Galardi Group, Inc.

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Galardi Group, Inc.

4440 Von Karman Avenue, Suite 222
Newport Beach, California 92660
U.S.A.
Telephone: (949) 752-5800
Toll Free: (800) 764-9353
Fax: (949) 851-2618
Web site: http://www.wienerschnitzel.com

Private Company
Founded: 1961
Sales: $230 million (2002 est.)
NAIC: 722210 Limited-Service Eating Places

Based in Newport Beach, California, Galardi Group, Inc., is a private company that runs the 350-unit Wienerschnitzel restaurant chain, the world's largest hot dog chain. About 10 percent of the units are company owned, while the rest are operated by franchisees. Wienerschnitzel's signature menu item is the chili dog. Other offerings are all-beef hot dogs with a choice of traditional toppings, Healthy Choice dogs, corn dogs, hamburgers, french fries, and chili cheese French fries. The company also owns the Tastee-Freez chain of more than 225 ice cream stands, acquired in 2003, the offerings of which are being incorporated into the Wienerschnitzel stores. In addition, Galardi Group owns The Original Hamburger Stand chain, which takes a no-frills, low-cost approach to the burger business. Galardi Group is headed by its founder, John N. Galardi.

Founder Involved Emergence of Fast Food
in the 1960s

John Galardi traces his involvement in the fast food business to the 1950s when at the age of 12 in Missouri he worked as a soda jerk. After high school, he moved with his family to Southern California and enrolled at Pasadena Junior College. As Galardi recounted in a 1987 interview with the Orange County Business Journal, "I walked across the street and a guy was hosing the lot.… I said, 'Do you need any help?' " The man with the hose turned out to be Glen Bell, Jr., founder of the Taco Bell chain. Bell hired Galardi at 50 cents an hour for part-time work, which soon led to Galardi managing Bell's commissary. He was only 20 years old when he took over a poor performing Taco Bell under a partnership arrangement. By working double shifts, and his wife taking on three part-time jobs, Galardi was able to save $6,000. He then lent the money to Bell, who was strapped for cash. Unable to pay back the loan, Bell three months later offered to sell the store to Galardi for $12,000. "So my folks borrowed $2,000 from Household Finance on their furniture," Galardi told Orange County Business Journal, "I let everybody go and I worked 30 days to get the other thousands and I paid $12,000 for a little taco store in Long Beach. That's how I got into the ownership position."

Galardi was fortunate in his timing in gaining a toehold in the fast food industry in Southern California, an area that saw the emergence of both Ray Kroc's McDonald's and Taco Bell, as well as Harold Butler's Denny's chain. After learning the ropes from Bell, Galardi was ready to carve out his own niche in the fast food sector. A major break occurred when his hard work was recognized by a businessman who offered to build him a restaurant in Wilmington, California. Because the location was next door to one of Glen Bell's stores, Galardi informed his mentor, who advised him to grab the opportunity—as long as he sold something other than tacos. Galardi decided to try his hand at selling hot dogs, since it was an unexploited area in the market. His wife, after looking through a cookbook, then suggested Wienerschnitzel as the name for the store, an idea that he immediately dismissed. However, three days later, unable to come up with anything better than "John's Hot Dogs," Galardi decided to call his new hot dog stand Der Wienerschnitzel.

Opening in 1961, Der Wienerschnitzel proved popular, in some ways too popular with the car clubs of younger customers who tended to get rowdy. "I'd walk out and sometimes find 100 kids drunk and chase them off," he told Orange County Business Journal. "I did a little survey and found out they were 100 percent of my problems and only 5 percent of my business." Galardi then came up with a creative answer to the problem: He set up a drive-through pick-up lane, one of the first in the industry, that passed straight through the middle of the store's A-frame structure. In this way, the customers could not get out of their cars and after they bought their food found themselves back on the streets and looking for somewhere else to go. Not only did Galardi get rid of rowdy loiterers, he was able to use a smaller format for his restaurants, lowering his rent.

Overcoming Difficulties in the Late 1960s

Galardi began franchising the Wienerschnitzel concept, which took off in the early and mid-1960s, making him a millionaire when he was still in his twenties. By 1968, the chain was 200 units in size, and Galardi was turning down offers of as much as $20 million to buy the business. Then the fast food sector hit a rut, and Galardi found he had expanded too quickly. Half the units were losing money, and he had $8.5 million in debt. In addition, he was contending with a monthly negative cash flow of $150,000. Moreover, he was besieged with scores of lawsuits. It took about six years, but Galardi succeeded in paying back his creditors. He also fought off every lawsuit and not only rebuilt the business but also doubled the chain's sales volume. This comeback was accomplished despite hot dogs slipping in popularity because consumers were becoming more health conscious. To remain competitive, Wienerschnitzel began offering hamburgers in 1973. In that same year, it quit building its 800-square-foot A-frames, turning instead to larger structures able to accommodate indoor and outdoor seating. Galardi had succeeded so well in turning around Wienerschnitzel that in the early 1970s he considered taking the company public, with the help of Bank of Boston, in order to fuel further expansion. However, fearful of losing control of the business he built, he elected in the end to remain private.

In the mid-1970s, at the age of 35, Galardi had grown weary of his self-imposed grind and decided to move to Aspen, Colorado, to become a ski bum for a year. Reinvigorated, he returned to work, opening another 150 stores before he was 40. The chain reached its peak in 1975 when it totaled 450 company-owned and franchised operations spread across 20 states. Two years later, the chain dropped the "Der," simply becoming known as Wienerschnitzel. Galardi, in the meantime, went through more life changes, including getting divorced at the age of 39. He told Orange County Business Journal, "I figured, you know, why be a workaholic, so I took off five years and kicked around the world. I made another guy president and retired. Lived on a boat in the Bahamas, lived in Hawaii and loved it, and found the right gal, got married and decided to come back to work."

While Galardi was on hiatus, Wienerschnitzel underwent some significant changes. The chain's dalliance with the hamburger culminated in the 1979 introduction of the Weldon P. Wienschnitel line of quarter-pound burgers custom cooked and garnished with such toppings as guacamole and pineapple, a concept in many ways ahead of its time. The company hired the man behind Wendy's "Where's the Beef?" advertising campaign and succeeded in driving up hamburger sales. Nevertheless, despite making up 40 percent of all sales, the burgers cost so much to make that they only accounted for about 20 percent of the profits. Moreover, according to market research consumers still associated Wienerschnitzel with hot dogs, so that hamburgers brought in no additional customers. As a result, the chain was stagnant, with annual sales hovering around $300,000 and little promise that with its current approach the chain would realize any growth. Thus, in 1981, Wienerschnitzel decided to focus on what it was best known for, hot dogs, while still pursuing a marketing theme of "We're not just hotdogs" in a campaign headlined by baseball superstar, and noted "hot dog," Reggie Jackson. In 1985, the chain added chicken sandwiches as well as biscuit breakfast sandwiches, but despite a significant increase in consumer awareness, Wienerschnitzel remained firmly associated with hot dogs. The chain began de-emphasizing everything on the menu other than hotdogs, changing its motto in 1986 to "Nobody hot dogs it like we do." Fortunately, hot dogs were also making a comeback with consumers around this time. To attract more business, the chain introduced its "big 'n beefy" lines of $1.99 hot dogs served on sesame seed buns, as well as double-cheese chili dogs and split-link Polish sandwiches with Swiss cheese on rye.

Wienerschnitzel kept hamburgers on the menu but no longer actively promoted them. In 1983, Galardi Group attempted to gain some diversity by launching two separate burger ventures: Weldon's gourmet hamburgers and the Original Hamburger Stand, which was essentially developed to replace poor performing Wienerschnitzel units. The company's initial attempt to underprice the competition with a no-frills approach became a factor in the burger wars of the period. In the 1980s, Galardi also tried to launch a yogurt and muffin shop concept called Chelsea's. The plan was to "cluster" the various concepts, so that Chelsea yogurt shops could be incorporated into Wienerschnitzel, Hamburger Stand, and Weldon stores, a strategy that anticipated co-branding efforts of the 1990s. However, the combination of hot dogs and burgers with yogurt and muffins failed to take hold in the 1980s.

Galardi had put a halt to new store openings in 1983, but by the late 1980s Wienerschnitzel was ready once again to expand. Serving as president, promoted in 1986, was Dennis Tase, who came to Galardi Group from PepsiCo in 1981 to serve as director of marketing. John Galardi, the company's chairman and majority shareholder, remained actively involved, however. The chain at this juncture totaled about 275 units. The average check was $3.25, resulting in average unit volume of $420,000 and total annual sales of $110 million.

Company Perspectives:

Wienerschnitzel was started with the opening of a single hot dog stand in 1961. Today, we're the World's Largest Hot Dog Chain with over 300 restaurants in ten states and Guam.

Challenges and a Strategic Acquisition:
the 1990s and Beyond

As Wienerschnitzel moved into the 1990s, it once again lost momentum. John Galardi was on the verge of selling the business to the New York buyout firm Kelso Group, but he held out for a higher price and the deal was shelved. To get back on track, the company slashed overhead, including sizable cuts in corporate staff, and closed down more than 53 of the old A-frame units that were no longer profitable. The Weldon's chain was also cast off. In addition, Galardi Group refinanced its debt. The company made steady progress during the first half of the 1990s, with sales reaching $134 million in 1995 and profits improving at a rapid clip for four consecutive years. Partly responsible for the comeback was the 1991 launch of its irreverent "Cop a Wienerdude Attitude" advertising campaign featuring a cartoon superhero. While it won some awards and garnered Wienerschnitzel national attention, it was never overly popular with franchisees and by 1995 had run its course. In 1996, the chain adopted a more folksy approach, launching an ad campaign featuring Roy Clarke, country singer and star of television's Hee Haw.

At the end of the 1990s, Wienerschnitzel entered another growth phase. In 1999, sales reached $170 million, and Galardi Group took in 45 deposits for new franchised stores, perhaps the largest number in company history. Management was also excited by a dual-branding effort with Tastee-Freez soft ice cream, which it tested in 11 company-owned stores, inspired by the success of the California chain El Pollo Loco, which had established a successful dual-branding program with the Foster's Freeze chain. By becoming a Tastee-Freez franchisee, Wienerschnitzel added dessert items to its mix and experienced a significant increase in business during the late afternoons and evenings. As the company moved into the 2000s, it launched plans to add another 100 units in the next few years and add Tastee Freez franchised operations to more of its stores, although the 100 older A-frame units were not able to accommodate the necessary refrigeration for the soft-serve equipment. Some of the new Wienerschnitzel stores would be opened in miniature golf sites and entertainment parks, new venues for the chain. Another venture for the company would be the 2003 introduction of a retail Wienerschnitzel chili sauce developed to be sold in grocery stores. While not likely to add much to the balance sheet, the product was expected to improve name recognition and help in the company's efforts at brand building.

By 2003, Tastee-Freez was incorporated into 52 Wienerschnitzel and eight Original Hamburger Stand units, resulting in sales increases at some locations as high as 14 percent, but generally between 5 and 10 percent. Galardi Group was so pleased with its dual-branding experience that in June 2003 it decided to buy the Tastee-Freez chain, a decision influenced by the news that a major chain was considering acquiring the business. The roots of Tastee-Freez dated back to 1950 when inventor Leo Moranz developed a new soft-serve ice cream pump and freezer that was better than anything else on the market at the time, capable of maintaining a quality product while providing speedy production of ice cream cones and dishes. Moranz teamed up with businessman Harry Axene to rent the equipment under the Tastee-Freez name to entrepreneurs who quickly set up walk-up stands across the country. Over the years, Tastee-Freez developed into a chain of 220 franchised stores located in 33 states and Panama, generating more than $115 million in sales in 2002.

After two years, Galardi Group was operating about 300 dual-branded units. The upgrade costs ranged from $23,000 to $40,000 per unit. As a result, franchisees saw little profit from the addition of ice cream to the menu, but it helped significantly in bringing in customers during what were typically slack periods. Once franchisees paid off their equipment, however, they could expect to see greater benefits from the addition of Tastee-Freez. Galardi Group was already satisfied with the Tastee-Freez acquisition, as ice cream promised to be more of a complementary fit with hot dogs than gourmet hamburgers, yogurt, or muffins had been in the 1980s.