Pappas Restaurants, Inc.

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Pappas Restaurants, Inc.

642 Yale Street
Houston, Texas 77007-2534
U.S.A.
Telephone: (713) 869-0151
Fax: (713) 869-4932
Web site: http://www.pappas.com

Private Company
Founded: 1976
Employees: 10,000
Sales: $320 million (2003)
NAIC: 722110 Full-Service Restaurants; 722212 Cafeterias

The family-owned Pappas Restaurants, Inc., chain operates in more than 60 locations in Houston, Dallas, Austin, San Antonio, Beaumont, Atlanta, Chicago, Denver, and Phoenix. The restaurants encompass a variety of concepts, including Pappas Bros. Steakhouse, C&H Steakhouse, Pappadeaux Seafood Kitchen, Pappas Seafood House, Pappasito's Cantina, Pappas Bar-B-Q, Pappas Burger, Pappas Pizza, Yia Yia Marys. The company is run by brothers Christopher and Harris Pappas, who also serve as the executive team at Luby's, Inc., a cafeteria chain in several states.

Origins

The origins of the family-operated Pappas Restaurants date back several generations, beginning with H.D. Pappas, who emigrated from Greece in 1897 and opened restaurants in Arkansas, Tennessee, and Texas. In 1945, H.D. Pappas's sons, Pete and Jim, moved to Houston where they obtained a franchise to sell beer coolers in South Texas. The brothers eventually built the venture into a successful restaurant supply business, selling chairs, booths, refrigerators, and other kitchen equipment. The business was cyclical, however, and the brothers soon decided to try the restaurant field in 1967 with the opening of a Dot Coffee Shop in downtown Houston. In 1970, Jim Pappas's son, Harris, joined the family business, soon followed by his other sons, Christopher and Greg. Although the 1970s proved to be a heyday for the restaurant business, the Pappas family largely sat out the prosperous times, preferring a more conservative approach of buying and owning property rather than leasing it. The company also pursued a strategy of expanding during economic downturns when land prices were relatively cheap and startup costs were affordable.

Beginnings of Company Growth

The company had modest success in opening and operating several casual dining spots, including two Dot Coffee Shops, a Brisket House barbecue, and the Strawberry Patch American bistro. The Pappas family also continued to operate the restaurant supply business, becoming its sole client. With the attitude that they could do things better themselves, the Pappas family built and supplied their own equipment, including wood-burning grills, chairs, sinks, and stoves. A business owned and operated by a sister, Victoria Giannukos, supplied the uniforms and awning designs. With the 1980 opening of the first Pappas Seafood House, the company realized that it had entered a lucrative market. However, the business also had its failures. In 1979, the family opened the Circus Restaurant with a Barnum & Bailey theme but terminated the venture in 1985. The company's taqueria concept called Pappatacos also proved a failure.

New Markets in the 1980s

After Jim Pappas's death in 1982, his sons aggressively expanded the business, opening up more seafood restaurants, in addition to profitable Mexican and cajun restaurants. The Pappas family eventually turned their business into a 50-unit chain worth hundreds of millions of dollars. The Pappas brothers grew the business on a tireless attention to detail, value, and service. The brothers also made their mark by offering large portions at moderate prices at restaurants with highly visible locations. What the restaurants tended to lose in higher food costs, they made up for with volume and considerable customer turnover. The company had a competitive edge on publicly owned restaurant chains, which were under pressure to build new units in a hurry and to improve their bottom lines from one quarter to the next. Unlike these competitors, the Pappas business could take its time in building a high quality restaurant, devoting as much labor to the project as was required.

In 1989, after concentrating their business in Houston where they had more than 25 Pappas dining spots, the family began expanding into Dallas and Austin. The company had several firmly established and profitable concepts, including Pappas Seafood House, Café Pappadeaux, Little Pappas Seafood Kitchen, Pappamia Cucina Italiana, Pappasito's Cantina, and Pappas Brisket House barbecue place. In 1992, the business broke into the San Antonio market with one of its Pappasito's Cantina Mexican food eateries. The company planned to open another Pappasito's and the Pappas' Cajun seafood concept, Pappadeux Seafood Kitchen, in San Antonio by the fall of 1993. Each of these restaurants included 10,000 to 12,000 square feet of space, was designed by the Pappas' architectural staff, and was built by the company's in-house construction crew.

Legal Challenges and Expansion

Amidst the company's growing success, it ran into legal woes. In 1995, the company settled a class-action complaint by the U.S. Equal Employment Opportunity Commission, claiming that four Pappas restaurants in Houston had discriminated against Hispanics, African Americans, and workers older than 40 in better-paying dining-room jobs in favor of younger, white workers. The lawsuit also alleged that the company hired mostly Hispanic workers for such jobs as dishwashers and busboys. The company settled the suit without admitting any wrongdoing. The agreement provided that Pappas Restaurant, Inc., offer dining room jobs to as many as 1,073 African Americans and 1,177 Hispanics who applied for those positions between January 1, 1988, and February 28, 1993. The agreement also stipulated that older and minority applicants who were denied jobs during that period might be eligible for monetary damages.

The company was also shaken when Greg Pappas died in a car accident on a Houston highway. With his death in February 1995, the company lost an important member of its executive team as well as its main architect.

In 1996, the company's gamble on a new concept—an upscale steakhouse with a cigar room, impressive wine cellar, and playful art—raised the business to new heights. The company opened its first Pappas Bros. Steakhouse on the spot of the Strawberry Patch American bistro, an eatery they opened in 1975 and closed in 1993 after the venture had run its course. The steakhouse represented a departure from its other causal dining restaurants and poised the company for future growth. Another Pappas Steakhouse was opened in 1998, located in the restaurant row that had developed along Northwest Highway in Dallas. The company took more than a year to build the restaurant, spending $6 million on the wine inventory alone. With a wine list of 1,600 selections, a cigar room, and other amenities, the restaurant proved a success in catering to business executives and others with a taste for fine food. At the same time, the company continued to expand its family empire with the opening of new restaurants in Chicago and Atlanta.

The company ran into more legal trouble in 1997 after a three-year federal investigation found the 54-unit restaurant chain to be in violation of federal immigration laws. In a plea bargain signed August 13, 1997, the company agreed to pay a $1.7 million fine, the largest ever in an Immigration and Naturalization Service enforcement case. Federal raids at six Pappas-owned restaurants in the Dallas area had found more than 100 undocumented workers, primarily from Mexico and Central America. In the plea bargain, the company admitted that it had hidden illegal aliens during raids and altered personnel records by changing the names of undocumented workers as they were moved from one restaurant to another.

Luby's Acquisition in the 2000s

In December 2000, the Pappas brothers acknowledged the purchase of more than a million shares of Luby's Inc., a financially troubled San Antonio-based business with a chain of cafeteria-style restaurants in ten states. Brothers Christopher and Harris Pappas bought 1.3 million shares, nearly 6 percent of Luby's stock, in increments between October 16 and December 22. At the same time, the Pappas brothers began negotiating for possible board seats, an active role in its management, and possible further investment in the company. The deal marked the Pappas brother's first ownership in a publicly traded company. Luby's stock value had plunged by more than 75 percent in three years. It had further suffered from high management turnover, declining sales, a controversial president who resigned in September 2000, and a proxy fight with a small group of shareholders who had tried to oust some of company's board members at its January annual meeting.

Company Perspectives:

Pappas Restaurants strives to be a superior restaurant company through constant innovation, attention to detail, and a focus on quality in all that we do. We believe that the greatest strength of Pappas Restaurants lies within our people. Committed to providing an exciting work environment that recognizes initiative and performance, we offer opportunities for growth, and we challenge individuals to achieve their best. In addition, we are dedicated to greeting each of our guests with warmth and friendliness. By identifying and fulfilling the expectations of our guests, we create an outstanding dining experience for them. We also build relationships within our communities through participation and service as we work together to help meet community needs.

In March 2001, with Luby's in dire financial straights, the company named Christopher J. Pappas as company president and CEO and Harris J. Pappas as chief operating officer. The Pappas brothers also joined Luby's board of directors and agreed to invest an additional $10 million in the company. As the brothers stepped into their respective management roles, Luby's posted a second-quarter loss of $9.4 million and was in default with its syndicate of lenders. Luby's financial fortunes continued to plunge with its stock price bottoming at 95 cents a share on May 7, 2003. By August 2005, however, the Pappas brothers had begun to turn the troubled company around by investing in better kitchen facilities, introducing new food selections, and launching a new marketing campaign. When the brothers took over the company in 2001, the chain had 190 cafeteria restaurants and was assuming debt that eventually totaled $108.6 million. They decided to close 50 of the chain's worst performers and worked to cut debt to $29.8 million. In June 2005, Luby's third-quarter sales had increased 6.5 percent to $77 million, fueled primarily by the introduction of new combo plates such as lemon basil salmon, Cajun etoufee, and sweet sesame pork. Christopher and Harris Pappas also moved Luby's headquarters from San Antonio to Houston, where the Pappas chain of restaurants was based. Although growth for the cafeteria chain remained in the distance, the Pappas brothers sought to improve profitability through increasing same store sales, improving brand through advertising, and introducing new entrees. Along with the success of their Pappas restaurant chain, the Pappas brothers appeared to be making headway in improving Luby's prospects as well.

Principal Competitors

Brinker International Inc.; Consolidated Restaurant Operations, Inc.; Landry's Restaurants, Inc.

Key Dates:

1897:: H.D. Pappas emigrates to the United States from Greece and opens up restaurants in Arkansas, Tennessee, and Texas.
1945:: H.D. Pappas's sons, Jim and Pete, enter refrigeration business in South Texas.
1976:: Brothers Jim and Pete Pappas open the Dot Coffee Shop.
1989:: Company expands business into Dallas and Austin.
1992:: Company breaks into San Antonio market.
1995:: Company settles class-action discrimination complaint by the federal government.
1996:: Pappas brothers open their first upscale restaurant, Pappas Bros. Steakhouse.
1997:: Company is found in violation of federal anti-immigration laws.
2001:: Christopher and Harris Pappas are named executive managers of Luby's Inc.