Chicago Pizza & Brewery, Inc.

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Chicago Pizza & Brewery, Inc.

16162 Beach Boulevard, Suite 100
Huntington Beach, California 92647
U.S.A.
Telephone: (714) 848-3747
Fax: (714) 848-5578
Web site: http://www.bjsbrewhouse.com

Public Company
Founded: 1978
Employees: 1,510
Sales: $52.35 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: CHGO
NAIC: 72211 Full-Service Restaurants; 31212 Breweries

Chicago Pizza & Brewery, Inc. operates a chain of restaurants which are run under various names: BJ’s Pizza & Grill, BJ’s Restaurant & Brewery, BJ’s Restaurant & Brewhouse, and Pietro’s Pizza. Chicago Pizza & Brewery Inc. has grown steadily during the 1990s, and in 2001 it included 30 restaurants in all in five western states, California, Hawaii, Oregon, Washington, and Colorado. The company expects to continue its expansion and to move into Arizona as well. Chicago Pizza & Brewery restaurants have menus which offer a variety of items, including salads, burgers, pasta, sandwiches, and entrees, but the chain is best-known for its Chicago-style deep-dish pizza. The company also operates microbreweries in six of its restaurants. Those breweries supply the entire chain with a full line of regular and seasonal beers. Beer sales account for about 25 percent of Chicago Pizza & Brewery sales.

Amateur Pizzerias

The history of Chicago Pizza & Brewery is in large part the story of the attractiveness of the restaurant business to outsiders. It began in 1976 when two residents of Ohio, Bill Cunningham, a partner in a brokerage firm, and Michael Phillips, the marketing director for an appliance company, decided to strike out and go into business for themselves. Rather than selecting a business they knew, however, they decided to try their luck in restaurants. Neither partner had any experience whatsoever in running a restaurant; the deciding factor was that because there would be no accounts receivable or inventory to worry about, the bookkeeping would be simpler. Cunningham and Phillips quit their jobs and moved their families across the country to California where they purchased a Burger King franchise in San Pedro. They were attracted to Burger King primarily by the detailed training the company offered its franchisees. That training provided the basis for the success of their own chain of restaurants. While with Burger King, Phillips and Cunningham hoped eventually to purchase more franchises. They were forced to reconsider that plan, however, when Burger King adopted a new policy that prevented franchisees from owning stores themselves. Instead the partners turned to pizza.

Phillips and Cunningham had no experience in pizza either. They knew what they liked, though, and in their minds, there was a lot of room for improvement in California pizza restaurants. “We didn’t think they were very people-oriented,” Cunningham once told the Orange County Register. ”It was: Get in line, order your pizza, put a number on your table. Kids screaming, peanuts on the floor.” They made up their minds that pizza could be served just as well in a real restaurant, with wait people and a nice décor. So, in 1978, they founded a company called Roman Systems Inc. and opened the first BJ’s Chicago Pizzerias. The first restaurant was located in Santa Ana, California, followed shortly by one in Newport Beach, California. The concept was simple and it worked: traditional Chicago pan pizza, for under $5 per person, served by waiters and waitresses in an attractive restaurant setting rather than amid benches, spilled beer, and sawdust. Through the 1980s, BJ’s business increased by about ten percent a year, even during periods of economic recession. When the economy was hit by another recession in the early 1990s, however, even an inexpensive, full service restaurant like BJ’s found it was only just holding on—not losing money, but not growing either. The pizza garnered a solid reputation too. By 1991, BJ’s had won just about every “Best Pizza” award given in the Los Angeles area.

New Careers in Pizza

By 1991, BJ’s had six restaurants, all earning over $1 million annually—about twice the pizza industry average. Cunningham and Phillips began getting inquiries from outsiders interested in opening BJ’s franchises. Growth seemed to be in BJ’s future and the partners were looking at the addition of 15 new stores in the first half of the 1990s. One of their basic principles was to go slow with growth philosophy until they had adequate experienced staff in place for new openings. By the early 1990s, Cunningham and Phillips were also growing tired of running the business on a day-to-day basis. They were ready to step back and start to enjoy what they had built up. One day the BJ’s owners asked their accountants, Paul Motenko and Jerry Hennessey, how to scale back their involvement in the company. Motenko and Hennessey hardly hesitated. They would be willing to take over the management of BJ’s. Although they had no experience as restaurateurs, they closed their CPA firm and launched new careers in pizza.

One of Motenko and Hennessey’s first decisions was to begin an aggressive expansion of the BJ’s chain. They opened a site in Long Beach in 1992, put a second location in La Jolla in 1993, and launched restaurants in Seal Beach, Huntington Beach, and Lahaina, Maui, in 1994. The quick expansion led to losses: in 1994, the company a suffered a $523,000 loss against revenues of $6.5 million, and in 1995 a loss of $1 million against revenues of $6.6 million. Nonetheless, 1995 Motenko and Hennessey were willing to purchase the business outright for about $4 million and stock in the firm, which had been newly incorporated.

Once they owned the firm, Hennessey and Motenko set to work revamping it. Consultants were hired to design a new logo and to create a consistent concept for a chain of restaurants. The results were first incorporated into a restaurant the firm opened in Brea, California, in April 1996. With 10,000 square-feet in floor space, the Brea restaurant was nearly five times larger than most then-existing BJ’s. It was also the first store in the chain with a microbrewery. It offered a much larger selection of food, adding pasta, salads, burgers, and sandwiches, and a greatly expanded pizza menu. The Brea restaurant was acquired and running in a remarkably short period of time. The building was first acquired on March 15 and the restaurant was opened on April 1, only two weeks later—after the installation of completely new fixtures, a full renovation, and the hiring and training of 135 new employees.

The opening was not free of problems, however, and the owners spent the next two months getting the restaurant’s service up to speed. But once the Brea restaurant got on track, it became the flagship store of the BJ’s chain. An important part of the new concept was the adoption of a new name for the restaurants: BJ’s Pizza & Grill. New stores continued to be opened through the rest of the decade. By October 1996, the BJ’s chain was ten stores large, with locations in four states, California, Hawaii, Oregon, and Washington. The growth got an important boost in March 1996 with the purchase of the Pietro’s Corp., the owner of a chain of pizza restaurants in the states of Washington and Oregon.

Pietro’s was on the verge of bankruptcy at the time and Motenko and Hennessey were able to acquire it for $2.35 million and the assumption of about $500,000 in debt. Four Pietro’s restaurants were converted to BJ’s format; some others were shut down; in 2000, six were still operating under the old Pietro’s name. When Pietro’s was acquired, Motenko and Hennessey anticipated that Pietro’s might add as much as $11 million in annual sales to their coffers.

Pizza IPO in the Mid-1990s

In the first quarter of 1996, BJ’s lost about $367,000 against sales—which had increased by 12 percent—of $1.8 million. Despite the losses, which the owners attributed to the opening of the new restaurants, in October of that year, the firm, under the name of a newly-formed holding company, Chicago Pizza & Brewery Inc., took another major step. It made an initial public offering of company stock, selling 1.8 million shares for $5 a piece. Of the approximately $9 million that the IPO raised for Chicago Pizza & Brewery, nearly $7 million was to go toward the renovation of newly-acquired restaurants and another $1.6 million was to be used for debt reduction. The IPO had one completely unexpected consequence for the firm. Chicago Pizza had floated its offering with a relatively unknown underwriter, the Boston Group of Los Angeles. Not long afterwards, the Boston Group went out of business. From one day to the next, Motenko later said, Chicago Pizza seemed to lose all market support and its shares plunged from their $5 opening price to around $1 where they would hover for much of the next five years.

Despite such unfortunate occurrences, the company had found an effective formula. By the mid-1990s, BJ’s was attracting a diverse clientele. The restaurants with their generous portions and low prices drew families, students, and seniors, while the exciting atmosphere of the bars in BJ’s drew crowds of singles and young professionals. In March 1997, Chicago Pizza & Brewery announced the opening of its first restaurant in Boulder, Colorado. The site included a restaurant with more than 150 seats and a brewery with a capacity of ten barrels. As 1997 ended, the company boasted 27 restaurants with annual sales of $26 million. In November 1998 the firm announced it would open three more restaurants in the Los Angeles area.

Company Perspectives:

BJ’s Brewery and BJ’s Brewhouse serve markedly superior food and fresh, handcrafted beers in a casual, lively atmosphere. Our employees and experience exude a warm, friendly and energetic spirit that serves to convey a sense of honest value and a commitment to totally exceed the expectations of our guests. To assure the delight and continued loyalty of the guest, we are fanatical about each and every detail: from the use of only quality ingredients and preparation of our product and the well-trained, enthusiastic spirit of our employees to clean premises, a colorful presentation of our image and our on-going community involvement, the BJ’s Brand strives to make our guests say “Wow!, I love this place!”

Late 1990s: Outside Interest in Chicago Pizza

In December 1998, La Pizza Loca Inc., one of the largest Latino-owned businesses in California’s Orange County, approached Chicago Pizza & Brewery and offered to buy out the company. Pizza Loca’s chief executive, Alex Meruelo, who already held a 7.4 percent stake in Chicago Pizza & Brewery offered to purchase it for $2 per share, nearly 50 cents above the then-prevailing market price, an offer worth approximately $12.8 million in all. Under the terms of Meruelo’s offer, La Pizza Loca would purchase all Chicago Pizza shares except those held personally by Motenko and Hennessey. Those shares would be exchanged for shares in the newly-combined Pizza Loca-Chicago Pizza. Meruelo said he was pursuing the deal because he believed there were strong synergies between the two firms. The owners of Chicago Pizza rejected the offer, however, saying they felt it did not serve the best interests of the company’s shareholders.

A little more than two months later, Chicago Pizza & Brewery announced that it was selling 1.25 million shares of its common stock to ASSI Inc., a real estate and hospitality company that had provided funds for the acquisition of the Pietro’s chain in 1996. In exchange for the stock, ASSI was to pay Chicago Pizza $ 1 million and cancel two consulting agreements it had with the company, as well as canceling 3.2 million of Chicago Pizza’s outstanding warrants which it held. Those warrants—a kind of stock option certificate which allowed the holder, for a predetermined period of time, to purchase a share of stock at a predetermined price—made up approximately 25 percent of all Chicago Pizza’s outstanding warrants. Many saw the deal as linked directly to the retirement of those warrants, which were seen to be depressing the value of Chicago Pizza’s stock. Another incentive for Chicago Pizza, however, was the promise of ASSIs real estate expertise as it pursued further expansion. Alex Meruelo, whose La Pizza Loca offer to take over the BJ’s chain had been rebuffed in December, immediately filed suit against Chicago Pizza in civil court, alleging that in accepting approximately 80 cents per share from ASSI instead of the $2.00 per share Pizza Loca had offered, Chicago Pizza had acted irresponsibly toward the interests of its stockholders. In March 1999, a California court refused Meruelo’s request for a temporary restraining order that would have blocked the transfer of stock to ASSI. The deal was consummated later in March.

Chicago Pizza earned its first profit under Motenko and Hennessey in 1998, when it reported earnings of $85,000, up from a loss of $315,000 in 1997. The company had 1998 revenues of $30.1 million, up 15 percent from the previous year. In mid-1999 the company announced an executive restructuring with the naming of Ernie Klinger as president. Jerry Hennessey gave up the position and became co-CEO with Paul Motenko. Chicago Pizza denied that the restructuring had anything to do with an attempt by Alex Mereulo, the holder by then of nearly 15 percent of the company’s stock, to win a seat on the board of directors.

The year 1999 saw Chicago Pizza’s annual sales jump to $37.4 million and same store sales at BJ’s restaurants increase by 7.8 percent. In 1999, it also opened new restaurants in Arcadia, Woodland Hills, and La Mesa, California, and planned several other new sites in the coming months. As 2000 began, the company was operating 19 BJ’s and eight Pietro’s. In spring 2000, Chicago Pizza opened a new restaurant in West Covina, California, which had 12,000 square feet in area as well as the chain’s largest microbrewery.

The ownership of Chicago Pizza underwent another change in December 2000, when the Jacmar Cos., one of Chicago Pizza’s major restaurant suppliers, agreed to purchase approximately 2.9 million shares of the company’s stock. Jacmar had a newly-formed affiliate called BJ Chicago, which had earlier in the year acquired more than 15 percent of Chicago Pizza common stock in open trading. BJ Chicago bought another 2.2 million shares at $4 each from ASSI Inc. and Louis Habash, and co-CEO’s Motenko and Hennessey agreed to sell 661,358 of their own shares, about half of their personal holdings, as well. In all, the deal gave Jacmar a 51 percent holding in Chicago Pizza and control of the firm.

Chicago Pizza officials later admitted that debt financing had forced them to make the deal. The Union Bank would only agree to $8 million in loan financing to Chicago Pizza only if the company were able to come up with additional equity. Chicago Pizza & Brewery called 2000 the best year in its history. Four new restaurants were opened in California. It marked the fifth consecutive year of same-store sales increases. Company revenues increased by 40 percent over 1999, reaching $52.35 million.

Principal Divisions

Pietro’s Restaurants; BJ’s Pizza & Grill; BJ’s Restaurant & Brewery; BJ’s Restaurant & Brewhouse.

Principal Competitors

T.G.I. Friday’s; Chili’s Grill & Bar; Claim Jumper; The Cheesecake Factory; California Pizza Kitchen; Pizzeria Uno; Chicago Bar and Grill.

Key Dates:

1978:: Bill Cunningham and Michael Phillips open the first BJ’s Pizzeria and found Roman Systems Inc.
1991:: Cunningham and Phillips turn the management of company over to their accountants, Paul Motenko and Jerry Hennessey.
1992:: Motenko and Hennessey begin aggressive campaign of expansion.
1995:: Motenko and Hennessey purchase BJ’s chain.
1996:: Chicago Pizza and Brewery is incorporated as a holding company for the BJ’s chain and goes public; company acquires Pietro’s Corp. chain of pizzerias in Oregon and Washington states.
1998:: A brewery/restaurant in Boulder, Colorado, is opened.
1998:: Chicago Pizza & Brewery rejects a takeover bid from La Pizza Loca, Inc.
1999:: 1.25 million shares of Chicago Pizza & Brewery stock are sold to ASSI Inc.
2000:: Jacmar Inc. obtains majority stake in Chicago Pizza & Brewery.