Donatos Pizzeria Corporation

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Donatos Pizzeria Corporation

1 Baston Oval, Suite 200
Columbus, Ohio 43219
U.S.A.
Telephone: (614) 416-7700
Toll Free: (800) 366-2867
Fax: (614) 416-7701
Web site: http://www.donatos.com

Wholly Owned Subsidiary of McDonald’s Corporation
Incorporated: 1963 as Donato’s Pizza, Inc.
Employees: 5,000
Sales: $197 million (2002)
NAIC: 722110 Full-Service Restaurants

Donatos Pizzeria Corporation is a subsidiary of McDonald’s Corporation, part of the fast-food giant’s specialty food division. Donatos operates approximately 200 pizza restaurants, including franchised units. The company’s restaurants operate in seven states, occupying a narrow swath stretching from Michigan to Alabama. A single Donatos unit operates in Munich, Germany. The chain is known for spreading its toppings to the edges of its pizza. Aside from Pizza, Donatos’ menu includes submarine sandwiches and salads. The chain offers delivery and carry out services; certain locations feature a dine-in telephone-ordering system.

Origins

Donatos drew its strength from its long-time leader, James Grote. A Columbus, Ohio, native, Grote began making pizzas while in high school during the late 1950s. He worked at a pizza parlor named Cy’s, where his philosophy toward business took shape. Grote worked for two partners who alternated nightly shifts. “One was skimpy, one was generous,” Grote explained in the April 15, 1998 issue of Restaurant Business. “On nights that the generous guy worked, there were lots of customers. They knew which night to go, of course,” he added. Grote’s lesson went deeper. He noticed the atmosphere in Cy’s changed depending on which partner was working, flipping from “nice” to “nasty” every other night. In his interview with Restaurant Business, Grote stated, “I decided that, when I had my own place, there’d be a set of principles and values, that you should always treat people as you want to be treated.” Grote’s early work experience instilled in him a desire for consistency, both in product and in management. For a brief time, it looked as if Grote would get the opportunity to test his business ideals before he left high school.

Grote spent three years working at Cy’s. When he was in the 11th grade, his two employers offered him the chance to buy the pizzeria. Grote tried to borrow money for the purchase from his father, a butcher, but the elder Grote declined, convinced that pizza was just a fleeting fad. His first attempt at becoming a restaurateur quashed, Grote enrolled at Ohio State University and spent a little more than a year at the school before the prospect of becoming a pizza parlor owner surfaced again. In 1963, when Grote was a sophomore, he learned that Donatos was up for sale. In his second attempt at ownership, Grote prevailed, borrowing $1,300 from his father and the owner of a plumbing shop to acquire Donatos.

Grote’s entry into the restaurant business had a homespun quality to it. His mother helped make the pizzas, and he kept a 100-pound bag of flour in her kitchen to make sure that she had a sufficient supply to turn out pizza dough. She also made the restaurant’s meatballs and sausage, obtaining the meat from her husband the butcher. The business did well, attracting enough of a loyal following in Columbus to justify expansion. Although Grote eventually did expand Donatos, he did not view his initial success as cause for immediate action. His concern for the consistency of his product, born during his days at Cy’s, made him reluctant to expand. First, he had to be sure a pizza made at one Donatos would be precisely like the pizza made at another Donatos. Duplication, he found, was difficult to achieve, involving more than separate restaurants working from the same recipe. Grote eventually felt comfortable enough to expand, but his satisfaction with the consistency issue did not unleash an ambitious expansion spree. Donatos grew slowly, and did not venture beyond the Columbus market for more than 25 years.

As Grote’s chain slowly grew, it developed its signature traits. Grote used provolone rather than mozzarella. He spread his toppings to the edge of the pizza. The pie pieces were cut into squares rather than triangles. However, perhaps the most important quality of Donatos’ pizzas—at least according to the Grote family—was the exacting standards by which they were made. Consistency in every step of the pizza-making process was the rule. For example, a Donatos pepperoni pizza might have 105 or 106 slices of pepperoni laid on top, but the weight of the meat compensated for the slight discrepancy. Whether there were 105 slices or 106 slices, the weight was virtually always the same, measured to “within a thousandth of a pound,” according to James Grote’s son, Tom Grote, in the October 12, 2001 issue of the Philadelphia Business Journal.

Growth in the 1990s

During its first quarter-century of existence, Donatos established itself as a fixture within the Columbus market. Grote, who was joined by his children and extended family in running the business, opened more than a dozen pizza restaurants in his hometown. Expansion outside Columbus eventually occurred, but again Grote was wary of losing consistency. By the early 1990s, he was satisfied that the Donatos concept could be exported to other markets. One of the major problems that had been resolved to allow geographic expansion was the refinement of a dough system. Grote used what he called a “low-temperature dough,” as he stated in the April 15, 1996 issue of Nation’s Restaurant News. The dough was rolled at a commissary where it was stored at zero degrees Fahrenheit before being shipped to the Donatos units. Satisfied that he had ensured a uniformity of product, Grote was ready to expand more aggressively. In 1991, he set up a franchising system and began forging agreements with interested parties. Franchising helped fuel the company’s expansion, enabling the chain to reach 30 units, system-wide, by the end of 1992. By the end of 1993, there were 41 Donatos in operation.

By the mid-1990s, Grote was preparing to launch Donato’s most aggressive expansion campaign. The company, which generated an estimated $80 million in revenue in 1995, comprised nearly 100 restaurants by the end of the year. Of the total restaurants in operation, there were roughly twice as many company-owned units as there were franchised units, a ratio the company hoped to reverse in the late 1990s. The goal was to create a chain in which 70 percent of the restaurants were operated by franchisees and 30 percent were operated by the company. To spur such expansion, a new post of vice-president of franchise development was created in 1996. The company also developed a more efficient operations system, added several new members to its executive team who were skilled in managing expansion, and adopted a new advertising campaign that revolved around the slogan, “Best pizza on the block.” Donatos described itself as the local favorite, the message of a marketing campaign that was geared to facilitate the chain’s entry into new markets. In 1996, the company hoped to open 41 new restaurants, only eight of which were to be company owned.

Over the course of the next two years, Donatos expanded into a number of new markets, establishing approximately 25 new stores a year. Company-owned and franchised units opened in Indiana, Michigan, Kentucky, Tennessee, Alabama, and Georgia. Although the company did not achieve its goal of a 70 percent to 30 percent franchise-to-company-owned ratio, more franchise units were opened than company-owned restaurants. By 1998, system-wide sales reached an estimated $130 million, a total generated by 80 company-owned Donatos and 60 franchise units.

Acquisition by McDonald’s Corporation in 1998

As Donatos pressed forward with its expansion in 1998, the company was being watched. Beginning around May of that year, executives at McDonald’s Corporation began taking a close look at Grote’s operation. The fast-food giant, whose own system-wide annual sales towered at $32 billion, was on the prowl, looking to diversify its operations and emulate the three-prong attack of Tricon Global, owner of Pizza Hut, KFC, and Taco Bell. McDonald’s executives saw the pizza business as the natural choice for branching out because it was the fastest-growing segment of the industry. They conducted assiduous research, reportedly studying the operations of 61 pizza companies before they made their decision. One day in November 1998, Grote’s phone rang. On the other end, a McDonald’s executive vice-president, Pat Flynn, informed Grote of his company’s great interest in Donatos. Next, Flynn flew to Columbus to meet with Grote. Several weeks later, Grote agreed to sell Donatos’ 146 units to McDonald’s for an undisclosed sum. In July 1999, the deal was completed, making Donatos a wholly owned subsidiary of McDonald’s.

After 36 years of running his family business, Grote gave up control over Donatos. The acquisition by McDonald’s did not signal the end of Grote’s influence over the company, however. Day-to-day control over Donatos was handed to Bill Rose, McDonald’s former senior vice-president for Southeast/Central Asia. Grote took the title of chairman, but he was far from just a figurehead at Donatos. In the early 1990s, McDonald’s first tried to enter the pizza segment of the food industry, offering slices of pizza at several thousand of its hamburger outlets. The experiment failed. In their second foray, McDonald’s executives realized they needed the help of someone with experience in making and selling pizza. They turned to Grote for guidance, relying on his lengthy experience to aid in their diversification.

Company Perspectives

Jim Grote founded Donatos as a sophomore in college. His philosophy was simple: ’to make the best pizza and to treat others the way I would like to be treated.’ Jim built trust with his customers and a sense of goodwill in the neighborhood. And although Donatos has grown and moved into more than 170 neighborhoods, Jim’s philosophy remains the same.

As Donatos entered the 21st century, its new status as a McDonald’s subsidiary promised accelerated expansion. At roughly the same time that Flynn first contacted Grote, McDonald’’s acquired a 20 percent interest in Chipotle Mexican Grill, a chain of 22 Mexican restaurants based in Denver, Colorado. In April 1999, McDonald’s completed another acquisition, purchasing London, England-based Aroma Ltd., which operated 22 outlets that sold coffee and sandwiches. Together, the three subsidiaries—Donatos, Chipotle, and Aroma—formed McDonald’s’ specialty food division, a small segment of the Oak Brook, Illinois-based company’s operations that was expected to become considerably larger in the coming years. At first, expansion of the Chipotle chain received much of the parent company’s attention, but industry analysts expected Donatos to soon benefit from the deep financial pockets of McDonald’s. In the fall of 1999, unrevealed sources, as reported in the October 15, 1999 issue of Restaurant Business, stated that McDonald’s intended to open 75 new Donatos restaurants during its first full year of ownership and planned to double the expansion rate during the ensuing years. Of greatest interest were the rumors that McDonald’s was considering international expansion of the Donatos chain.

Not long after embarking on its new era of ownership, Donatos changed its name. In 2000, the official title of the company changed from Donatos Pizza Corp. to Donatos Pizzeria Corp., which reflected the change in decor at the company’s units. During the year, 22 new restaurants were opened, blanketing markets in Atlanta, Cleveland, and Indianapolis. The company’s pace of expansion nearly doubled in 2001, when 42 new Donatos units opened their doors. By August 2001, there were 186 restaurants operating in seven states, with plans in the works to broaden the chain’s geographic scope. Several months later, the company announced it would open five Donatos in Philadelphia, which were to serve as a springboard for further expansion in the northeastern United States.

As Donatos neared its 40th anniversary, the chain’s pace of expansion slowed as it experimented with a new pizzeria format. In 2002, Donatos, as well as another member of McDonald’s specialty food division, Boston Market, opened fewer new restaurants than the two chains had opened in previous years, but Donatos did make a significant geographic leap during the year. In November 2002, a Donatos debuted in Munich, Germany, the first of perhaps more overseas units. Domestically, the company was experimenting with a dine-in telephone-ordering system that featured a telephone at each table. “Whenever they are ready to order, or whenever they need anybody, all they have to do is pick up the phone,” a Donatos executive explained in the July 22, 2002 issue of Nation’s Restaurant News.

As Donatos prepared for the future, further expansion was expected. McDonald’s had formed its specialty food division with the intention of expanding each of its non-hamburger chains. Donatos, with the vast financial resources of its parent company behind it, was expected to benefit from McDonald’s’ desire for growth. In the years ahead, Donatos, with numerous Grote family members working throughout the chain, hoped to continue the legacy of success established by their patriarch, James Grote.