August 31, 2004 will mark the end of one of the most discordant franchisor-franchisee relationships the U.S. pizza industry has ever seen. On that day, Singapore-based Inno-Pacific Holdings will relinquish ownership of Shakey's Pizza to a newly formed subsidiary of the Jacmar Companies named Shakey's Restaurants Franchising Company.
When Inno-Pacific bought the chain in 1989, Shakey's was about half the size of its late-1970s peak of 450 units. Today the company claims just 61 units.
According to a filing with the Singapore Stock Exchange, Jacmar, headquartered in Alhambra, Calif., franchises 19 Shakey's in Southern California. It paid $4.5 million dollars for the Shakey's chain, about 1.5 times the amount the Los Angeles-headquartered company collects in annual franchisee royalties.
Jacmar's offer to purchase the company came just days before a May courtroom showdown between Shakey's and nearly two-dozen franchisees was set to go to trial. By purchasing Shakey's, Jacmar relieved Inno-Pacific of the burden of funding a costly court battle that it
could not afford to lose.
Steve Coomes, Senior Editor
The deal also gave Shakey's and its franchisees (some of whom have been with the chain for four decades) a new chance to grow their businesses under a strong, well-heeled owner with a vision for expansion. Jacmar not only knows how to run restaurants, it knows about growth, and few would be surprised if Shakey's goes public someday.
To use a haggard but applicable saying, this is a win-win for buyer and seller. Here's why.
Salvation for Inno-Pacific
A look at Shakey's sale price shows that Jacmar bought the name and its brand power, not the chain's assets. According to documents filed by Inno-Pacific with the Singapore Stock Exchange, the net book value of Shakey's assets is $422,802, a number well shy of the asset value stated in a Shakey's P&L in June of 2002. That document, circulated among the chain's franchisees, claimed total assets of $2.1 million itemized vaguely as follows: $1 million for "Intercompany;" $562,000 for "Fixtures, Signs, Equip. & Computers;" and $424,000 for "Net Franchise Rights."
Over the 15 years Inno-Pacific owned Shakey's, the firm claims it invested about $27 million in the company, but it has little to show for it. The company has reported a long string of annual losses, which, were it not for the Shakey's sale, likely would have continued through 2004.
According to an April 2003 independent auditor's report, Inno-Pacific lost $8.5 million in 2002 and $6.8 million in 2001.
The publicly traded company's market cap (based on 477 million outstanding shares of stock valued at about a half-cent each) is $2.4 million, and it claims total assets of less than $1 million. It also claims ownership of 28 companies — 17 of which are dormant. Only one, Shakey's Inc., generates revenue.
The last time Inno-Pacific filed complete financials for public review was August of 2003. However, in one of two announcements about Jacmar's purchase of Shakey's, the company reported it lost $1.1 million in 2003. And in a perplexing stroke of accounting, the company claimed that if the June 2004 Shakey's sale had actually occurred on January 1, 2003, the profit for that year would have been $2.96 million. How it will represent the sale as a part of its 2004 financials is unknown.
Lastly, in 2002 and 2003, the firm's independent auditors questioned Inno-Pacific's validity as a going concern. The auditors' reports said the company faced the following possible losses: $2 million in a dispute over back taxes owed to Singapore's tax controller; and what was then an unsettled franchisee litigation against Shakey's, in which it faced potential damages of $10 million. The auditors wrote that the company had made no provision for potential losses in either dispute.
Salvation for Shakey's
Founded in 1954, Shakey's Pizza is arguably the original pizza franchise chain in the U.S. Its storied rise from pizza-parlor-beer-joint to a 450-unit powerhouse is the stuff of legends. In its first 25 years, it was a trendsetter for dine-in pizzerias.
But in an equal span of time, the chain fell from its lofty heights under the pressure of intense pizza competition and poor management.
While Inno-Pacific's ownership can't be blamed for all of Shakey's woes, it's clear that its influence on the system was profoundly negative. Under its ownership, a dozen Shakey's presidents have been hired and fired. The chain has lacked a president since the resignation of Sean Flynn in 2002, and its franchisee and field support services are all but non-existent.
Through lawsuits and multiple public declarations to the press, franchisees have accused Inno-Pacific of taking their royalties to Singapore instead of reinvesting them into the Shakey's system.
Hoping to renew some expiring franchisee contracts in 2002, Shakey's leadership pursued the renewal of its Uniform Franchise Offering Circular in California. However, the effort was abandoned several months later when California Senior Corporations Counsel W. Anthony Colbert questioned whether the company had the funds available to serve its current and future franchisees as spelled out in the UFOC.
Aware that Shakey's was attempting to negotiate renewals with an outdated UFOC, franchisees filed a class-action lawsuit against the chain in December of 2002. (Jacmar's purchase includes an undisclosed settlement of the case, which litigants voted unanimously to accept.)
Though Shakey's believed it would prevail in court, it's likely the threat of a potential defeat pressured Inno-Pacific into selling the company. But in the end, it will walk away with cash rather than lose it, and Shakey's franchisees have a chance to start afresh under Jacmar's leadership.
Three franchisees I've spoken with are ready to begin opening new stores; others have told them they are eager to do the same. All believe the company's brand recognition is strong enough to stage a strong revival first in Southern California, followed by expansion into contiguous states.
Does such enthusiasm mean Shakey's will return to its former status? The challenge to do so is indisputably greater than when Shakey's peaked nearly 30 years ago; neither the pizza industry landscape nor Shakey's itself is remotely similar to what it was back then.
At the very least it means long-term adversaries will soon part ways, the final chapter of this long and disturbing story will be closed, and the readers of PizzaMarketplace.com have a reinvigorated competitor to keep an eye on.
Read related Shakey's stories by clicking here.