Chain Leader

I sat next to Sami Ladeki at dinner in San Diego this week. Sami is the founder and CEO of Sammy's Woodfired Pizza. These upscale casual dining restaurants are known for their gourmet pizzas baked in woodfired ovens, but they also serve sandwiches, pasta dishes, salads, and a selection of tapas. There are 80 items on the menu. He has 14, soon to be 15 locations. Most are in the San Diego area, but he has also expanded to Las Vegas. 

I had met Sami once before, but didn't get as much of an opportunity to talk to him as I did at dinner. He is the prototypical successful restaurateur. He has other concepts now and he has had other concepts in the past. He started Sammy's in 1989 and now has a thriving business that is the pride of San Diego. He does almost $3 million per unit. I give you this preamble so that you can appreciate that this is not an inexperienced man in our industry.

As is the case when you seat restaurant people together, they talk about restaurants. Sami asked what restaurants I have been involved with, and I gave him a list of large chains that would be familiar to most people, in and out of the industry. Sizing me up as a representative of the Big Chain Business he began asking me questions about why Big Chains do business the way that they do.    

• Why do they not seem to care about quality as much as profits? Don't they realize that you can't have one without the other?
  
• Why do they seem to all copy each others' menu ideas? Isn't the goal to have something that the others don't have?
  
• Why do they treat their managers as employees instead of owners? Aren't the managers the ones that are responsible for the success of a location?
  
• Why do the chains raise prices with such disregard for the economy? Why don't they wait for people to feel a little richer and then raise prices?

By the third question I wanted to change teams. It is hard to defend these practices among each other, but it is a losing battle when you are being asked them by a consummate restaurateur. Fortunately, Sami shifted gears and began asking questions about the private equity firms that have been buying and selling chains for the past few years. 

• Why do they borrow so much money when they buy a chain? Why don't they just invest the money that they already have? (I was ready for this one. I explained that by leveraging their investment with debt it boosted the returns. This answer resulted in the next question.)
  
• Isn't it enough of a return to buy something small and then grow it bigger? It increases your risk to take on all of this debt. I know that these are not stupid people, but why do they do these stupid things?

I will leave it to the private equity community to defend themselves. I have my hands full defending the big chain restaurants against a man who must feel like he is watching an entire industry being built in Wonderland.