-sell-’em approach left Fuddruckers with few new units. The company added four in fiscal ’03, bringing the total to 114. King expects to open eight to 10 units by September; franchisees could open as many as 15.

King finally landed a deal last month when he and Cannon became stalking-horse bidders for 18 Koo Koo Roos in Southern California. It will be the partnership’s biggest gain to date. Still, King estimates more than 80 percent of corporate Fuddruckers were opened before 1995. They closed the $5 million deal and expect to immediately convert four of the 2,500-square-foot units to company-run Fuddruckers. As an experiment, he’ll add Fuddruckers burgers to the menu in the remaining Koo Koo Roo restaurants.

Asked if he would do things differently given what he now knows, King concedes he might have pushed “for stronger development designs earlier and ways to build more new restaurants.”

Even so, he’s not done badly. The changes in decor and expanded menu boosted revenues, putting the company on strong financial footing, King says. EBITDA (earnings before interest and taxes) climbed 35 percent on a compounded basis since Fuddruckers changed hands. Unit volumes rose 36 percent for the same period. In its last fiscal year, Fuddruckers posted pretax earnings of $26 million on revenues of $156 million.

“The company is in significantly better shape than when [Cannon and King] bought it and is very well positioned,” declares mergers and acquisitions specialist David Epstein of J.H. Chapman, who has recently advised the company.

King, a former banker, believes a turnaround has taken place but warns much work remains. “Initially my job was to bring financial stability and deal with ambience and menu extensions,” he says. “Now, we have to figure out what to do to get our guests to drive the concept.”

It Was All Good Then
Getting customers excited wasn’t a problem for entrepreneur Phil Romano, who opened the first Fuddruckers in the late 1970s. People lined up to eat a burger billed as the “World’s Greatest.” Others raced to franchise the concept, where customers got to dress their burgers with as much lettuce, onion and tomato as they wanted.

The real genius of Fuddruckers, however, was visibility, which boiled down to five crucial components: butcher shop, bakery, black-iron griddle, toppings bar, and cases of cans and produce. Customers witnessed everything restaurants had always kept hidden, including meat grinding and dough mixing. “I wanted to put everybody in the middle of things. My brands were all over the floor,” Romano says.

The concept was a smash. Fuddruckers went public in ’83, but Romano quickly tired of managing the fast-growing company. He turned things over to professional managers, who tweaked the concept and doubled its size to 10,000 square feet, with predictable results. “The bean counters came in and said, ‘Do you know how much product is on the floor? That’s $12,000. We’re taking it out,’” Romano recalls with some bitterness.

Management’s bet on big restaurants and rapid expansion didn’t pay off, and Fuddruckers was forced to seek a merger partner. In 1988 the beleaguered chain became part of Danver, Mass.-based Daka International, a contract-feeder now known as Unique Casual Restaurants.

Philosopher King
King, who had no prior restaurant experience, is prone to philosophizing about the company’s chances of winning customers back. “Sometimes you have to let the bush grow before you trim,” he says. “The real test is what people will accept. If you are getting everything you need by focusing on what you are focusing on, then fine. But you can’t keep doing exactly what you are...” He pauses. “You know the definition of insanity? It’s doing the same thing over and over again and expecting different results each time.”

King credits Cannon for making sure that doesn’t happen. “His real strength is that he decides very quickly what works and what doesn’t, and he cuts back on what doesn’t,” King adds.

Cannon recently decided that thatched awnings and bamboo-like poles might work in the Lakeline prototype. “Michael really likes the Tiki look,” says Marketing Vice President Scott McCullough. Although the company has introduced elements of “the smart look” in three other restaurants, this unit is the first example of the full-blown design.

“If we’re serving the world’s greatest hamburger, then we should also have the world’s greatest toppings,” McCullough says, pointing to several exotic condiments like soy sauce and chipotle-spiked ketchup on the thatch-covered bar.

Same but Different
More importantly, the prototype returns the concept to its market-like roots. Romano’s original design showed customers the products used in the kitchen. Today King and Cannon are lining the path to the registers with soups, sandwiches and fresh-baked desserts. But they’ve still hidden the bakery equipment and, significantly, the butcher-shop area. A small window display with three ground-meat patties is all that remains.

“What I see today is Fuddruckers trying to be a Friday’s or a Chili’s,” Romano complains. “It’s supposed to be a burger joint.”

Yet given the ambitious goal of hiking average volumes to $1.8 million, King says he doesn’t have much choice but to define Fuddruckers away from a “burger joint.” To that end, McCullough conducted focus groups last May to learn how “to get past the rejecter vote,” he says.

The answer is variety. A $5.99 salmon burger, for example, is being tested in Austin and Southern California with good results, McCullough claims. Ostrich meat, a low-fat alternative to beef, was introduced three years ago.

King says that trial has grown 5 percent to 10 percent in the nonbeef menu items. Still, some in the system think burgers—at $47 million, the largest menu category—remain a key driver. “I think we have opportunity for growth in the burger area, maybe through toppings. I want to expand the menu but within the parameters of what we stand for,” asserts Jim Boland, a former Fuddruckers executive and now a Boston-based franchisee with two units.

Reaching Milestones
Management, however, is intent on widening variety. McCullough launched the “World’s Greatest Shake” campaign last year, putting 5-foot-high “milk shakes” in units and creating six new flavors including lemon-cheesecake. A traveling trophy was awarded to the unit that sold the most in a given month. Milk-shake sales grew from 2 percent to 4 percent of the total sales mix. “We wanted to focus on one product to bring awareness,” McCullough says.

Over Christmas, Cannon challenged the chain to generate $1 million in gift-card sales by Dec. 31. By early December, the chain had sold $250,000 worth.

Should gift-card sales hit the goal, King will chalk up another victory. “Every two months we hope to reach a milestone. You can’t do everything in one day. It’s just too overwhelming,” he says.

For the time being, he’s working on integrating the Koo Koo Roo units and improving service in Fuddruckers. “It has never been a service-friendly restaurant, and we need to find ways to introduce a service element that matches our product offerings,” he explains.

To help him figure that out, King has read the best sellers Built to Last and Good to Great. “I’m also reading a book called something like Companies That Have Lost Their Way and How to Rejuvenate Them,” he says. “The title is almost perfect for the Fuddruckers story. Maybe that’s why I had an interest in it.”