A Pub Chain Returns to its Roots

Claddagh Irish Pubs rebrands itself to shed a painful past.

By David Farkas, Senior Editor -- Chain Leader, 5/18/2008

Claddagh Irish Pubs is back in the hands of its original investor, a wealthy Irishman named Patrick McDonagh. He is paying about $10 million for the troubled 15-unit chain, where systemwide sales have tumbled about 15 percent to 20 percent over the past three years. In 2007, the company rang up $37 million in sales. It’s a new start for Claddagh, having gone through bankruptcy and a court battle over who to blame for the chain’s problems.

McDonagh’s plan is to turn the units back into pubs--small pubs, at that. “More pub with food than food with pub. That’s where we see the growth area in the future,” he explains while in a nearly empty 8,500–square-foot Claddagh in Lyndhurst, Ohio, 15 miles from company headquarters in Solon. 

Ideally, he’d like to change the sales mix, pushing liquor and beer sales to about 65 percent of the mix. Ideal size, he adds, is from 3,500 square feet to 5,500 feet.

McDonagh, who also owns the 80-unit Supermac chain, a franchised quick-service system with a varied menu on the Emerald Isle, is visiting the restaurants before retuning to Galway later this month. He says he has no plans to open smaller units until the company improves profits.

Cheaper Rents

Meanwhile, the 15-unit chain is $20 million in the red, most of it owed to McDonagh himself. “I probably won’t get it back,” he concedes.

It is also about to exit involuntary bankruptcy after McDonagh’s lawyers and real-estate consultants improved Claddagh’s EBITDA by negotiating favorable deals with landlords and vendors.“They did a good job,” allows McDonagh, who will not detail the transactions because the company is not yet out of bankruptcy.

“The deal is never closed until the documents are signed and you get the key,” he says. McDonagh expects the bankruptcy trustee to release the company to him by the end of May.

By that time Claddagh’s marketing director, Christian Rinehart, will have selected an advertising agency to redevelop the brand, including new logo, uniforms and slogan. The goal, he says, is make the concept more contemporary and less formal. He also wants to build a happy hour and late-night business. “It is a complete rebranding effort. We are bringing the fun back,” Rinehart says. 

No Fun

Fun has been sorely lacking, particularly in the court battles McDonagh and former protégé Kevin Blair engaged in from 2004 to 2006. Blair founded Claddagh with McDonagh’s backing in Indianapolis after two years as director of operations for Supermac.

Blair, who expanded the chain to 17 units, sued his former boss and partner for breach of contract in 2005 after McDonagh refused to invest more money. He claims he stopped funding Claddagh because Blair hadn’t provided a fair accounting of the company’s financial condition.

McDonagh counter-sued, seeking repayment of the $21 million he had plowed into the enterprise. Blair claimed that sum was an equity investment. McDonagh argued it was a loan. In late December, a Hamilton County (Ohio) jury agreed with McDonagh and awarded him $2.5 million. Efforts to reach Blair for comment were unsuccessful.

Meanwhile Claddagh’s vendors, owed some $4.7 million, filed an involuntary bankruptcy petition against the then-17-unit chain. By early 2007, a court-appointed trustee was deciding whether to sell the company to pay off some $33 million in debts, including $12 million in back taxes and interest. McDonagh, however, wanted to hang on to it, hoping to recoup some of his losses.
 
What Went Wrong

Court-appointed CEO T.J. Callahan says sales and profits were tumbling in the company’s largest restaurants, which make up about half of the chain. He blames poor operations in the large units for the steep declines.

McDonagh, who lives in County Galway, says he was not aware of the extent of Claddagh’s problems until it was too late.

That surprises one financial expert. “It seems unlikely to me [McDonagh] wouldn’t have requested a CPA to perform an audit when things were going sideways,” says Paul Fields, a Bethesda, Md., financial consultant specializing in restaurants.

McDonagh admits he is partly to blame. “Being older and wiser now, I would have had more controls in place. You know, you trust a guy and, well, whatever,” he explains, his voice trailing off.