Jacmar to spend $4.5 million on Shakey's Pizza chain

 
July 15, 2004

Chuck Wilburn was meeting with a handful of Shakey's Pizza franchisees when he heard the news on June 30: Singapore-based Inno-Pacific Holdings was selling the beleaguered 61-unit pizza chain to The Jacmar Companies in Alhambra, Calif.

"We were totally elated. I think a cheer erupted in the room," said Wilburn, a one-unit Shakey's franchisee. "Now I can get up in the morning and I know I have a future."

The sale should be official in about a week if Inno-Pacific shareholders approve the deal. According to a filing with the Singapore Stock Exchange, the $4.5 million generated by the sale would make Inno-Pacific profitable for the first time in many years. It also may save the troubled firm from the brink of bankruptcy.

For all intents and purposes, the sale also ends a 19-month-old class action lawsuit filed against Shakey's, Inc., by nearly two dozen franchisees, including Wilburn, spokesman for the class. The breach of contract trial, set for May 12, was postponed for 60 days with the May 5 initiation of settlement discussions centering on Jacmar purchasing the chain.

According to the Inno-Pacific filing, the sale's completion would absolve it of any damages sought by the class, including potential fines of $10 million.

Though Wilburn couldn't provide details, he said Jacmar has addressed the class' concerns with "a proposal that the franchisees voted unanimously to accept."

Franchisees hoped the lawsuit against Shakey's would lead to a resolution that included Inno-Pacific's investment and involvement in growing the Shakey's business again. However, the proposed change of ownership to Jacmar is viewed positively.

"One of the key components for the franchisees to accept this (proposal) was that Inno-Pacific would not be in control of Shakey's any more," he said. "That was pretty much what we wanted all along."

Jacmar franchises 19 Shakey's restaurants and is the largest shareholder (42 percent) of Chicago Pizza & Brewery, Inc. Randy Hill, president of Jacmar's restaurant division and a one-unit Shakey's franchisee (he also is a litigant in the current lawsuit), said he is pleased the agreement to buy the company has been memorialized and signed. But until it's approved officially, he's cautiously optimistic.

"Both Inno-Pacific and Jacmar are confident there are no roadblocks to the completion of this," said Hill. "We're thrilled about this opportunity to work with our fellow franchisees in making Shakey's what we all have felt for a long time it could be. We believe it can now realize its potential."

Fifteen 'acrimonious' years

By Inno-Pacific's account in the June 30 filing, Shakey's was a shrinking and declining system when it purchased the chain in 1989. True enough, its U.S. unit numbers had dropped to about half the brand's late '70s peak of 450, and revenue was falling.

The company claims it spent nearly $27 million over the next 15 years attempting to rejuvenate the once great chain, but met with continual failure and frustration. According to the filing, "The Company's efforts to rebuild the Shakey's business have been plagued by the acrimonious relationship with the franchisees and have often ended in the court room."

Under

start quote I honestly believe they'll make Shakey's greater than it ever was at its peak. I have that much confidence in these people. So look out. We're going to be a contender again.end quote

-- Chuck Wilburn,
Shakey's Pizza franchisee

Inno-Pacific's ownership, Shakey's has been sued three times by its franchisees, which it said "cost Shakey's millions of dollars in legal fees and immeasurable unproductive executive time."

Relative to the current litigation, Inno-Pacific believes Shakey's would have prevailed had there been a trial. But even had it won, "the soured relationship with these franchisees would have been a major obstacle for it to move forward and succeed in its business."

Wilburn views the past decade and a half differently.

"The whole thing has always been a management issue," he said. "Inno-Pacific had totally lost the confidence of the dealers a long time ago. After all the broken promises, all the bad ideas ... there's no way that anything they would have proposed to us would have been believable. Their credibility with us was gone."

From 1989 to 2002, Shakey's hired and fired about a dozen presidents. Wilburn said that on multiple occasions, just when the latest Shakey's president would restore his confidence in the company and encourage him to open a new store, the president was fired.

"It became clear that this thing was going nowhere but down," he said. "I decided there was no reason to invest another dime into the concept as long as they were running it."

Shakey's has had no president since it fired Sean Flynn in 2002, and its current executive leadership team includes only Chairman Wong Chin-Yong (who lives and works in Singapore), and executive vice president and chief operation officer Sonia Barajas-Najera, who works at the chain's Los Angeles headquarters.

For years franchisees have complained of an ongoing lack of franchisor field support personnel and a virtual absence of new menu ideas. In the past five years, multiple attempts to launch new products, alternative concepts or modified Shakey's platforms met with franchisee ire and never came to fruition. According to several franchisees, suggested additions such as the "Triplets" chicken and pizza appetizer portions, simply didn't fit the Shakey's menu or concept.

Hill believes Inno-Pacific's far-flung headquarters contributed to the ownership problems, adding that Jacmar's location in Southern California—where 95 percent of the remaining Shakey's restaurants operate—will be a plus. "When you think about it, we're about 12,000 miles closer than they are."

John McNulty, a one-unit Shakey's franchisee and president of the Shakey's Franchised Dealers Association, said his excitement over Inno-Pacific's all-but-certain departure is tinged with the disappointment of watching a formidable pizza powerhouse crumble under its mismanagement and neglect.

"It looks like that's going to be behind us, though," said McNulty, who, along with five-unit franchisee Mick Clark, settled a fraud and negligent misrepresentation lawsuit with Shakey's in 2002. "We're all chomping at the bit to open new restaurants now, and that's something none of us have thought was possible for a long time. I'd open up a new one in a heartbeat."

Brighter future

Hill said he and the franchisees "have a very positive outlook toward the future, because there are a lot of great ideas and strong operators in the Shakey's system who can turn it around."

McNulty said Jacmar officials promised to hire "serious foodservice industry veterans" to run Shakey's when it takes over. Experienced hands-on operators, he said, will not only encourage frustrated franchisees, they will help reinstate and enforce Shakey's formerly high product and facilities standards.

System growth is on the Jacmar agenda, and McNulty said the company has committed to building new stores. Southern California, where the brand not only remains strong but retains a loyal following, is a logical seedbed for new sites, but McNulty said franchisees he's spoken to also are looking beyond the state's borders.

"California is difficult to do business in and it's very expensive," he said. "You can look at a 600-mile radius around Southern California and see so much potential; we're all salivating over it."

Wilburn also said he will build another restaurant as soon as the deal is completed. With Jacmar's leadership, he has no hesitation about "getting a couple more of these in the ground and running. ... I honestly believe they'll make Shakey's greater than it ever was at its peak. I have that much confidence in these people. So look out. We're going to be a contender again."

Read related Shakey's stories by clicking here.


Topics: Shakey's


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