Are congrats in order for Donatos Pizzeria's Jim Grote?

Nov. 18, 2003

Perhaps I'm overly presumptuous or simply foolish for doing this, but I want to be the first to publicly congratulate Jim Grote on buying back Columbus, Ohio-based Donatos Pizzeria (the company he founded) from McDonald's.

As you'd expect with a touchy story like this, everyone wants to be the pizza industry's Deep Throat, while threatening to slit my throat if I quote one them as a source. Simply put, this prediction is largely rumor based (neither McDonald's nor Donatos is talking), but based on the burger giant's most recent SEC filing--plus an abnormal amount of information coming from sources in the Columbus, Ohio, restaurant rumor mill--I'm confident it's a done deal.

Steve Coomes, Editor

Bottom line: McDonald's isn't happy at all with the performance of the company's Partner Brands (Donatos, Chipotle and Boston Market). Here's what the filing said: "During the fourth quarter, we will take additional actions to revitalize the business. These will include making decisions related to our Partner Brands ... (t)hese actions ... will result in charges in the fourth quarter 2003."

The first key word there is "charges," which translates to losses and expenses, or perhaps the sale of any or all of the Partner Brands at a loss.

The second key words are "fourth quarter 2003." I suspect someone's getting a whopper of a Christmas present in the next few weeks.

Inspired by recent sales increases at McDonald's, company CEO Jim Cantalupo has issued a full-steam ahead order for the burger juggernaut, and he'll not deviate from that course at the behest of smaller vessels like Donatos. The way I see it, as far as Cantalupo is concerned, all hands are on deck at McDonald's, and the non-burger chains are destined to become jetsam.

Good riddance

There's no denying the Partner Brands have cost McDonald's a lot of money. Quarter after quarter, McDonald's has lost tens of millions on them--though no one's ever clearly stated why.

Chipotle and Donatos were perfectly healthy when purchased, though Boston Market was awash in debt.

Chipotle has grown nicely within the McDonald's system, but Donatos unit counts have seesawed.

All of that was expected to happen: "Fresh-Mex" food is hot, but pizza is, well, cold. So could Boston Market's home-meal-replacement formula been that damaging to profits?


Back to Donatos: One has to wonder whether the chain would have been better off left in Grote's hands. When he sold the company in 1999, it had 146 units. Today it has about 180; three of those are in far-flung Germany--a decision questioned by many in the industry. Net unit growth of 27 percent in five years isn't much to write home about, when Ronald McDonald is your corporate sugar daddy.

Could Grote have grown it that 27 percent on his own, an average 6.8 units per year? I'd wager he could, even in the current market. Though the chain didn't exactly race to 146 units in the 36 years he owned Donatos, I'm confident enough momentum was there to carry it along for a mere 6.8 units a year.

What I'm trying to say is McDonald's must be the cause of Donatos' problems. Product and system changes weren't received well in new markets (in Atlanta alone, Donatos opened 23 stores, and then closed them all at once), and even Columbus locals grumbled that the pizza they grew up eating wasn't the same after Ronald got into the kitchen.

That said, a departure from the McDonald's system will be a good thing for Donatos.

Good guy

Even the hardened cynic loves a happy ending, and people in the pizza world want to see Jim Grote get his company back. Employees and competitors alike speak well of him--he's truly one of their own--and his "regular Joe" personality is genuine.

Several operators I spoke with said they envy him because he's succeeded at what they're working to do--without selling his soul. They admire his passion not only for his product, but for people on both sides of the pickup counter. So many I've talked to simply said, "Grote's a good guy. I'm glad it's working out this way."

Which I hope it does.

Not only to save me from the embarrassment of being wrong if it doesn't, but to save Donatos from McDonald's. Released from the fetters of the world's largest foodservice company, I believe it can grow again and become a sizeable player in the U.S. pizza market. Passion and product will reign again in Columbus.

Topics: Commentary , Public Companies

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