Poised for a comeback

Nov. 30, 2004

It was the worst of times.

Shakey's Pizza was headed for a May courtroom showdown with two-thirds of its franchisees — a battle royal that could potentially bankrupt the once-great pizza chain.

Though the suit was against Shakey's, franchisees truly were angry at Shakey's parent company, Singapore-based Inno-Pacific Holdings, for its role in a decade-long reign of error. During its tenure, the chain lost more than 200 stores and dozens of loyal franchisees.

Franchisees were seeking millions in compensation for alleged misuse of their royalties, and a dire outcome for Shakey's looked all but certain ... until Bill Tilley stepped in.

The chairman of the board of The Jacmar Companies, a 19-store Shakey's franchisee in Alhambra, Calif., knew a court battle would yield no real winners. So five days before the case was scheduled for trial, he made an offer to buy Shakey's from Inno-Pacific. The $4.5 million deal allowed Inno-Pacific not only the chance to save face, it could leave town with badly needed funds for its struggling firm back home.

An additional $2.5 million would be paid to cover franchisees' legal costs amassed in the suit against Shakey's.

In September, when the buyout was completed, it wasn't suddenly the best of times. But the dark clouds that hung over Shakey's so interminably long were clearing. Today it remains largely the same: 63 stores and holding. The future, however, is remarkably brighter.

Tilley, one of Shakey's first franchisees, is assembling a plan to rejuvenate the legendary pizza chain,

What's Important

Shakey's Pizza is under new ownership. Its old managment team is gone and a new one made up of pizza veterans is positioning it for new growth.

The company is debt free and has deep cash reserves. A private stock placement will occur in 2005.

The plan for growth is 1,000 stores in the next 10 years, as well as a public offering.

which at one time included 500 stores. He is building a leadership team that includes a former Pizza Hut president and executives with decades of pizza and restaurant experience.

He's also injecting capital into Shakey's — something Inno-Pacific hadn't done in years — to the tune of millions to position it for growth on a grand scale.

If Team Tilley can pull it off, the turnaround will mark one of the greatest comebacks ever staged in the U.S. restaurant industry.

"The company is incredibly financially sound," said Joe Remsa, Shakey's new executive vice president. "We have no debt and a significant amount cash in the bank. That allows us to move this forward very fast and removes a lot of the obstacles you would normally have in a start-up."

How fast can Shakey's grow? Remsa said the company will roll out a moderate number of units at a Sunday-drive pace through most of 2006. After that, the turnaround turbocharger is scheduled to kick in.

"You'll see it ramp up geometrically over the next 10 years," he said. "The goal is 1,000 units in 10 years. ... A public offering is part of that, too."

Why Shakey's?

Since Tilley was traveling and unavailable for comment, the question of why he has taken on the enormous task of revitalizing a troubled company was handled by his executive team. To a person, they say Tilley sees huge and untapped potential in the company. Despite closing more than 400 stores since the late 1970s, the chain enjoys not only nationwide brand recognition, but is regarded fondly by former customers.

"Shakey's has a 97 percent aided awareness level," said Arthur Gunther, a consultant hired to help with Project Shakey's. "You ask them, 'Have you ever heard of Shakey's Pizza?' And they say, 'Oh absolutely, I remember Shakey's!' It evokes a fabulous memory for them, a time of banjos and pianos, great pizza and old-time movies."

And a time of keen competition for Gunther, who served as the president of Pizza Hut from 1980-'86.

"The Shakey's restaurants always outperformed the Pizza Hut restaurants in Los Angeles," he said. "I knew I was in a battle with someone — like Mr. Tilley, who ran a great operation — when they were growing and going."

For the present, the greatest growth Shakey's will see is in the size of its corporate staff. According to Remsa, the old guard is gone and he's working double time to fill key positions. Two recent hires include director of training Rebecca Black, a veteran of Pizza Hut and Panera Bread, and director of franchisee support Gary Moss, also a Pizza Hut veteran, who spent the last nine years with Einstein's Bagels.

Jacmar president James Dal Pozzo is serving as Shakey's interim CEO until a permanent one is found.

Sonia Barajas-Najera, Shakey's executive vice-president and chief operating officer at the time of the sale, has been retained temporarily as a consultant "because she holds so much institutional knowledge," Remsa said.

Gunther called his consultant title "a bit of a misnomer" because of the level of input he's been encouraged to provide to the venture.

"I am extremely involved in it and participating at many levels on a regular basis," he said. "I've visited the stores and with the franchisees, who are delightful people, survivors who've hung in there by their own determination not to go away. I'm having the time of my life. This is terrific."

John McNulty, a one-store franchisee and president of the Shakey's Franchise Dealers Association, said the communication between the new leadership team and the franchisees has been very open and clear.

"That's completely different from what we received in the past; it's a big change," he said. "Though we haven't seen a lot of work produced yet, we clearly know where they're headed."

According to Remsa, franchisees should start seeing changes in the menu, followed by a new look for existing stores.

Shakey's mainstays, pizza and fried chicken, won't change, but more healthful alternatives, such as rotisserie chicken and more upscale salads, are under consideration.

Creating a new look for Shakey's, however, won't be as simple, he said. The chain's focus on appealing to a family audience will force it to blend nostalgic, contemporary and entertainment elements to form a new identity.

"We have design teams figuring out and creating something that represents the nugget that is Shakey's," Remsa said. "The challenge is to maintain that great feeling of family fun and a social experience and bring it into the 21st century with the right textures, feel, look and menu."

Franchisee fixes

They'll also be challenged to convince franchisees that changes will do them good. Such poor support from the company over the last decade left many franchisees fending for themselves and working to keep the doors open. Helping them accept a team mentality will take some effort, Remsa said.

"The franchisees that are left standing here, they're survivors," Remsa said. "But now we have to show them a new way of doing business that's better for the customer and for them economically. That takes time, but so far, we've been very well received."

Franchisee Chuck Wilburn said he's enjoying the input from the new leadership team.

"They're diving right into rethinking product quality and examining a lot of things we've had issues with in the past," said Wilburn, a one-unit franchisee. "They're doing all the right things to get this going again, they're saying the right stuff and they know what has to be done."

But Wiburn admits he's been in the same situation before, when Inno-Pacific bought Shakey's in 1993. Though declining, the company was four times its current size, and the new owner's promises to right the ship left him highly optimistic back then. "But within a couple of years, you could see it just wasn't happening."

What convinces him now things are different?

"I know the reputation of Jacmar and how they run their stores," he said. "I know Bill Tilley's a brilliant guy who can make this thing work. It's a matter of principle for him to straighten this thing out now."

McNulty grew up in the Shakey's system and has known Tilley for more than 40 years. Not only does he share Wilburn's enthusiasm for the man, he said he's humbled at Tilley's generosity toward the franchisees and store managers.

As part of a $15 million private placement of Shakey's shares in 2005, franchisees and store managers will be given stock in the company simply to imbue a sense of ownership, he said. Additionally, Tilley will turn nearly all of Jacmar's franchised stores into company units over the next couple of years to ensure Shakey's has a good base of working/training units.

"Bill wants this to be an employee-owned company because he understands that the success of the system lies with the knowledge of the people who run it," McNulty said. "He's really putting his money where his mouth is."

According to Remsa, franchising in California, where more than 90 percent of its stores are located, can begin as soon as next January, when the company's UFOC is updated and approved.

Remsa said calls from potential franchisees are already trickling in, but he said existing franchisees are the most likely to open new stores first.

"Among the 63 franchised restaurants, there are probably about 25 franchisees in the system," he said. "So far, we've got requests to build about a dozen restaurants."

Topics: Shakey's

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