Luby’s, Inc.

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Luby’s, Inc.

Luby’s, Inc.
2211 Northeast Loop 410
Post Office Box 33069
San Antonio, Texas 78265-3069
U.S.A.
Telephone: (210) 654-9000
Fax: (210) 599-8407
Web site: http://www.lubys.com

Public Company
Incorporated: 1959 as Cafeterias, Inc.
Employees: 14,000
Sales: $493.4 million (2000)
Stock Exchanges: New York
Ticker Symbol: LUB
NAIC: 722212 Cafeterias

Luby’s, Inc. is a leading cafeteria-style restaurant chain. From one small cafeteria in 1948 located in downtown San Antonio, Luby’s steadily expanded, first in Texas and then in other southern states, to become a cafeteria chain with more than 200 units. In 2000, the company operated 173 units in Texas, 11 in Arizona, eight each in Oklahoma and Tennessee, five each in Arkansas and Florida, three in New Mexico, and two each in Louisiana, Mississippi, and Missouri. 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.

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. They are located in shopping and business developments as well as in residential areas. Prior to the company’s financial difficulties that began in the late 1990s, individual units were typically 10,000 to 11,000 square feet in area and could accommodate up to 300 people. As part of an attempted turnaround, a new prototype unit was developed, which was 6,000 to 8,600 square feet in size, seated 170 to 214 guests, and had a more contemporary design. Takeout service is a growing part of the chain’s business, and drive-throughs are being added to more and more units.

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: 1930s to World War II

Harry’s son Robert (Bob) 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 that 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 Great 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 the United States, sparking social changes and robust economic growth. Forced to sell his Dallas cafeteria when he enlisted in the Army Air Corps, Luby nonetheless continued to think about the food 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 change, Americans also would seek the threads of the past.

In 1948, 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 postwar 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 Cafeterias, Inc. on February 4, 1959. The preexisting cafeterias were not affected by the move, although those units provided the cash to help the investors finance the new corporation.

Cafeterias, Inc. 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 that 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.

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 would fuel the economy further. Meanwhile, the first Luby’s located outside of Texas opened in Las Cruces, New Mexico, in 1966.

Company Perspectives:

The Company’s product strategy is to provide its customers with a wide variety of freshly cooked foods served cafeteria-style at reasonable prices in an attractive and informal environment. These products appeal to a broad range of consumers, including families with children, seniors, shoppers, and business people who want quick, healthy meals. Generally located in close proximity to retail centers, business developments, and residential areas, the restaurants are open seven days a week, year-round, for lunch and dinner. The restaurants also offer take-out service .

Consolidating Operations and Going Public: 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 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 1973, the company’s stock was offered to the public in the over-the-counter market. The company continued to expand into new areas 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 customers, sensitive to 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 resulted in a stable workforce at the individual Luby’s cafeterias. Luby’s recorded one of the lowest turnovers of support staff in the restaurant industry. That low turnover translated into experienced and consistent service for the customers and minimal training costs for the individual units. After graduation, the prospective managers spent 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 were given a high degree of autonomy. This enabled them to cater to customer tastes in their local markets with specialized menu offerings. The majority of the food ingredients were 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 were carried by every cafeteria in the Luby’s network. Ingredients for these signature items were 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 were 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 gave Luby’s managers a strong incentive to operate profitably for the long-term. Approximately 85 percent of the company’s unit managers remained with Luby’s for ten years or more.

Growth in the 1980s and Early 1990s

The year 1980 saw corporate revenues surpass the $100 million mark, and the company adopted a new name, Luby’s Cafeterias, Inc., in 1981. 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.

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. The chain expanded into Oklahoma in 1980 and into Arizona, Arkansas, and Florida in 1988.

Key Dates:

1948:: First Luby’s cafeteria opens in San Antonio.
1959:: Luby’s, with 11 cafeterias, incorporates as Cafeterias, Inc.
1966:: First non-Texas location opens in Las Cruces, New Mexico.
1973:: Company goes public in the over-the-counter market.
1981:: Cafeterias, Inc. is renamed Luby’s Cafeterias Inc.
1982:: Company stock begins trading on the New York Stock Exchange.
1996:: Luby’s records its 28th consecutive year of increased sales and earnings per share.
1999:: Company is renamed Luby’s, Inc.
2000:: Declining sales and profits lead to suspension of dividend and near bankruptcy.
2001:: Pappas brothers take over top management positions and begin turnaround bid.

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 the nation. 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 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 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 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 2 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 restaurants in three cities served moderately priced, Gulf-of-Mexico-style seafood.

With a possible hint of a major new direction for the company as it moved toward the 21st 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 was widely 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. And Forbes magazine named Luby’s among the top 200 Best Small Companies for eight of the first ten years the publication conducted the survey.

Restaurant management publications also awarded Luby’s 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 and 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 were 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 drinks 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 were given a budget to spend on public service in their areas. The company’s largest civic program was the Community Drug Education System. Initiated in 1987, the program 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 more than $1.3 million on the program.

Late 1990s and Beyond: Declining Fortunes

The final years of the 20th century saw Luby’s falter. Although the results for fiscal 1997 showed another increase in sales, they also brought an end to a streak of 28 consecutive years of increased earnings per share, as net income fell from $39.2 million to $28.4 million. Luby’s was finally being affected by the overall decline of the restaurant industry’s cafeteria segment, which was now squeezed by the increasing popularity of both lower priced fast-food outlets and higher priced casual dining chains. Long known for its solid leadership, Luby’s at the same time faced a sudden management crisis when, within the space of four days in March 1997, CEO and President John E. Curtis, Jr., committed suicide, apparently triggered in part over concern about potential store closings, and the company’s chairman, Ralph Erben, resigned unexpectedly. John B. Lahourcade, who had previously served as both CEO and chairman, was named interim chairman and David Daviss became acting CEO. The interim executive team announced in August 1997 that the company would close four stores and take a pretax charge of about $12 million in connection with the closures. Two months later, Barry J.C. Parker was hired as the company’s new president and CEO. Parker was a former CEO of County Seat Stores, a nationwide clothing store chain. At the same time, Daviss replaced Lahourcade as chairman.

In 1998, the year that founder Bob Luby died, the new Luby’s management team took steps aimed at sparking a turnaround. More than a dozen additional underperforming units were slated for closure with a $36.9 million charge taken in connection with asset impairments and store closings. Luby’s began expanding its takeout service and opened its first unit with a drive-through window at a new restaurant in Tulsa, Oklahoma. These initiatives proved successful, leading to the rollout of food-to-go and drive-throughs at additional Luby’s outlets. In January 1999 the company changed its name to Luby’s, Inc., dropping the word “cafeteria.” This move was in line with the company’s new store prototype, which imparted a warmer, more casual dining feel by jettisoning the traditional stainless steel tray lines. The new units, which were smaller than usual at 9,600 square feet, also featured a hearth oven where a customer could pick out a steak to be cooked to order and ready by the time the customer reached the cash register. Luby’s also introduced a “community restaurant” format in 1999, which was even smaller at about 7,000 square feet, and was specifically designed for markets that were previously considered not large enough to support a traditional Luby’s. In a further retrenchment, Luby’s sold its joint-venture interest in Water Street Seafood, having determined that the casual dining chain was not a good fit with the company’s expertise in limited-service restaurateuring.

Despite price increases, both overall and same-store sales continued to decline through the fiscal year ending in August 2000. Net income that year totaled only $9.1 million, compared to $39.2 million just four years earlier. Another 15 stores were marked for closure during fiscal 2000, leading to a further charge of $14.5 million. With the company’s stock price plummeting and a number of Luby’s managers unhappy with a new compensation system Parker instituted that tied pay to specific sales targets, Parker resigned suddenly in October 2000. Daviss again assumed the positions of president and CEO on an interim basis. The company announced that it would suspend payment of its quarterly dividend for the first time in its history. It also reinstituted the old profit-sharing compensation plan for managers and launched new marketing campaigns.

The news grew bleaker by December 2000. Luby’s reported a net loss of $2 million for the first quarter of fiscal 2001, a dissident group of shareholders began organizing a proxy fight for the annual meeting to be held in January 2001, and the company said it was nearing the end of its credit line, placing it on the verge of bankruptcy. Late that month, however, Christopher J. Pappas and Harris J. Pappas purchased about 6 percent of Luby’s outstanding shares for about $6.6 million. The Pappas brothers were the principal owners of Pappas Restaurants Inc., which ran a number of successful casual dining chains, including Cajun, Mexican, and barbecue concepts. After Luby’s survived the proxy battle in which the dissidents, angry over the depressed stock price as well as executive pay issues, aimed to gain three seats on the company board, the company gained some financial breathing room in March 2001 when the Pappas brothers agreed to purchase as much as $10 million of the company’s debt. At the same time, Chris Pappas was named president and CEO of Luby’s while Harris Pappas became chief operating officer. The Pappases also gained seats on the board of directors. Robert T. Herres replaced Daviss as chairman of the company, although Daviss remained on the board. The Pappas brothers were determined to engineer a turnaround at Luby’s, which they felt had failed to adapt to changing times, and they appeared eager to take a hands-on approach to doing so. According to the Dallas Morning News, Chris Pappas told a group of stock analysts, soon after taking over the reins, “Everything starts and stops at the store level. If it doesn’t work at the store level, it won’t work at the corporate level…. We’re great listeners to the market because we get out into the market. We’re in the retail business.” Industry observers were confident that the Pappases would reinvigorate the Luby’s chain, but they also felt that the turnaround would be a difficult one.