Avado Brands, Inc.

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Avado Brands, Inc.

Hancock at Washington
Madison, Georgia 30650
U.S.A.
Telephone: (706) 542-4552
Fax: (706) 342-4057
Web site: http://www.avado.com

Public Company
Incorporated: 1986 as The MRG Company, Inc.
Employees: 20,300 (1998)
Sales: $862.7 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: AVDO
NAIC: 722110 Full Service Restaurants

Known until 1998 as Apple South, Avado Brands, Inc. owns and operates several restaurant concepts in the United States, primarily in the upscale market between casual dining and fine dining. The company’s restaurant chains include McCormick & Schmick’s, which prepares more than 30 kinds of fresh seafood entrees daily, and Hops Restaurant Bar and Brewery establishments, which serve American-style food made from scratch and beer fresh brewed on-site. Avado’s Don Pablo’s restaurants serve authentic Mexican dishes based on the traditional recipes of Mexican ranch cooks in the 1940s. Canyon Cafes, acquired by Avado in 1997, offer a southwestern menu and atmosphere. Avado’s international joint ventures include Belgo Neiuw York, which features Belgian cuisine and beer, and San Marzanno, where Neapolitan-style pizza features sauce made with tomatoes from the San Marzanno region in Italy. A vado’s combined restaurant locations covered 30 states and Washington, D.C. in 1999.

Origins in Casual Restaurants Concepts

The history of Avado Brands may be traced to the 1986 founding of The MRG Company, which took the name Apple South, Inc. in 1988 through a merger with Sunburst Restaurants. As owner of Sunburst Restaurants, Tom E. DuPree, Jr., was operating six Burger King franchises and ten Hardee’s franchises at the time. Moreover, DuPree’s interest in full-service, casual dining led him to open an Applebee’s Neighborhood Grill and Bar franchise in Greenville, South Carolina, in 1986; DuPree would eventually become one of the most successful franchisees of Applebee’s restaurants; he formed Apple South to oversee the holdings. The Applebee’s concept featured Mexican, Italian, and Cajun entrees, hamburgers, sandwiches, soups, and salads. Menu items ranged in price from $5.75 to $7.25 for lunch and $7.25 to $8.75 for dinner.

Under the leadership of DuPree Apple South set about opening and operating an empire of Applebee’s franchises. In 1988 Apple South opened ten Applebee’s restaurants in Mississippi, Tennessee, and Virginia. Another 17 units opened in 1989 in North Carolina and another 11 units opened throughout Apple South’s development territory in 1990. DuPree determined store placement by researching the demographics of a potential location, including household income, age range, and retail support. Those demographics needed to sustain a 5,000-square-foot restaurant and bar with a seating capacity of approximately 160 people.

At the time of the company’s initial public offering of stock in November 1991, Apple South operated 40 Applebee’s franchise stores and owned development rights in 15 states, primarily in the southeastern states. Apple South retained ownership of the ten Hardee’s franchises DuPree had brought with him at the founding of Apple South as well. The company offered 2.25 million shares of stock, which sold at $8.34 per share on the NASDAQ stock exchange. The proceeds were applied to debt payment and expansion of Applebee’s franchises, with ten to 12 planned each year for 1992 and 1993.

After its first full year as a public company, Apple South ended 1992 with an additional 20 Applebee’s restaurants in operation. The cost of opening each store averaged $1.3 million and included the purchase of real estate whenever possible. With a per-person check average at $8.50, first year sales approximately equaled opening costs. The company had added six of the franchise units through an acquisition that also included future development rights in northeastern Florida and southeastern Georgia.

A second public offering in March 1993 raised $41 million in equity capital for further expansion. Three-for-two stock splits in December 1992 and February 1993 allowed Apple South to offer 1.3 million shares at $16.50 per share. The company planned 15 new stores in 1993 and 20 new stores in 1994. In addition, Apple South acquired eight Applebee’s franchises in northwestern Illinois, Missouri, Iowa, Minnesota, and Wisconsin, in April 1993. The $17 million cash transaction included development rights to the counties adjacent to those stores. DuPree expected to add at least 22 stores and to improve sales at existing stores in those areas.

Apple South strategically located new stores in areas where an Applebee’s franchise already existed. Awareness of the existing stores provided recognition for the new stores, while the new stores acted as a promotion of the restaurant concept and increased sales at existing stores. In May 1993, Apple South opened Applebee’s franchises in Louisville, Richmond, and Nashville based on this strategy. Television advertisements and promotions by Applebee’s International (the franchisor) and by Apple South boosted sales as well.

Apple South ventured into an Italian restaurant concept in 1993 with the acquisition of two Gianni’s Little Italy restaurants in Tampa and Winter Park, Florida. The stores provided an opportunity to develop a casual Italian restaurant concept that served as a prototype for a new chain of restaurants. Apple South changed the menu and added hand-painted murals to the interior decoration for a more authentic Italian look. The size of the original restaurants more than doubled, from 80 seats to 195 seats. By July 1994, the eighth Gianni’s restaurant had opened in Charlotte and two more were planned for Knoxville and Charleston.

Apple South continued to exceed its goals for the Applebee’s chain as the 100th Apple South-owned Applebee’s opened in Chesapeake, Virginia, in March 1994. The company expanded in May 1994 with the purchase of another Applebee’s franchisee, Apple Tenn-Flo L.P. The acquisition included nine Applebee’s restaurants in Tennessee, and another under construction, as well as development rights in six states. Acquisition of Marcus Corp. added 18 restaurants to the Apple South chain with Applebee’s units in Chicago, parts of Wisconsin, Minnesota, and Michigan. The $48 million transaction included development rights. Applebee’s International, the franchisor, approved the acquisition, but limited Apple South to 75 new units in that market territory and to 200 additional units throughout existing Apple South franchise territory by 2000.

In September 1994, DuPree filed a proposal with the Securities and Exchange Commission for a merger between Apple South and Applebee’s International. The proposal came as a surprise to Applebee’s executives. While some observers regarded the situation as a hostile takeover, the filing initiated an open discussion between the two companies. The merger seemed a reasonable idea to many investment watchers and led to an increase in stock values for both companies. Apple South maintained the highest store-level profit margins, at 17 percent to 18 percent after accounting for royalties to the franchisor, than at any other Applebee’s units, including those units owned and operated by Applebee’s International. Negotiations to merge with Applebee’s International stalled in December, however. DuPree, in an article in the December 19, 1994 Nation’s Restaurant News, attributed the breakdown to “philosophical differences on the strategic direction and operating methods for the Applebee’s concept” Other opinions attributed the collapse to differences in personal management styles.

Diversification in the Mid-1990s

Apple South continued to expand its chain of Applebee’s franchises, but began to experiment with proprietary restaurant concepts as well. In April 1995 Apple South implemented changes in its Gianni’s Little Italy dining concept. Renamed Tomato Rumba Pastaria Grill, the livelier format featured Rumba dancers on the weekends and the menu incorporated fun names such as Roasted Veggie Watusi, a winter vegetable dish served over penne pasta with marinara sauce. The moderately priced menu included more non-Italian selections. The first store conversions occurred in Columbia and Greenville, South Carolina, and a new store opened in each city as well. All of the 15 Gianni’s Little Italy restaurants were converted by the end of 1995, and five additional Tomato Rumba stores opened.

To its chain of 170 Applebee’s franchises, Apple South added two new restaurant concepts in the acquisition of DF&R Restaurants in August 1995. DF&R became a wholly owned subsidiary of Apple South and maintained separate operations involving 29 Don Pablo’s Mexican Kitchen restaurants and 12 Harrigan’s Grill and Bar restaurants. The plan to open 18 Don Pablo’s stores created some concern as the concept competed with Rio Bravo, a Tex Mex chain owned by Applebee’s International. The Don Pablo’s concept attracted more families, however. By the end of 1997 the chain grew to 91 restaurants.

Company Perspectives:

There is a point of balance in any organization that, when skillfully achieved, produces harmony. Avado Brands is the balance of innovative entrepreneurial restaurant concepts with the practical strength of effective brand management principles. Holding to our core values of honesty and integrity, best effort, and fun, Avado Brands is dedicated to moving forward with high concern for the enrichment of customers, investors, personnel, and alliance partners. That, too, we see as a carefully attended balance. It is the ongoing mission of Avado Brands to take high-growth concepts and turn them into very profitable national and international businesses. This, combined with a total commitment to the future of our entire enterprise and our company’s value, will achieve the shortest distance between vision and reality.

With other, more successful restaurant concepts drawing attention and company finances, Apple South began to close the Tomato Rumba units in the first half of 1996. The company executives learned from the experience that their talent was in their ability to expand existing concepts rather than developing their own. Although the restaurant industry’s conventional wisdom proclaimed that lack of focus leads to failure for multi-concept companies, Apple South determined that high growth potential in the concepts they chose and the autonomy and talent of each restaurant division would fuel its success. The company retained several of the company-owned structures from the Tomato Rumbas chain for conversion to other restaurant concepts and sought to develop its restaurant chain by acquiring restaurant chains with proven dining concepts.

In February 1997 Apple South purchased McCormick & Schmick’s, a chain of 16 seafood dinner houses with locations in California, Oregon, Washington, and Colorado. In Washington, D.C., the restaurant concept operated under the name Jake’s and had four additional stores planned at the time of the acquisition. Apple South planned only two new McCormick & Schmick’s restaurants because of the expense of interior decoration and location for the upscale concept. In addition, the need for trained chefs and the complexity of the menu, which changed daily according to the availability of fresh seafood, required extensive forethought. The two McCormick & Schmick’s stores opened in October 1997—one in Southern California and one in Northern Virginia. Three were planned for 1998, to be located in Florida, California, and Baltimore.

The day after the company announced the agreement with McCormick & Schmick’s, Apple South announced that it would purchase Hops Grill and Bar, a restaurant and micro-brewery with 18 units located in Florida, Colorado, and Kentucky. Each location employed its own brewmaster for hand-crafting the company’s signature beers and ales. The acquisition evolved when the owners of the Hops chain approached Apple South about the possible purchase of some of the Tomato Rumba structures for conversion to Hops Grill and Bar. Hops was later renamed Hops Restaurant Bar and Brewery.

The following June, Apple South acquired Canyon Cafes, Inc. The 13-unit chain of southwestern-style restaurants featured a rustic look and spicy entrees such as corn-husk barbecued salmon. Nation’s Restaurant News named Canyon Cafes a “Hot Concept” for 1997. With locations in Arizona, California, Colorado, Georgia, Missouri, and Texas, the acquisition brought the company’s total number of restaurants to 363.

Apple South’s acquisitions provided mutual benefits to each company. The company increased its sales revenues, while the three new divisions benefitted from additional capital for expansion, as the acquisition transactions involved cash, stock, and debt payment. DuPree and Apple South executives had learned from some conflicts with the cofounders of Don Pablo’s that each chain would operate more successfully with autonomy. The strengths the parent company offered were fiscal and administrative organization as well as chain development experience. Like DF&R, the McCormick & Schmick’s, Hops, and Canyon Cafes operated as separate, autonomous entities.

Diversification into its new proprietary restaurant concepts prompted Apple South to divest other assets. The company completed the sale of its ten Hardee’s franchises in May 1997. In November 1997, Apple South sold a 75 percent interest in the Harrigan’s chain to Pinnacle Restaurant Group. In December 1997 the company announced its intention to divest the 264 Applebee’s franchises that it owned and operated, as well as development rights in 20 states and in Washington, D.C.

The decision to sell its Applebee’s franchises stemmed from Apple South’s preference to pursue a variety of restaurant concepts with high growth potential in the burgeoning niche between casual dining and fine dining. The franchise agreement with Applebee’s International required Apple South to open new stores on a regular basis. By selling the franchises, Apple South gained the freedom to invest available funds in its proprietary restaurant concepts, as well as to invest in concepts that might compete with Applebee’s International. A conflict with Applebee’s International over the alleged similarity of the Hops and Applebee’s concepts played a minor role in the decision. In addition, Apple South wanted to sell the franchises before thorough saturation of the territory’s development capacity, making the property more salable.

Announcement of the divestiture shocked the industry, as DuPree had spent 13 years actively pursuing new territory and expanding operations. The high-risk move resulted in a steep decline of stock values for both Apple South and Applebee’s International. Although the sale of the Applebee’s franchises resulted in a loss of 50 percent of the company’s overall revenue, the divestiture netted $400 million, making funds available for debt payment and expansion of its proprietary restaurant chains. The process of selling the franchises and development rights resulted in 15 transactions with other franchisees and the additional sale of 33 units in Virginia to Applebee’s International. Apple South offered employee bonuses to maintain the quality of the store-level staff during the transition. To reflect the transformation of the company, its name was changed to Avado Brands, Inc. in October 1998.

Key Dates:

1986:: The MRG Company is formed in Georgia; Tom DuPree, Jr., begins his franchise of the Applebee’s restaurants.
1988:: MRG becomes Apple South, Inc., headed by DuPree.
1991:: Apple South goes public.
1994:: The 100th Applebee’s franchise is opened.
1995:: Apple South acquires Don Pablos restaurants.
1997:: Apple South acquires McCormick & Schmicks, the Hops Grill & Bar, and Canyon Cafes; company announces the sale of its Applebee’s franchises.
1998:: Company renamed Avado Brands, Inc.

1998: International Enterprises

Avado Brands accessed new restaurant concepts through joint ventures with European firms. In February 1998 it acquired a 20 percent interest in England-based Belgo Group plc. BGP owned two restaurants in London that featured Belgian foods, such as fresh mussels, in appetizers and entrees, and “frites,” thick slices of fried potatoes served with warm mayonnaise. Belgium had also become renowned for its wide variety of high-quality beers, another feature of the eateries. Avado and BPG invested equally in the Belgo Neiuw York in Greenwich Village, which opened at the beginning of 1999. The restaurant featured two distinct atmospheres—an exuberant bar on the first floor offered more than 100 kinds of Belgian beer, while fine dining in a contemporary setting was offered on the second floor. With the profit margin at 25 percent, Avado began to research possible locations for the Belgo concept in Boston, Chicago, San Francisco, Montreal, and Seattle. The joint venture also allowed for a future location of an Avado restaurant in Europe, likely to be the McCormick & Schmick’s concept.

In a joint venture with England-based PizzaExpress plc, Avado Brands opened its first San Marzanno restaurant along Philadelphia’s restaurant row on Walnut Street. PizzaExpress had been in operation for more than 35 years and owned more than 200 units in eight countries, including India, Pakistan, and Turkey. The Philadelphia eatery featured a trendy, upscale atmosphere with moderately priced, Neapolitan-style pizza, available with traditional or contemporary ingredients. First-year sales were expected to reach more than $1.5 million. Avado planned to open one or two new locations in 1999, cautiously testing the concept.

In its existing American stores Avado focused on brand quality and profit margins, as well as expansion. The company relaxed plans to expand its chain of 129 Don Pablo’s Mexican Kitchens from another 30 units down to 15 planned for 1999. Plans for the 18-unit Canyon Cafe chain were reduced from eight new stores to one in 1999. Meanwhile, McCormick & Schmick’s began construction on a 9,000-square-foot restaurant in Atlanta featuring an outdoor patio and a custom interior with seating for 250 people. Seafood would be flown to that location daily from the Pacific and Atlantic coasts. Hops Restaurant Bar and Brewery opened its 50th unit in March 1999, located in Newington, Connecticut. Twenty Hops restaurants planned for 1999 would be located in existing territory and in six new states—Indiana, Louisiana, Maryland, Missouri, Ohio, and Virginia. Avado completed the divestiture of the Applebee’s franchises in May 1999.