Claim Jumper Under New Ownership

With a new parent footing the bill, Claim Jumper’s veteran managers are tackling national expansion.

By David Farkas, Senior Editor -- Chain Leader, 2/1/2006

At 5:30 p.m. on a recent Wednesday, hungry diners are streaming into Claim Jumper at South Coast Plaza mall in Costa Mesa, Calif. Soon, the cavernous dining room is on a wait. By evening’s end, the 400-seat restaurant will have served 1,500 meals, typical of a weekday. On weekend nights, the number grows by a thousand.

The attraction is easy to figure out: A decor blending rusticity with sophistication makes for a comfortable setting, and stupendous portions of good food on a reasonably priced menu equals value. Tonight, for example, strips of breaded calamari, $10.95, are as thick as steak fries, and a heart-stopping slice of a chocolate cake, $8.95, dubbed The Motherlode, might well feed six. The company claims it sells 250,000 of them a year. Many customers are toting leftovers as they leave.

More undoubtedly will be asking for doggy bags now that the 38-unit chain is in the hands of private-equity owner Leonard Green. The Los Angeles-based firm, which paid an estimated $220 million to $240 million after beating out six other bidders, is eager to turn the chain into a national player. Although some potential buyers are said to have wanted new blood at the top, Leonard Green Partner Tim Flynn isn’t among them. “We backed Craig [Nickoloff] and his team,” he insists. “We think it’s a great management team.”

Nickoloff, the 54-year-old founder and CEO, is indeed sticking around. “I’m still very active. I’m in the office six days a week and still get out to openings,” he says, adding that he reinvested in the company he and his father, Nick, launched 28 years ago in Los Alimitos, Calif. It remained a family-run enterprise until the October auction.

Nickoloff therefore will be heading to Chicago this year. Of the five new units scheduled for this year, three will open in the Chicago suburbs of Lombard, Hoffman Estates and Wheeling. “We will do this slowly and cautiously. We are aware of economic trends,” he says.

“The big challenge is to move from a small, closely held private company to a large, national brand,” says CFO Bill Hustedt. He, along with Nickoloff and President and COO Robert Ott, runs day-to-day operations.

That won’t be easy. None has broad national experience, although they have grown the chain throughout California and opened a dozen Claim Jumpers in four other Western states. Management admits they’ve learned hard lessons along the way. One: Don’t hire new managers locally. The company now seeds new restaurants largely with veteran managers and has trimmed management turnover from 50 percent to 14.1 percent in the process.

“We noticed this very interesting phenomenon during our openings,” recalls Vice President of Training and Development Bill Story. “We tripled our turnover. Because we do so much business, even existing employees get pushed to their maximum.” The Fresno unit, for example, reportedly rang up $300,000 in its first week last July.

For the Lombard restaurant, which opened in January, Story hired just three entry-level people, dispatching 10 experienced managers at the cost of $27,000 each. Among them is eight-year Claim Jumper veteran Anna Bozarelos, general manager of the South Coast Plaza unit.

Old Timers
Long tenure helped up the ante in October’s auction. Both Ott and Hustedt, for example, have worked for Claim Jumper for almost 20 years. Story has been there even longer. General managers, like Bozarelos, also hang around for a long time. “There was something we have never seen before,” says Flynn, recalling his due diligence. “Among all the managers, 185 have been there more than 10 years.”

Tonight, the South Coast Plaza unit’s display kitchen is a blur of activity. Yet it is hard to miss its most notable features: a floor-to-ceiling rotisserie and a wood-fired steak broiler. The chain introduced open cooking in 2003, and so far all new units (seven in total) have installed it. Still, it’s hard not to wonder what took so long to debut a standard design element among casual-dining chains. “We hadn’t put them in before because we do so much volume,” Ott says, citing the pressure of putting out so many dishes. Nonetheless, Ott says, they were installed because “we take pride in what we do.”

Large volumes are Claim Jumper’s hallmark. Although the privately held company doesn’t disclose financials, officials claim the last 10 units are each ringing up more than $8 million a year—a figure that puts them in the rarefied company of Maggiano’s Little Italy (AUV: $9.2 million) and The Cheesecake Factory (AUV: $11.2 million). Taken as a whole, the unit average is $7.1 million, still way above most everyone else.

The company expects systemwide sales to grow to $290 million, from ’05’s $250 million, in ’06—a year the Irvine, Calif.-based chain begins testing the concept in the Midwest. In ’07 and ’08, the chain will open smaller restaurants—10,000 to 11,000 square feet instead of the usual 13,000 square feet—in St. Louis; Indianapolis; and Columbus, Ohio. Then it plans to head to the Carolinas and Florida.

That’s when Leonard Green’s bet will pay off, says former Baja Fresh CEO Greg Dollarhyde, who represented another private-equity firm interested in the company. “Where [Claim Jumper] is going to reward the very full investment of the equity partners is when they can pop the East Coast,” he says.

Nickoloff insists he’s not in a hurry or under pressure from the new owners. “They recognize how careful you need to be,” he says. “We haven’t even gone to Texas yet, and we always get pressure to go there. [But] that is a very, very, very saturated state.”

Then again, so is California, and Claim Jumper has done quite well there since opening its first restaurant. Since 1995, Claim Jumpers have popped up in Colorado, Arizona, Nevada and Washington. Two units are scheduled for Portland, Ore., this year.

Until recently, no one outside the company really knew how well Claim Jumper did. Could it be that profitable given the portion sizes and the well-appointed buildings? The selling memorandum Minneapolis-based Piper Jaffray prepared for buyers of Nickoloff’s company (his family owned about 85 percent) gave industry experts a close look at unit performance. Although sworn to secrecy by confidentiality agreements, several offer a broad picture that confirms what observers long speculated: strong box economics.

“Claim Jumper has a long-standing history of high sales, passion and dedication to the concept,” says former investment banker Mark Saltzgaber, who advised two bidders. Management tenure was important, too, but no one failed to notice another salient point. “You weren’t going to wake up one day and find someone had copied you. You aren’t worried about a direct threat,” he says.

Risky Business
Of course, not everyone has the stomach to risk $4 million plus on each restaurant, despite warding off potential rivals. Damon Chandik of Piper Jaffray, who prepared the selling memorandum, recalls he didn’t underline the investment cost: “We didn’t downplay it, but I will say you’ve got to be willing to make the investment.” Instead, he positioned Claim Jumper as having a strong culture and team that would make it a nationwide concept. “There was great growth potential,” Chandik adds.

That notion was evident in the final round of bidding among seven private-equity firms, who pushed the multiple into the low double digits, according to a source who asked for anonymity. If accurate, it’s an astonishingly high valuation, even for a proven, high-volume restaurant company. “It’s off the charts,” declares mergers-and-acquisitions specialist David Epstein of J.H. Chapman Group, adding that seven times earnings is more typical.

Why did Nickoloff, the son and grandson of restaurateurs, give up 65 percent of his company? Certainly the timing must have seemed propitious, with so much private capital sloshing around the industry. Taco Bueno, El Pollo Loco, Dunkin’ Donuts, Garden Fresh and Dave & Buster’s, for example, recently sold to private-equity buyers, many new to the industry. For his part, Nickoloff wanted to “do some family financial planning.” Part of that included immediately reinvesting an undisclosed amount in the company, hoping his family might get “a second bite of the apple,” he adds. Employees, including management, own the remaining shares.

Private-equity firms, of course, are buying a company’s earnings potential, and Leonard Green’s Flynn thinks Claim Jumper has it in spades. “It is still a small company, but we see a long runway ahead. We think the concept can grow to two or three times its size,” he says. Adds Nickoloff: “We have a very high potential to achieve our EBITDA goals.”

Bottoms Up
Like other executives, Nickoloff, Ott and Hustedt think about boosting the bottom line in their restaurants. “Everyone wants a little more profit. We’re on that train,” Nickoloff says. At the first board meeting in late November, the company set its profit goals. “With time, we’ll be able to achieve a little more profit,” Ott says.

Driving down building costs and picking up purchasing and shipping efficiencies in Chicago will eventually help. Meanwhile, keeping the existing restaurants—big, complicated affairs that employee 140 workers—up to snuff is daunting. “Daily operations is foremost on our minds,” Nickoloff concedes.

Standardizing the design would reduce costs. But Nickoloff, Ott and Hustedt have so far resisted the temptation, though for how long is anyone’s guess. “I’m not a big believer, or haven’t been, in just designing a box and then cookie-cuttering it all over. Our feeling is that the design of our restaurants plays a big part of our success,” Nickoloff says.

If proof is needed: The gorgeous South Coast Plaza unit, with its gleaming display kitchen, rang up $9 million in sales last year.

Take This Job and...
Though Claim Jumper’s overall management turnover was only 14.1 percent last year, the high-volume units remain a tough place to work. Vice President of Training and Development Bill Story lists the five top reasons that send newbies out the doors:

Transfer issues. Where’s the bank, the dry cleaner, and can you deal with the absence of friends and family?

Different focus. Total focus is on operating the restaurant according to Claim Jumper’s plan—not yours.

Indifference to new ideas. “We can be perceived as not grabbing on to all those great ideas for improvement,” Story admits.

Large teams. Not only must new managers get used to running their shifts by the book, they must also learn to subordinate themselves to any one of nine other store managers in the process.

Quality of work life. Consider managing 140 employees serving hundreds of customers inside a 10,000-square-foot restaurant from a huge scratch menu with multiple bosses judging your performance.