Avado Brands on the Fast Track

Rick Barbrick has taken Avado Brands from bankruptcy to growth mode in less than two years.

By Lisa Bertagnoli, Contributing Editor -- Chain Leader, 12/1/2006

Late in 2004, Rick Barbrick was president of Somerville, Mass.-based Bertucci’s Corporation, one of casual dining’s success stories. During his leadership, Barbrick doubled EBITDA, increased unit volumes to $2.3 million from $1.7 million, and launched a four-year string of positive same-store sales, which began in October 1999.

Then one day, Barbrick got a call from Alice Elliot, CEO of Tarrytown, N.Y.-based The Elliot Group, a hospitality training and executive-search firm. Elliot, whom Barbrick describes as an old friend, told him that Avado Brands was looking for a CEO. “When I stopped laughing, we had a serious conversation,” Barbrick says.

The job offered him CEO status, plus a challenge that was the reason for his initial amusement at Elliot’s suggestion. Avado, owner of Don Pablo’s, a full-service Mexican chain, and Hops, a brewpub concept, had filed for bankruptcy in February 2004. “A bankruptcy is an interesting place to be in any business, first to see if you can do it,” Barbrick says.

A visit to Avado headquarters in Madison, Ga., convinced Barbrick that the concepts were salvageable, victims perhaps only of mismanagement. In October 2004, he and his family moved to Georgia, where Barbrick began a turnaround process that involved hiring a new management team, installing operational efficiencies, refocusing menus and paying close attention to restaurant-level operations.

From Apple to Avado

Avado Brands’ roots are in Apple South, at one time a public company and Applebee’s largest franchisee. In the mid-1990s, Apple South owned 279 Applebee’s locations; thanks to the concept’s success, the franchisee’s growth seemed nearly limitless.

In 1997, Apple South divested itself of its Applebee’s restaurants to concentrate on other concepts it had acquired, among them Don Pablo’s, Hops, McCormick & Schmick’s, and Canyon Cafe Southwestern Grills. In 1998, it changed its name to Avado Brands and planned to expand with the $400 million net proceeds from the sale of the Applebee’s locations.

Investors, however, lost confidence in the company, and share prices dropped to $10 from $19 in only a month. Avado sold McCormick & Schmick’s in 2001 and Canyon Cafe in 2003. In February 2004, the company filed for bankruptcy.

From the Ground Up

When Barbrick came on board, he discovered everything from a bloated corporate structure to purchasing inefficiencies to neglected restaurants. “Take a broken company, and every day you turn over a rock and a monster jumps out at you,” he says.

He hired a new management team, all of whom he had worked with at Bertucci’s or other companies: CFO Kurt Schnaubelt and Senior Vice President of Marketing/Strategic Planning Bob Hogan joined the company in February 2005. John Koch, senior vice president of procurement, research and development, and quality assurance, came on board in January.

Barbrick and Schnaubelt reduced general and administrative expenses by $3 million, in part by trimming the number of corporate staffers to 91 from 128. They kept morale high by promising no further job cuts and by “telling employees they were key members of a high-performance team,” Schnaubelt says. They brought purchasing in-house, a move that saved $1.5 million in 2005 and is expected to save another $750,000 to $1 million this year. A new intranet system streamlines communications between the corporate office and store managers.

The changes weren’t easy, according to Schnaubelt. “It’s hard on people…you have to be agile, you have to be multidisciplinary,” he says.

Within the system, Barbrick closed 15 Hops and four Don Pablo’s, all of which were unprofitable. This past year, he funneled $8 million into the remaining 118 stores, which had seen years of neglect. “The deferred maintenance was staggering,” Barbrick says. While most of the $8 million went toward repairing HVAC systems, improving lighting, replacing doors and windows, and re-landscaping properties, $1.5 million was spent on re-imaging 10 Don Pablo’s in Dallas and Marietta.

Renewed attention to store-level operations has impressed longtime employees. Avado “is not run so much as a financial institution anymore as it’s being run like a restaurant company,” says Tonya Bosher, general manager at a Don Pablo’s in Columbus, Ohio. “There’s been a refocus on fundamentals, on putting the guest first. You can feel the difference.”

Avado executives say they’ve spent “a lot of time and money” refocusing on guests. Efforts include instituting a new secret-shopper program; scores have risen 10 points, to 90 percent, since new management took over. Holding focus groups helped Avado determine where guests wanted Hops’ and Don Pablo’s menus—back to their original focus. Other initia tives such as Don Pablo’s remodeling program are also aimed at improving the guest experience.

Minding the Stores

The re-imaging program, an ongoing project, costs about $150,000 per store. It includes restoring Don Pablo’s original “plaza” feeling, complete with fountains, an earth-tone palette, tile mosaics and exterior serape-striped awnings. Unit volumes at the 18 restaurants remodeled to date are 11.1 percent higher than the system average, Barbrick says.

Another ongoing effort: Redoing the menus. To prove to investors that the brands were viable, Avado launched an all-you-can-eat fajitas promotion at Don Pablo’s in March and April 2005 that increased systemwide sales from -4 percent to 1.5 percent and guest counts from -4.8 percent to 2.4 percent over the time the promotion ran. At Hops, where the menu had strayed from its original upscale focus, the revival of 20 original menu items, among them spinach-artichoke dip and Mardi Gras Chicken, and a $10.99 steak promotion increased sales by 4.6 percent and guest counts by 3 percent for 2005.

The corporate and store-level changes were enough to convince DDJ Capital Management LLC of Waltham, Mass., Avado’s debtor-in-possession lender, that Avado was ready to move out of bankruptcy. In May 2005, the management team orchestrated a $42 million debt and equity-financing package; Avado emerged from bankruptcy as a privately held company.

Ready to Grow

Eighteen months out of bankruptcy, comp-store sales at Don Pablo’s are positive, rising from a low of -5.2 percent in 2002 and -4 percent for the last six months of 2004 to flat in 2005 and positive in the first quarter of 2006. Hops hit a low of -15.7 percent in 2004, rising to 4.6 percent in 2005, a trend that has continued through the first quarter of 2006. While he won’t release specific figures, Schnaubelt says Hops is now outperforming the casual-dining segment, and Don Pablo’s comps are in line with other casual, full-service Mexican concepts.

The turnaround is complete enough that Avado is ready to launch another brand.

The first Pablo’s Fajita Grill will open late next year in Philadelphia. The fast-casual concept, featuring fajitas grilled to order over an open flame, is Avado’s future growth and franchise vehicle. (All Don Pablo’s and Hops restaurants are company-owned.) Barbrick expects 100 Fajita Grills to open within the next five years. He has no plans to expand Don Pablo’s and Hops in the foreseeable future.

Full-size Don Pablo’s cost about $3 million to build, while Fajita Grill stores cost about $1.5 million. The prototype is 3,000 square feet with 90 seats inside and 30 on a patio. Barbrick estimates a $9 check average at the grill, compared to $13 at Don Pablo’s, and unit sales of $1.5 million, vs. $2.2 million at Don Pablo’s.

Pablo’s Fajita Grill “is a viable way to increase both brands,” says David Mansbach, managing director of HVS Executive Search, a foodservice recruiting firm based in Mineola, N.Y. “It just has to be a well-thought-out differentiation point so there’s no confusion,” or cannibalization of the full-service brand, Mansbach adds.

Barbrick deems the companywide turnaround about 70 percent complete. Improving training is on his to-do list: “I want it to be one of the most intense training programs in the industry,” he says. In November, Jeanne Colaizzi, Avado’s director of operations, was promoted to vice president of training.

Current challenges include continuing to instill a guest-focused culture and improving store-level operations. “We can’t compete with Chili’s or Applebee’s on marketing, but we can out-execute them,” Barbrick says. Another challenge lies in managing the restaurants, so geographically spread out that Barbrick logged 75,000 air miles this year visiting the stores.

But the worst is over. “The monsters,” Barbrick says, “are smaller now.”