Luby’s Cafeteria

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Luby’s Cafeteria’s, Inc.

2211 Northeast Loop 410
P.O. Box 33069
San Antonio, Texas 78265-3069
U.S.A.
(210) 654-9000
Fax: (210) 599-8407

Public Company
Incorporated: 1959
Employees: 11,000
Sales: $419 million (1995)
Stock Exchanges: New York
SICs: 5812 Eating Places

Luby’s Cafeterias, Inc. is the largest chain of cafeterias in America. From one small cafeteria in 1947 located in downtown San Antonio, Luby’s has steadily expanded, first in Texas and then in other southern states, to become the most profitable cafeteria chain in the United States with over 200 cafeterias. In 1996, the company operated 147 units in Texas; 12 in Arizona; ten in Tennessee; nine in Oklahoma; five in Florida; four each in Arkansas, Kansas, and New Mexico; three in Missouri; two in Louisiana; and one in Mississippi. Unlike many restaurant chains, Luby’s does not franchise its units, but it does compensate each unit manager with a generous portion of the profits from the unit the manager runs.

With its motto of“Good food from good people,” the Luby’s cafeterias offer freshly-prepared, family-style food at reasonable prices served in attractive settings. The cafeterias cater primarily to shoppers and to store and office personnel at lunchtime, and to families for the dinner meal. The cafeterias do not serve breakfast. The individual units are generally 10,000 to 11,000 square feet in area, can typically accommodate up to 300 people and are located in shopping and business developments as well as in residential areas. Luby’s cafeterias are part of the social fabric and a tradition in many parts of the southern United States, “In San Antonio, they say you have to beat the Baptists out of church on Sunday to get a seat at Luby’s,” Forbes magazine writer William P. Barrett observed in an article in the November 12, 1990 issue.

Coupled with this down-home style is a stellar financial record. Luby’s leads its publicly-held competitors in growth benchmarks in sales, earnings, earnings-per-share, return on average equity and average sales-per-unit. Since 1965, Luby’s has paid consecutive quarterly dividends and has increased the dividend every year. With the exception of a brief time in the late 1970s, the company has shown no long-term debt on its balance sheet. Luby’s growth has been financed from internal cash flow, periodic stock offerings and, on occasion, from short-term lines of credit from banks. Forbes magazine wrote that Luby’s executives and individual unit managers “do try to stick to what they know, and so far have done that brilliantly.” Comparing Luby’s to its cafeteria-field competitors such as Morrison’s, Furr’s/Bishop’s and Piccadilly, Forbes noted that“none cuts a better hog” in terms of return on equity.

Luby’s Origins

Luby’s roots run through America’s political, social, and economic history, beginning with the first unit and extending through every successive decade of the 20th century. Although Luby’s was incorporated in 1959, the company’s history was planted in 1909 when clothes merchant Harry Luby made a business trip from his home in Springfield, Missouri, to Chicago, Illinois. Luby was captivated by a new type of restaurant where patrons picked the food items they wanted from a counter and carried their own trays to dining tables.

Luby immediately saw that the Chicago restaurant was employing the then-emerging concepts of mass production and assembly lines in the restaurant business. Two years later, Luby opened a similar operation in Springfield, Missouri. From a 12-foot counter he built himself, Luby dished out freshly-prepared food at reasonable prices. One year later in 1912, Luby opened a second cafeteria in Springfield. From Missouri to Oklahoma to Texas, Luby opened one cafeteria after another over the next ten years. In stepping stone fashion, Luby would sell outright or retain a partial interest in a unit before moving southward to establish his next eatery. In 1927, the 39-year-old Harry Luby had made enough money to retire in San Antonio where he oversaw his investments in seven cafeterias in Texas and one in Kansas.

Amiable and generous, Harry Luby had operated his restaurants on some very simple concepts: good food at reasonable prices for the customers and a generous portion of profits for the managers.“Share the work, share the risks, share the profits” was a guiding principle for Luby. Thus, as an investor in eight cafeterias, Luby gave 40 percent of profits to the unit managers, an unusually large percentage at the time as well as in the years that followed.

A New Generation of Leadership

Harry’s son Robert M. Luby grew up in the restaurant business, playing after school in cafeteria basements as a young child and working in cafeterias cleaning grease traps as a teenager. After graduating from college, Bob Luby and his cousin Earl Luby set their entrepreneurial sights on San Francisco where they opened a cafeteria which failed to produce the Texas-sized profits his father’s restaurants generated. Bob returned to Texas undeterred in his goal to establish and run a successful cafeteria. That goal was reached with a cafeteria in Dallas on Live Oak Street. Luby next enlisted his aunt, uncle, and brother-in-law George H. Wenglein to invest in, establish, and operate a cafeteria in El Paso, Texas.

While Bob Luby’s cafeterias prospered during the 1930s, business* was bleak for others. Homeless, hungry people often visited Luby’s for sustenance. During the Depression, the cafeterias associated with Harry and Bob Luby served needy people from the food left over at closing time.

World War II and its wake profoundly altered America, sparking social changes and robust economic growth. Forced to sell his Dallas cafeteria when he enlisted in the Army Air Corps, Luby’s thoughts returned to the cafeteria business even while serving as an intelligence officer. The contacts he made while serving his country constituted the foundation of a management team for the cafeteria chain to come.

Postwar Expansion

In 1946, Bob Luby hung up his military uniform and began plans with his cousin, Charles R. Johnston, to establish a cafeteria for the postwar era. In the decade following the war, household incomes would rise, families would move from cities to suburbs, and lifestyles calling for convenient products and services would reshape the fabric of American life. Amid such awesome change, Americans also would seek the threads of the past.

In 1947, Luby and Johnston recognized the promise of these postwar stirrings and opened a cafeteria with capacity to seat 180 people. Located in downtown San Antonio, the restaurant was an immediate success thanks to returning servicemen in the area and to the post-war housing shortage which had forced many people to live in downtown hotels. Nearby movie theaters provided brisk business in the evening. The cafeteria was managed by Norwood W. Jones, a fellow officer of Luby’s while stationed at Santa Ana Army Air Base.

Luby and Johnston’s next restaurant was located in the growing and affluent San Antonio suburb of Alamo Heights. Brother-in-law Wenglein was persuaded to co-manage the cafeteria with John Lee, a prewar Luby’s associate. The Alamo Heights cafeteria served as a model for future Luby’s units.

From the front seat of a sporty Studebaker serving as their office, the two entrepreneurs traveled the Lone Star State in search of new locations. Luby and Johnston were careful to open new cafeterias only when they had managers to operate the units according to the standards Harry Luby had pioneered.

By 1958, Luby and Johnston had opened 11 cafeterias, each of which had a different configuration of investors. In order to build and operate new Luby’s cafeterias, the investors formed a new corporation—Cafeterias, Inc.—on February 4, 1959. The pre-existing cafeterias were not affected by the new structure because those units provided the cash to help the investors finance the new corporation.

The new corporation launched its first cafeteria in March 1960 in a strip shopping center in Corpus Christi and two others followed within 60 days. Although in the black, the three units were not generating the profits normally associated with Luby’s cafeterias. Downtown locations proved to be a problem while an experiment to serve breakfast was a mild failure.

Luby’s hit pay dirt with its fourth cafeteria located in a far north San Antonio suburb in a retail development called North Star Mall. Bob Luby recalled, “Some people thought we had lost our minds because it was so far out that the city buses didn’t serve the mall adequately. We actually had to subsidize the bus service in order to get our employees to work.” But the fast-growing affluent suburbs surrounding the mall would fill the fourth corporate Luby’s restaurant with patrons and provide profits to build more cafeterias.

With Bob Luby as president and Charles Johnston as executive vice-president, Luby’s entered the Houston market in 1965 with an upscale cafeteria which offered an expanded menu and more expensive food items. Operating under the Romano name, the cafeteria quickly became a huge money-maker. The modern structure with its rich decor served as a model for revamping efforts at existing Luby’s and proved a market existed for cafeterias with a very modern style and design.

Company Perspectives:

Recipe for Success. Take liberal quantities of: Luby’s Fresh Foods and Variety. Add large portions of: Luby’s Organization and Entrepreneur ship. Fold in: Luby’s Ability to Choose and Train Good People. Season with: Luby’s Convenience and Service. Top with: Luby’s Dedication to Public Service

Luby’s growth in the Houston market was propelled, in part, by the nation’s space program, initiated in the early 1960s, with its mission control headquarters in the area. In subsequent years, the oil industry and its attendant financiers in the banking and financial services industries would fuel the economy further.

Consolidating Operations and Going Public in the 1970s

The corporation forged a link with the original Luby’s cafeterias in 1969 when it agreed to manage those units for the next 15 years, bringing the number of corporate-managed units to 26, of which 17 were company-owned. Luby and Johnston passed their executive management reins to George Wenglein and to Norwood Jones, respectively, in 1971. Luby, who remained chairman of the board, recalled the reason for stepping aside at age 61:“I had run the company with Charles since the beginning. ... Before we started selling stock to the public, I wanted to be darn sure the company could operate without me as president. So Charles and I stepped down earlier than we had to.”

In January 1972, the company’s stock was offered to the public in the over-the-counter market. The company continued to expand into new markets such as Dallas and to strengthen its internal operations creating the new corporate position of area manager to oversee existing units and to launch new ones in a specific market.

The Yom Kippur War in October 1973 ushered in an era in which the Texas economy would be inexorably tied to Middle Eastern oil and the volatile political situation in that part of the world. The war created gasoline shortages in the United States but no shortages of customers at Luby’s which offered a reasonably-priced, convenient suburban alternative to consumers whose pocketbooks were pinched by higher gas prices and whose auto travel was circumscribed by scarce fuel.

High oil prices soon began to work to Luby’s advantage as energy exploration and development in Texas, Oklahoma, and Louisiana injected billions of dollars into the region’s economy. With more cafeterias opening to meet the demand, Luby’s created a formal training program to ensure that each new cafeteria would have adequate managerial staffers who were service-oriented to their customers, sensitive to their employees, and cost-conscious to the bottom line.

Establishing a School of Management

The Luby’s Story, a history of the company published in 1988, explained that trainees were schooled in the theory and practice of running a cafeteria. The boot-camp style training taught the recruits“the intricacies of butchering a side of beef, baking a lemon meringue pie, and mopping the floor,” as well as how to clean the restaurant equipment and replenish the cafeteria serving line.

Trainees also learned to show respect to all Luby’s employees.“In the kitchen, the young recruit is taught to show deference to his instructors—the fry cook, the baker, the butcher, and the salad maker. Clearly the young college graduate is the disciple and the veteran cook his master,” the corporate history stated.

The deference and respect has resulted in a stable workforce at the individual Luby’s cafeterias. Luby’s has recorded one of the lowest turnovers of support staff in the restaurant industry. That low turnover has translated into experienced and consistent service for the customers and minimal training costs for the individual units. After graduation, the prospective managers spend seven to ten years of additional training in individual cafeterias moving from assistant manager to associate manager to manager, and from manager of a small unit to manager of larger and larger units.

Luby’s cafeteria managers are given a high degree of autonomy. This has enabled them to cater to customer tastes in their local markets with specialized menu offerings. The majority of the food ingredients have been purchased locally by the individual cafeteria management team. This permitted managers to take advantage of price bargains in the local wholesale markets and to quickly respond to local product shortages.

A few items such as fried haddock are carried by every cafeteria in the Luby’s network. Ingredients for these signature items have been centrally sourced by the company. The management team of the individual cafeterias received their compensation based on the financial performance of each cafeteria. The management team consisted of a Manager, an Associate Manager and two to three Assistant Managers. Each team received 40 percent of the unit’s operating profits. After the salaries of the assistant managers are deducted, the remainder in profits was divided in a 65/35 percent split between the manager and associate manager, respectively.

The opportunity for autonomy and for attractive financial compensation has given Luby’s managers a strong incentive to operate profitably for the long-term. Approximately 85 percent of the company’s unit managers have been with Luby’s for ten years or more.

Growth in the 1980s

The year 1980 saw corporate revenues surpass the $100 million mark, and the company adopted a new name, Luby’s Cafeterias, Inc. On February 22, 1982, Luby’s entered the financial big league when its stock began trading on the New York Stock Exchange under the LUB symbol and since May 16, 1985, Luby’s stock has been included in the Standard and Poor’s 500 Composite Stock Price Index.

The 1980s represented a period of expansion outside Texas which was suffering from slumping oil prices. Luby’s Texas cafeterias weathered the economic downturn by avoiding waste and cutting labor costs. While others in the restaurant industry expended millions of dollars on advertising and borrowed heavily, Luby’s relied on word-of-mouth recommendations to build its customer base and internally-generated profits to build new cafeterias.

In a much publicized incident, random and bizarre violence hit a Luby’s restaurant in Killeen, Texas, on October 16, 1991. A lone gunman entered the restaurant filled with patrons and employees, shot and killed 23 people, wounded 25 more, and then turned the gun upon himself. When the killing ended, Luby’s had acquired the unwanted distinction of being the site of the worst mass shooting in the history of America. The killer took his motive for the murders with him to the grave.

When word of the massacre reached company headquarters in San Antonio, Luby’s chairman and several senior executives immediately flew to Killeen to provide aid and comfort to the victims’ families, the survivors, and to the community. In fact, Luby’s management was praised for its sensible and sensitive handling of the crisis surrounding the shooting. When the Killeen Luby’s reopened on March 12, 1992, hundreds of people, including some of the survivors, came to the cafeteria to eat freshly-prepared jalapeno corn bread, pan-grilled catfish, and Jefferson Davis pie.

The 1990s and Beyond

The 1990s brought a more vibrant economy to the markets Luby’s served and some new directions in its operations. In 1991, the company began developing a new marketing program using television and radio advertising in order to build repeat business and to position itself for youthful customers.“Luby’s TV ads cut the mustard, go heavy on the wry” was the double entendre headline over an article appearing in the December 5, 1994 issue of Nation’s Restaurant News. The article noted Luby’s ads used humor to convey the message that its restaurants catered to patrons of every age. Unlike the ads for other chains, Luby’s did not merely feature glittery shots of the food and the cafeteria.

During fiscal year ended August 31,1994, Luby’s conducted its first cooperative promotion, joining forces with Southwest Airlines, Sea World of Texas and Karena Hotels of Texas to target families with children. Favorable results from the advertising and promotional campaigns led Luby’s to earmark two percent of sales for marketing efforts in fiscal 1996.

At its January 1996 annual meeting, Luby’s unveiled joint venture plans with Waterstreet Inc. for five to seven seafood restaurants over the next five years. Waterstreet’s five restaurant in three cities serve moderately priced, Gulf-of-Mexico-style seafood.

With a possible hint of a major new direction for the company as it moves toward the twenty-first century, Luby’s Chairman Ralph“Pete” Erben told shareholders, “We will actively explore other potential concepts for diversification and enhancement of shareholder values.” He said the company expected the joint venture to furnish Luby’s with“restaurant concepts that provide growth and profitability into the future.”

Luby’s successful strategy has been recognized by the press.“Why They’re Lining Up at Luby’s” was the headline for an article by The New York Times in the August 18, 1985 issue describing the company’s recipe for success. Kiplinger’s Personal Finance Magazine included Luby’s in its list of“39 Stocks for Your Portfolio” which appeared in the August 1994 issue. An October 19, 1990 article in The Wall Street Journal examined how the company maintained its profitability during an economic recession. Forbes magazine named Luby’s among the top 200 Best Small Companies for eight of the ten years the publication has conducted the survey.

Restaurant management publications have also awarded Luby’s with top honors. Restaurant Business profiled Luby’s in a May 1989 article entitled“Slow and Steady Wins.” In 1996, for the sixth time in seven annual surveys conducted nationally by Restaurant & Institutions magazine, consumers voted Luby’s as their favorite in the cafeteria/buffet category.

With firm roots in the local communities it served, Luby’s cafeterias have been closely involved in local community events and philanthropic endeavors. When Hurricane Carla crashed into the Texas Gulf Coast in September 1961, the Corpus Christi Luby’s served as an outpost for the National Guard and scores of emergency workers. Using gas-fired stoves, Luby’s dispensed food and hot drink to police, guardsmen, and neighbors.“We didn’t charge a thing, but we made a lot of friends,” cafeteria manager Bill Lowe recalled. When the cafeteria reopened for normal business, Lowe remembered, “We were swamped with customers.”

In addition to such ad hoc measures, unit managers have been given a budget to spend on public service in their areas. The company’s largest civic program is the Community Drug Education System. Initiated in 1987, the program has received a Presidential Citation for educating students, parents and teachers in 11 states about the dangers of substance abuse. By the end of fiscal 1996, Luby’s had spent over $1.3 million on the program.