Santa Barbara Restaurant Group, Inc.

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Santa Barbara Restaurant Group, Inc.

3938 State Street, Suite 200
Santa Barbara, California 93105
U.S.A.
Telephone: (805) 563-3644
Fax: (805) 563-3844
Web site: http://www.sbrg.com

Public Company
Incorporated: 1986 as GB Foods Inc.
Employees: 5,000
Sales: $114.4 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: SBRG
NAIC: 72211 Full-Service Restaurants

Santa Barbara Restaurant Group, Inc. (SBRG) owns or franchises three different restaurant chains: La Salsa (which specializes in moderately priced “fresh mex” cuisine and of which there are about 100); Timber Lodge Steakhouses (in 20 locations); and Green Bum to restaurants (roughly 40 stand-alone eateries). SBRG also operates 214 dual-concept restaurants with the fast food chain Carl’s Jr. (which is owned by CKE Restaurants, Inc.). In 2000, SBRG was in the process of divesting its 52 JB’s Family Restaurants and six Galaxy Diner establishments. William Foley, the restaurant mogul who pre-sides over CKE, is SBRG’s chairman and exerts considerable influence over the company.

Humble Beginnings: 1980–85

SBRG’s roots date back to 1980, when a Puerto Rican-born social worker named Ruben Rodriguez paid $40,000 for a small Mexican restaurant—The Green Burrito—a few blocks from his house in the Los Angeles suburb of Hawaiian Garden. Dissatisfied with the eatery’s heavy menu, Rodriguez took night classes in cooking and invented new recipes that were fresher and lighter. He wanted his establishment to occupy a market niche between fast food Mexican chains such as Taco Bell and more expensive sit-down Mexican restaurants. His strategy was validated as sales at the Green Burrito began to soar.

In 1985 Rodriguez met Gary Me Arthur, a more experienced restaurateur who was familiar with owning, operating, and developing franchises (though his previous venture in franchise building had resulted in bankruptcy). Me Arthur was enchanted by Green Burrito’s potential, and he pushed Rodriguez to franchise the concept.

Franchising and Growth: 1986–92

Rodriguez and Me Arthur joined with attorney Robert Gibson in 1986 and founded GB Foods Inc., which owned the rights to the Green Burrito name and oversaw the building of new restaurants (both company-owned and franchised). The troika ran the fledgling company as an executive committee: Rodriguez (with an 18.8 percent share in the venture) dealt directly with the franchisees; Me Arthur (who controlled 17.4 percent of GB Foods) administered the company; and Gibson (with a 4.4 percent stake) provided legal counsel.

For the next four years, GB Foods rolled out new company-owned stores and franchises in the Los Angeles area. The company differentiated itself from rival chains in a number of ways. Rather than pay a premium for roadside real estate, GB Foods built Green Burrito restaurants in less expensive strip malls. Green Burrito also abjured the plastic booths, drive-thrus, and multiple cashier stands characteristic of most fast food establishments in favor of real tables and long wooden order counters. In addition, its diverse menu featured an assortment of traditional Mexican dishes, such as tacos, burritos, tostados, chile rellenos, and flan.

What truly distinguished Green Burrito from its counter-parts, though, was its centralized food preparation and high-quality ingredients. GB Foods insisted that all proprietary menu items be prepared at the company’s commissary. Less than a dozen cooks created dishes for all Green Burrito eateries. The dishes were delivered twice a week to individual restaurants, which then put the finishing touches on them. This method ensured a consistent quality of food and also helped keep costs down by allowing the company to pay its managers less (as they had fewer supervisory responsibilities). These lower labor costs enabled the company to buy more expensive ingredients; GB Foods spent 38 percent more than the average fast food establishment on its ingredients, using items such as Grade A white chicken meat and 95 percent lean pork not generally found at its competitors’ restaurants.

The company blossomed during the late 1980s. Between 1985 and 1990, GB Foods built a network of nine company-owned and 23 franchised Green Burrito restaurants. Low start-up costs made the franchises attractive to prospective owners. GB Foods sold its franchises for $25,000, and without the need for heavy cooking equipment or drive-thru technology, start-up costs to the franchisee ranged from $209,900 to $312,500 in 1990 (compared with the $400,000 needed simply to purchase a lot to construct a Taco Bell restaurant). GB Foods’ revenues tripled between 1987 and 1990, while its profits grew twelvefold. Between 1989 and 1990 alone, the company’s net revenue soared from $3.66 million to $5.08 million. This rate of growth—GB Foods’ sales rose 39 percent in 1990 alone—was particularly impressive as the rate of increase industry-wide during the same period was only one percent. “We have no limits,” an ebullient Rodriguez told the Orange County Business Journal adding, “I think we can be the McDonald’s of the 1990s.”

Buoyed by such optimism, GB Foods sought to expand more rapidly. In 1990, Rodriguez, McArthur, and Gibson merged GB Foods Inc. with GB Foods Ltd. (which they had founded in 1989) to form GB Foods Corp. Soon thereafter, they took their company public, selling off roughly 39 percent of their holdings, in the hope of generating capital to fund future growth. The $2.9 million they raised was immediately used to begin construction on four new company-owned stores. In December of 1990 GB Foods leased a larger commissary capable of preparing food for more than 300 individual Green Burrito restaurants.

By September of 1992,44 Green Burrito restaurants existed, all in the Los Angeles area. Rodriguez opted to locate some of his newest restaurants in less-traveled areas such as La Verne and Temecula so that Green Burrito could beat the “majors” (the likes of Taco Bell and McDonald’s) in establishing new markets. “They’re going to wake up to our stores out there and hear our salsa; the salsa music we play in our stores,” Rodriguez averred in the September 7, 1991, Los Angeles Times. Despite his bravado, there were indications that GB Foods was overextended. The company reported a net loss in 1991 (although sales rose to $8.5 million).

Ups and Downs: 1992–96

In April of 1992 GB Foods signed an agreement with KFF Management, a 62-unit Arby’s franchise in Los Angeles, to convert ten underperforming Arby’s restaurants into dual-concept stores that offered both Green Burrito and Arby’s menus. The first such establishment opened in September. Within weeks, sales at that store nearly doubled. But GB Foods lacked sufficient capital to continue to expand (it had, in fact, reported losses for every quarter but one since it had gone public in 1990). To improve its financial picture, the company sold about 20 percent of its common stock (one million shares) for $3.1 million to William Theisen in November of 1992. In return, Theisen gained a seat on GB Foods’ board of directors, as well as voting control of a majority of the company’s common stock.

Theisen was the wildly successful founder of Godfather’s Pizza, which he had launched as a single restaurant in 1973. Within ten years the chain had grown to 950 units and Thiesen sold it to the Pillsbury Co. But Green Burrito’s potential brought him out of semi-retirement. Theisen’s enthusiasm stemmed from his belief that he could make a Godfather’s Pizza-style triumph out of Green Burrito. He planned to trans-form the regional chain into a national powerhouse of 3,000 restaurants by adding 500 stores each year.

To meet his ambitious expansion goals, Theisen aimed to graft Green Burrito franchises onto existing fast food restaurants. GB Foods’ dual-concept success at Arby’s restaurants showed that the idea was a viable one, and that offering two distinct menus could boost sales at stagnant fast food restaurants. Moreover, since almost all of Green Burrito’s menu was precooked off-premises, fast food chains would need to make only minimal changes to accommodate Green Burrito.

Theisen immediately began to cast about for a partner to implement his dual-concept restaurants, settling on Carl N. Karcher, the chairman of CKE Restaurants, Inc. (which was the parent company of Carl’s Jr.). Although Karcher was supportive of the idea (and of the loan Theisen was prepared to make him), the rest of CKE’s board was not. After a boardroom battle, Karcher was dismissed as CKE’s chairman.

Key Dates:

1980:: Ruben Rodriguez purchases a Mexican restaurant named the Green Burrito.
1986:: Rodriguez, Gary McArthur, and Robert Gibson form GB Foods Inc.
1990:: Rodriguez, McArthur, and Gibson create GB Foods Corp. from GB Foods Inc. and take GB Foods Corp. public.
1992:: GB Foods signs agreement with KFF Management Inc. to build a Green Burrito within an existing Arby’s to test “dual-concept” stores; GB Foods enters agreement with William Theisen.
1993:: GB Foods signs distribution agreements with D.I. Manufacturing Inc. (Deli International) and Eagle Distributing Co.; Green Burrito franchisees file suit against GB Foods.
1994:: Additional franchisees join lawsuit; Rodriguez and Gibson resign; GB Foods agrees to dual-concept test with CKE’s Carl’s Jr.
1995:: Carl’s Jr. begins to convert franchises to dual-concept stores with Green Burrito.
1998:: GB Foods changes name to Santa Barbara Restau-rant Group; acquires Timber Lodge Steakhouse and JB’s Family Restaurants.
1999:: Santa Barbara Restaurant Group purchases La Salsa Co.
2000:: Santa Barbara Restaurant Group sells JB’s.

With prospects of partnering with CKE dimming, GB Foods looked for other ways to leverage the Green Burrito brand and drive expansion outside the southern California region. In April of 1993 GB Foods signed an agreement with D.I. Manufacturing Inc., the parent company of Deli International, for that concern to distribute Green Burrito products through its system of grocery stores, convenience stores, and warehouse clubs. In September GB Foods joined with Eagle Distributing Co. (the snack food arm of the Anheuser-Busch Companies, Inc.) to market Green Burrito frozen snacks in bars, convenience stores, supermarkets, and restaurants. Despite these steps, GB Foods continued to lose money.

Matters worsened in May of 1993, when GB Foods was sued by 13 Green Burrito franchisees. The plaintiffs claimed that GB Foods had overstated the sales volume of typical Green Burrito restaurants to lure franchisees, had improperly directed start-up franchisees to subcontractors who were relatives of the company, and had concealed the fact that company founder Gibson had been sanctioned by the Securities and Exchange Commission and that Mc Arthur had declared bankruptcy. The franchisees demanded repayment of their start-up costs. GB Foods denied the allegations but eventually settled the suit in May 1994, agreeing to give the franchisees $280,000 in cash and 400,000 shares of stock.

The following month, another round of Green Burrito franchisees made identical claims. (The case settled on similar terms.) Rodriguez and Gibson resigned shortly thereafter, though they denied that their abrupt departure was related to the lawsuits. Theisen assumed Rodriguez’s position as chairman and chief executive officer, while Gibson was replaced as chief financial officer by Madeline Cline.

GB Foods’ fortunes revived in June of 1994, when CKE reversed its earlier opposition to dual-concept restaurants and agreed to introduce Green Burrito menus at six Carl’s Jr. locations. CKE’s about-face was due in large part to a change in leadership. (After Karcher’s ouster in October of 1993, William Foley II led a team of investors who took control of Karcher’s stock. Early in 1994, Foley was named CKE’s chairman, and he negotiated Karcher’s return to the company as chairman emeritus.) If the dual-concept restaurants proved successful, CKE would exchange warrants for up to 20 percent of GB Foods’ stock, and GB Foods would purchase up to 2.5 percent of CKE stock.

Unfortunately, the agreement was temporarily jeopardized in 1995, when CKE began to test its own Mexican fast food chain, Picante Grill, in Carl’s Jr. GB Foods immediately filed suit against CKE, alleging breach of contract. The dispute blew over in May 1995 when CKE agreed to convert at least 140 Carl’s Jr. restaurants to dual-concept stores with Green Burrito. That same month, Rally’s Hamburger Inc., a chain with 500 restaurants in 23 states, also announced that it would incorporate Green Burrito franchises into some of its restaurants. These arrangements seemed to offer benefits to all parties. Green Burrito hoped to profit from both the national exposure and the franchising fees it would collect (a $7,500 development fee for each burger unit, as well as a four percent royalty on all Green Burrito sales). Carl’s Jr. was plagued by flattening sales and wanted to boost its tired brand image.

In the end, the dual-concept system assisted CKE far more than GB Foods. The incorporation of Green Burrito into Carl’s Jr. was a huge success (some stores reported sales increases of up to 25 percent after the changeover), bolstering CKE’s bottom line. GB Foods, on the other hand, lost $4.5 million on sales of $6.3 million in 1994, and its gross revenues continued to trend downward, dropping to $6.2 million in 1995 and $4.5 million in 1996. To stanch the bleeding, Theisen closed GB Foods’ company-owned restaurants to devote more resources to joint branding efforts.

Changing Direction: 1997 and Beyond

In July 1997, CKE Chairman Foley shocked the industry when his Fidelity National Financial Inc. (which owned seven title insurance companies) paid $5.8 million for a 41 percent stake in GB Foods. Theisen resigned and was replaced as chairman by Foley and as CEO by Andrew Puzder (a former executive vice-president at Fidelity). Although most analysts speculated that Foley took control of GB Foods primarily to buttress the Carl’s Jr. revival, Foley proved such rumors wrong in 1998 when he led GB Foods into new sectors of the restaurant business.

In April of 1998 GB Foods announced plans to acquire JB’s Family Restaurants from CKE (a deal that included 62 company-owned JB’s restaurants, 20 franchisee-owned JB’s restaurants, and six Galaxy Diners). GB Foods also sought to purchase Timber Lodge Steakhouse Inc., a chain of 18 family-style restaurants concentrated in Minnesota, South Dakota, and Wisconsin. To facilitate these massive transactions, GB Foods formed a strategic alliance with Franchise Finance Corp. of America. Under the terms of the deal, Franchise would provide the money for GB Foods to acquire land or property, but would lease the restaurants back to GB Foods. The two acquisitions transformed GB Foods “from a company with annual sales of $5.3 million into one with about $100 million,” the Orange County Register reported on August 22,1998. GB Foods’ board approved the various facets of the arrangement in September. The company re-christened itself Santa Barbara Restaurant Group (SBRG) to reflect the new diversity of its holdings. By the close of 1998 SBRG controlled 343 restaurants, which generated $35.6 million in sales.

SBRG continued to grow in 1999. In July the company completed the purchase of La Salsa Holding Co., the parent company of 50 company-owned and 48 franchised La Salsa Fresh Mexican Grill Restaurants. Soon after, SBRG announced that it would sell JB’s to focus more heavily on “fresh Mex” restaurants and steakhouses. Fresh Mex represented an upscale, quick-service alternative to traditional Mexican fast food. Made from high-quality ingredients (often displayed for customers), fresh Mex restaurants were taking the industry—especially in the western United States—by storm. SBRG planned to expand fresh Mex La Salsa beyond California, into regions where Taco Bell dominated the Mexican food market.

SBRG was forced to pursue fresh Mex in another arena as well. The company’s freestanding Green Burrito restaurants (those not attached to a Carl’s Jr.) successfully sued SBRG for cheapening the Green Burrito brand by SBRG’s association of it with fast food restaurants. In 2000, SBRG agreed to provide $1.2 million in loans to its 42 freestanding Green Burrito franchisees for remodeling. Ruben Rodriguez emerged from retirement to take charge of the overhaul. In an effort to distinguish themselves from the dual-concept Green Burritos, the freestanding restaurants planned to focus more on fresh Mex and to rename themselves The Grill by Green Burrito.

In June 2000, Puzder left the SBRG to become the new CEO and president of Hardee’s (which CKE had acquired in 1997). Although his post as SBRG’s CEO was left unfilled for some time in 2000, and SBRG struggled to integrate its latest farflung holdings, the company was on solid ground. Sales in 1999 topped $114 million, and the company continued to concentrate on its multifaceted efforts to develop its dual-concept restaurants, to build its presence in the lucrative fresh Mex market, and to expand Timber Lodge Steakhouse.

Principal Subsidiaries

Timber Lodge Steakhouse, Inc.; La Salsa Holding Company.

Principal Competitors

Advantica Restaurant Group, Inc.; CBRL Group, Inc.; Metromedia Company; Outback Steakhouse Inc.; Pancho’s Mexican Buffet, Inc.; Ryan’s Family Steakhouse, Inc.; Taco Bell Corp.