A Shadow Over Shakey's

June 2, 2002

On August 7, 2000, Shakey's Pizza franchisees gathered at the Bonaventure Hotel in Los Angeles, eager to see and hear the company's latest plan for revitalization.

Charged with creating the plan was Lombard Associates, a one-woman firm run by Alexis Ainsworth, touted as a turnaround expert by Lamar Campbell, Shakey's president.

What Ainsworth unveiled in the meeting was a concept she called Il Stivaletto, an Italian-style café selling coffees, desserts and dried foods such as pasta.

Randy Hill, president of Los Angeles-based Jacmar Restaurant Group, which operates 19 Shakey's in Southern California, said he and the other franchisees were aghast.

"I thought it was a joke; I actually thought it was an elaborate hoax," said Hill. "I didn't think anybody could believe she would be that far off base."

Sean Flynn

According to John McNulty, another franchisee in attendance, several franchisees decided that night not to renew their franchise contracts; he said many have since left the system.

Less than two years later, Shakey's Pizza is still on shaky ground.

Founded in 1954, the company grew to nearly 500 stores by the mid-1970s, but today, only 67 domestic stores remain, according to Hill.

There are, however, nearly 400 Shakey's scattered throughout Japan, Malaysia and the Philippines. And though its U.S. headquarters are in Garden Grove, Calif., its parent company of 14 years, Inno-Pacific Holdings, is based in Singapore.

U.S. franchisees view IPH as distant and detached, claiming it provides them no corporate support. McNulty, president of the Shakey's Franchised Dealers Association, has accused it of gutting the stateside corporate staff and rendering it unable to lead the organization or service franchisees effectively.

Shakey's franchisees have long claimed the aging concept is well overdue for a makeover, and that the company has made false and unfulfilled promises to reinvigorate it. Consequently, Shakey's Inc. is facing two breach of contract lawsuits.

McNulty, on behalf of his own company, and Sterling Foods, a Shakey's franchise company owned by Mick Clark, filed nearly identical lawsuits against Shakey's last March. They accuse the company of breach of contract, fraud and negligent misrepresentation. Sterling Foods is seeking approximately $6 million in damages, McNulty almost $2 million.

Sean Flynn, hired as Shakey's president last April, insists the company is on the comeback trail. He said promised store facelifts and menu changes will roll out with the April 2002 opening of a franchise store -- its first since 1992 -- in La Habra, Calif. A veteran restaurant developer from Switzerland-based Mövenpick and former Pizza Hut franchisee in Singapore, Flynn says that plans to double domestic franchise store numbers by 2006 remain the centerpiece of his revitalization plan.

"We have a new franchisee in La Habra, and he's opening according to the new prototype design," said Flynn. "Ideally, what we'd like to do to reestablish ourselves is start with area developers who can open five to 10 stores."

When he accepted Shakey's offer to become president, Flynn said he knew his work was cut out for him. But he said the opportunity to return the brand to its former glory was too good to pass up.

"What I learned confirmed what I had known: Shakey's, as a brand, is extremely well known in the U.S. and overseas as well," said Flynn, 49. "It had so much history and equity in the brand that if we could find a way to tap in to that, the potential was limitless."

Refine the Design

Cited in McNulty and Sterling's lawsuits are multiple corporate communiqués that promised franchisees Shakey's was working to fix the chain's problems. Campbell, who resigned as president in 2001, wrote that Shakey's was building a corporate support structure for franchisees, while consultant Ainsworth wrote that the company was at work on a massive improvement of store concepts.

McNulty and other franchisees were skeptical of Shakey's plans then, having heard similar stories from the home office for years, and they remain uneasy about Flynn's strategy now.

McNulty said franchisees he's spoken to don't like the new store designs, nor a proposed menu addition called Triplets. (Triplets are three-piece miniature versions of signature pizza and chicken items, as well as onion rings and cookies designed to generate snack sales between lunch and dinner. Market tests haven't begun, though their proposed sale price is about $2 each.) Tom Miller, a one-store franchisee in Milwaukee, Wis., said Triplets simply don't fit Shakey's widely used buffet format.

"The development of Triplets has no application to what we're doing here," said Miller. "To go to that would be a big switchover, and I don't relish the thought of switching over. I fear we would lose a lot of customers here because they know us as a buffet store."

Miller added that seeking to boost sales with such small-ticket items won't help owners of large units (4,000 to 8,000 square-feet) designed for high volume, and which feature arcade-style games and entertainment for kids.

"We will never -- and this is an irrevocable statement -- be associated beyond the length of our existing contract with Inno-Pacific."

Randy Hill
President, Jacmar Restaurant Group, a Shakey's Pizza franchisee

Though Triplets was introduced last September at the annual Shakey's franchisee meeting, Flynn said he is only now beginning to hear franchisees' complaints. "If they have some constructive criticisms, I'd be pleased to listen to every one of their issues."

Despite what appears to be growing opposition, Flynn fully intends to test Triplets upon opening the LaHabra store in April. Additional opportunities exist, he said, to sell Triplets as snacks to customers whose appetites strike between lunch and dinner.

Rochester, Minn., franchisee Marty Canfield said adding Triplets could weaken Shakey's position as a Midwestern buffet restaurant.

"Restaurants that are true buffet concepts have a wider variety of offerings, some pretty nice dishes that we don't have. That makes it very difficult to compete," said Canfield. "We are a buffet house, technically, but we have takeout and you can eat in and order separate things off a menu if you want. We're not like other (buffet) concepts."

McNulty said that if Shakey's listened to the advice its franchisees have willingly offered, such problems could be avoided. "We're all very frustrated ... because the franchisees are truly the best source for new ideas, innovation and growth. For years Shakey's has negated any of our input."

The Distance that Divides

Inno-Pacific Holding's long-distance ownership is another source of franchisee disgruntlement. The absence of a hands-on owner running the company, said Canfield, has kept IPH removed and unaware of U.S. franchisees' needs.

McNulty said Shakey's California headquarters staff is supposed to serve as IPH's long-distance liaison, but that endless turnover problems there have rendered it unable to help. According to McNulty, 13 people have occupied the president's seat at Shakey's since 1980, and some of Flynn's hand-picked eight-person turnaround team have been dismissed or resigned.

Flynn admitted that staff has been cut because the company is watching costs closely, but he declined to say exactly how many were left. He did say Shakey's vice presidents of operations and marketing were no longer with the company, but that its purchasing manager and director of franchise development are still employed.

"I think that we're sufficiently staffed to accomplish the tasks that are ahead of us," said Flynn. "One constantly reassesses the resources, both manpower and financial, and it's incumbent upon me as the president of this company to ensure we have the appropriate resources in place for the time being. As activity increases, no doubt so will the staffing level at the head office."

According to Flynn, IPH's handling of Shakey's U.S. properties is not uncommon for an international holdings company.

"They consider Shakey's as an investment (and) they want to see -- as much or more than anyone -- this company produce a return on that investment," said Flynn. "I think that they will do what ever is necessary to ensure that."

Courting Conflict

McNulty said many other franchisees share the same frustrations detailed in the two legal complaints, "but they didn't want to join in the lawsuit for a lot of reasons: financial, emotional, all that stuff. I can understand that."

Both Sterling Foods and McNulty have made settlement offers, but Shakey's hasn't responded. (McNulty's counsel has advised him not to discuss the case in detail.) With depositions nearly complete in each case, Shakey's has not refuted either suit's complaints, and McNulty believes a trial is imminent.

Shakey's Pizza

HQ: Garden Grove, Calif.
Founded: 1955
Owner: Inno-Pacific Holdings (Singapore)
Stores: approx. 460, 67 in the U.S. (54 in California), others in Japan, Malaysia, Philippines
Estimated Sales: $60 million
Average Check: $7.50
Key pesonnel: Sean Flynn, president; John McNulty, president of Shakey's Franchised Dealers Association

Flynn isn't permitted to discuss the cases in detail, but he said he's confident the ordeal will end in favor of Shakey's.

"Certainly we have given some thought to every possible outcome," said Flynn. "But as we get further and further down the legal path, we are becoming increasingly comfortable with our position."

Mass Defections

Since the disastrous franchisee meeting at the Bonaventure Hotel in 2000, multiple Shakey's franchisees are allowing their contracts to lapse. Among them, said McNulty, are Craig Clausen, a six-store franchisee, and three-store franchisees John and Delores Supple, who left the system in January.

Hill said that Jacmar will leave when its contracts expire in 2006. Asked if Shakey's leadership had done anything to convince Jacmar to stay, Hill said no, and that it's too late for that.

"We will never -- and this is an irrevocable statement -- be associated beyond the length of our existing contract with Inno-Pacific," said Hill, 60, who has worked with Shakey's since he was 22. "And if there's a way for us to exit the system prior to expiration we will."

The financial impact of Jacmar's departure, said McNulty, would represent a loss of 35 percent of Shakey's annual U.S. sales, estimated at $60 million by the 2001 Directory of Chain Restaurant Operators.

Flynn doesn't view the potential consequences so negatively.

"My job is to position this company and this brand in such a way that no one party is going to be the life or death of this brand," said Flynn. Asked whether Shakey's is working to repair damaged relations with Jacmar, he added, "Yes, by demonstrating leadership at the corporate level ... (and) developing a world-class franchise system at every single level."

Such comments raise doubts in the minds of franchisees like Miller, who said the lack of help from corporate headquarters can't get much worse.

"You really need a strong franchisor to develop products and marketing efforts, and we don't have that," Miller said. "They have limited manpower, too, and I know there's only so much they can do."

Flynn admits that there are "some disgruntled franchisees because of the past," but he insists that dwelling on history won't help Shakey's. "I'm focused more on how to get it moving forward rather than looking at the past and how it declined."

Many of Shakey's remaining franchisees are "legacy" franchisees, a term used by operators to describe franchises begun by parents and grandparents and passed down to present generations. And given those franchisees' knowledge of the company's checkered reputation, Shakey's faces a strong challenge to convince them that the mistakes of the past won't be repeated.

McNulty said he believes the company is worth fighting for because, as Hill pointed out, many of Shakey's remaining operators are profitable despite the lack of support from headquarters.

"We very much want this brand to continue," said McNulty. "I've been involved since 1964, when my dad bought and built the store. Mick Clark's grandfather started his business, too."

Acknowledging the fact that Jacmar's departure could drain $21 million from Shakey's sales in one fell swoop, McNulty admitted that the one-time pizza powerhouse's future doesn't look bright.

"Shakey's is in a real tenuous financial condition right now, and I don't know if they're going to survive it."

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