Fazoli's Management, Inc.

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Fazoli's Management, Inc.

2470 Palumbo Drive
Lexington, Kentucky 40509
U.S.A.
Telephone: (606) 268-1668
Fax: (606) 268-2263
Web site: http://www.fazolis.com

Wholly-Owned Subsidiary of Seed Restaurant Group Inc.
Incorporated: 1990
Employees: 7,400
Sales: $370.1 million (2004 est.)
NAIC: 722211 Limited-Service Restaurants

Fazoli's Management, Inc., is the operator and franchiser of the Fazoli's Italian fast-food restaurant chain. One of the most popular and fastest growing restaurant concepts in the country by the late 1990s, Fazoli's grew rapidly in its relatively short history. The company operates and franchises over 380 restaurants throughout 32 states. Fazoli's is owned by Seed Restaurant Group Inc. (SRG). SRG chairman and CEO Kuni Toyoda owns 40 percent of the company.

The Early Years

Although the Fazoli's restaurant concept was created in 1989, Fazoli's Systems, Inc., was actually formed in 1990, when the chain consisted of just five restaurant locations in Lexington, Kentucky. At that time, the restaurants were owned and operated by Jerrico Inc., which was also the parent company of the Long John Silver's seafood restaurant chain. Jerrico decided to focus solely on developing Long John Silver's, however, and Fazoli's was put up for sale. Entrepreneur Kuni Toyoda—Jerrico's Asian franchise vice-president—joined forces with Japan-based Duskin Co. Ltd. and purchased the tiny restaurant chain. They formed Seed Restaurant Group Inc. to own and manage the enterprise, and Fazoli's Systems, Inc. became its subsidiary.

When Toyoda acquired the Fazoli's chain, the restaurants were selling a pretty equal mix of pizza and pasta items. Toyoda decided that it would be almost pointless to compete in the well-established pizza industry, especially because Fazoli's did not offer home delivery. Therefore, Fazoli's began phasing out pizza and instead focused mainly on its pasta selections. Toyoda upgraded the ingredients that Fazoli's used, while also making changes such as the creation of larger portions and a shift toward cooking the pasta more firmly (known as "al dente").

The early 1990s marked a trend toward health consciousness in the United States. Grocery store shelves were lined with "fat free," "low fat," and "reduced fat" alternatives to most popular items, and Toyoda realized that he could capitalize on this trend with the Fazoli's concept. In the August 1995 issue of The Lane Report, he noted, "Pasta is here to stay, simply because the Italian segment is the most popular ethnic segment. Pizza used to dominate, but now people are so used to eating pasta. They know what good pasta is." He began marketing Fazoli's as a more healthful alternative to the traditional fast-food menu of burgers and fried foods.

Toyoda also promoted Fazoli's as an affordable alternative to most full-service casual restaurants. Each Fazoli's restaurant featured an ample, comfortably decorated dining room where the manager was likely to be seen serving patrons hot bread-sticks as they ate. Dine-in customers were treated to an unlimited supply of the breadsticks, as well as free drink refills. A typical individual check at Fazoli's was under $4, while a family of four could usually eat there for less than $15. For those prices, each customer was buying six to eight ounces of food, whereas most hamburgers were only two ounces.

Fazoli's soon began opening more restaurant locations, focusing at first on gaining a presence in small- and medium-sized towns. For one thing, real estate prices were usually lower in such areas, and the healthful, low-cost Fazoli's concept appealed to their residents. Fazoli's also benefited from the fact that its restaurant set-up was flexible enough to allow the company to purchase other failed restaurant buildings and convert them, rather than having to actually build all of its new structures.

From the start, the new company placed a great emphasis on customer service. New employees were required to complete a one-week training seminar, while store managers underwent a five-week program. Rather than focus most of its attention and resources on adding restaurants and increasing in size, Fazoli's focused instead on making sure each of its locations was able to properly represent the company's principles. According to Toyoda in a 1998 issue of Kentucky Business Viewpoint: "We could grow faster, but we don't want to grow fast…. It takes time to develop competent general managers that really understand Fazoli's system. We tend to focus more on service."

Rapid Expansion in the Mid-1990s

Within a couple years, however, the chain was, in fact, expanding rapidly. By 1992, the company had grown to include over 35 Fazoli's restaurants. It almost doubled that figure in 1993 by adding 25 additional locations, giving Fazoli's a total count of 62 restaurants throughout the states of Kentucky, Florida, and Indiana. Of those, 53 were company-owned and none were franchised.

Not only did the company expand quickly in terms of the number of restaurant locations, it also exponentially increased the amount of sales that each location achieved each year. When Toyoda took over the operations of Fazoli's in 1990, the average unit volume for each of the five restaurants had been about $500,000 per year. Within five years, that figure had increased to around $1 million per year. This made expansion quite easy financially, because start-up costs ranged from $150,000 for conversions to $500,000 for newly constructed buildings. At those costs, most locations could turn a profit in the first year of operation.

Fazoli's expanded its prototype unit as well, from 2,800 square feet and 100 seats, to over 3,000 square feet and 140 seats. This helped each unit handle higher volumes of dine-in business. In 1994, the company's takeout orders represented only 30 percent of its total sales. Most of the restaurant's business was done in its dining room, with about 60 percent of it taking place during the dinner hours.

In early 1994, the company brought aboard Toyoda's former boss at Jerrico—Ernest Renaud—as a marketing vice-president and special consultant. Renaud, who was already a board member of Fazoli's parent, Seed Restaurant Group, had actually done a lot of the start-up work on the Fazoli's chain in its early years. Along with Toyoda, he set out to help the young enterprise compete with the other players in the fast-food Italian niche, including market-leader Sbarro and Pizza Hut's Fastino's concept. A goal was set to open at least 120 Fazoli's units by 1996.

In late 1994, Fazoli's began testing the potential for food court and strip mall versions of its restaurants to achieve success. This move may have come about as a means of competing with Sbarro, which operated most of its units within shopping malls. Fazoli's knew, however, that its strength was in its freestanding restaurants, and it therefore continued to expand mainly in that area. The company posted 1994 sales of $59 million.

By mid-1995, the company had grown to include 112 units in 120 states. Of those, only 30 were franchised. In the June 19, 1995 issue of Business First—Louisville, however, Ernest Renaud stated that the vast majority of new units in the coming years would be operated by franchisees. This would help the company offset the cost of start-ups, as each franchisee would pay a one-time $25,000 fee for Fazoli's rights, in addition to all start-up costs and 5 percent of the restaurant's gross annual sales each year.

In August 1995, Fazoli's made headlines when Nation's Restaurant News published its "Second 100 Chains" rankings, based on growth in three different areas. Fazoli's was ranked third in the area of systemwide sales growth, second in the growth of company-owned units, and first in the growth of franchised units. At year's end, the chain was composed of 164 Fazoli's restaurants, each of which generated an average of $964,000 in annual revenue.

Continued Success in the Late 1990s

Within a year, Fazoli's units numbered 214 in 23 different states throughout the country. Meanwhile, in a surprising move, Seed Restaurant Group introduced a new Italian restaurant concept called Bella Notte in 1996. According to Toyoda in a 1998 issue of Kentucky Business Viewpoint, "We try to duplicate Trattoria, the neighborhood, casual restaurant in Italy where people go to have fun over great quality food." While some may have felt that the company was potentially diluting its market base and creating competition for Fazoli's, Seed did not see it that way. Bella Notte would be pricier than Fazoli's, with an average individual check double that of its older sibling. In reality, the new entry would more appropriately serve as competition for such established Italian restaurants as the Olive Garden chain.

Entering 1997, the company was altering its market strategy slightly as it moved into bigger cities. Its most recent entries into larger markets dictated that the company needed to change its advertising strategy in order to maintain the sales volume it had achieved in smaller locales. Regional television advertisements surfaced. The company knew that it was important for things such as the Fazoli's tagline—"Real Italian. Real Fast."—to be in the public eye and permeate the potential consumer's awareness.

Company Perspectives:

Our vision is to become "America's Favorite Italian Family Restaurant Company." This is one heck of a goal, but read closely. We don't want to be the biggest for the sake of being big; we simply want to be the best. We strive toward this goal everyday and support it through guiding philosophies and values that together form our unique and vital company culture.

Toyoda invested himself mainly in his employees, however. In a January 21, 1997 article about him in Nation's Restaurant News, he contended, "To be a success in a people-driven industry like ours, you definitely have to take care of your people." Not only did he ensure that the company operated on its founding principles of open communication, idea sharing, teamwork, and excellence, but he also actually invested in his employees. Toyoda offered half of his 50 percent ownership of the company to his management team. (The other 50 percent was owned by Duskin Co. Ltd.)

Corporate management also began offering each of its restaurant units incentives for maintaining a high level of customer service. Each month, a "mystery shopper"—that is, a customer who actually reports back to the company about the level of service received—visited Fazoli's restaurants on multiple occasions. Any unit that received scores of 90 or higher three times within a month received bonuses for all of its employees.

In late 1997, and early 1998, Fazoli's received more accolades within the industry. Restaurant Business released its list of top 50 growth chains in July 1997, and Fazoli's was ranked seventh overall. The company also received a number seven ranking in terms of sales increases, and a number 13 ranking with regard to increases in number of units. The following March, Restaurants and Institutions ranked quick-service restaurant chains on multiple attributes; Fazoli's came out on top in overall rankings, as well as in the areas of value and service. Fazoli's also ranked second to Starbucks in the atmosphere rating, and third in cleanliness—just barely behind Starbucks and Bruegger's Bagel Bakery.

In December 1997, Fazoli's opened its 300th restaurant. As the company entered 1998, Toyoda began announcing that some time in the near future, the company would be going public in order to fund a true nationwide expansion campaign—a public offering had failed to materialize due to unfavorable market conditions. In 1999, Fazoli's announced that it had signed 150 franchise agreements to open 150 new restaurants by 2004 in Texas, Utah, Nevada, and Georgia.

Fazoli's in the New Millennium

Fazoli's entered the new millennium on solid ground. Forty franchise restaurants opened their doors in 2000 in new markets including Las Vegas, Washington DC, and Minneapolis-St. Paul. Twenty-eight franchise locations were launched the following year. The company's strong growth led to a deal with McDonald's Corp. in 2002. The nonbinding agreement was structured as a joint venture to open up to 30 Fazoli's in three U.S. markets. The deal also gave McDonald's the option to buy Fazoli's at a later date. McDonald's, which was struggling to shore up earnings, hoped its investment in the Fazoli's chain would bolster its bottom line. Meanwhile, Fazoli's eyed its union with McDonald's as a way to further expand its burgeoning restaurant chain. McDonald's changed its strategy in 2003, however, and decided to end the venture.

Popularity of low-carb diets such as South Beach and the Atkins diet forced Fazoli's to rethink its menu strategy during this time period. In early 2004, the company launched its Smart Italian marketing campaign which featured eight menu items with eight grams of fat or less. The company's culinary and research development division also worked to create new menu items featuring more vegetables and protein. Later that year, the company hired dietitian Elizabeth Somer to help develop healthy low-calorie dishes.

In 2005, the company announced it was eliminating the trans fat found in partially hydrogenated oil from its breadsticks. According to the company, trans fat was created artificially by bubbling hydrogen gas through vegetable oil in a process called partial hydrogenation. Scientific studies demonstrated that trans fat could raise cholesterol levels and increase the risk of heart disease. As such, many food manufacturers began looking for ways to reduce or eliminate trans fat from their products.

Fazoli's became the first quick-service chain to promote zero trans fat menu offerings in a print and television advertising campaign. An ad that ran in the March 31, 2005, edition of USA Today claimed Fazoli's offered over 50 entrees with zero grams of trans fat. Chief concept officer Greg Lippert explained the strategy in an April 2005 Nation's Restaurant news article claiming, "Our intent is to position Fazoli's as a health-friendly alternative to quick-service brands offering fried food…. For the most part we're accomplishing this change without changing our menu."

The low-carb craze ate into company profits during 2003 and 2004 and Fazoli's experienced declining same-store sales. While revenues appeared to be on the upswing in 2005, the company began to develop a smaller store format that would be found in strip malls. The 2,800 square feet prototype was slated to debut in Summer 2005. Management believed the smaller, less expensive store concept would allow the company to continue its expansion in the years to come.

Principal Competitors

Noble Roman's Inc.; Sbarro Inc.; YUM! Brands Inc.

Key Dates:

1989:: The Fazoli's restaurant concept is created.
1990:: Fazoli's Systems, Inc., is created.
1993:: By now, there are 62 restaurants throughout the states of Kentucky, Florida, and Indiana.
1995:: The Fazoli's chain is composed of 164 Fazoli's restaurants, each of which generate an average of $964,000 in annual revenue.
1997:: Fazoli's opens its 300th restaurant.
1999:: The company opens its first restaurant in Utah.
2004:: Dietitian Elizabeth Somer is hired to help develop healthy low-calorie dishes.
2005:: Fazoli's eliminates the trans fat found in its bread-sticks.