Skyline Chili, Inc

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Skyline Chili, Inc.

4180 Thunderbird Lane
Fairfield, Ohio 45014
U.S.A.
Telephone: (513) 874-1188
Fax: (513) 874-3591
Web site: http://www.skylinechili.com

Private Company
Incorporated: 1949
Employees: 800
Sales: $30 million (2003 est.)
NAIC: 722211 Limited Service Restaurants; 311412 Frozen Specialty Food Manufacturing

Skyline Chili, Inc. is a regional family restaurant chain centered in the Ohio area. The company was founded in Cincinnati in 1949 by Greek immigrant Nicholas Lambrinides with a single restaurant. Skyline's unique chili recipe became a staple of Cincinnati cuisine. After cutting back on an earlier national expansion plan, the restaurant chain is now growing steadily within 500 miles of Cincinnati. It has more than 100 locations, most franchised. Skyline restaurants are found throughout Ohio and in Kentucky, Indiana, Michigan, and Florida. The company also sells frozen chili and other items from its restaurant menu in grocery stores in markets where it has a presence. The company makes its chili at a central commissary located outside Cincinnati, and ships fresh or frozen food to its chain outlets. The restaurants emphasize quick table service, and the average check is about $6.50. The company is privately owned by the investment firm Fleet Equity Partners.

Early Years in Cincinnati

Skyline Chili, Inc. began as a single chili parlor located on Cincinnati's Glenway Avenue. Its founder, Nicholas Lambrinides, grew up in the village of Kastoria, in Greece, where he learned to cook by watching his mother and grandmother. Lambrinides used his cooking skills to get a start in the United States. The restaurant he opened in 1949 looked out over the Cincinnati skyline, and so he took that as the name. He worked the restaurant with his five sons. The chili Lambrinides developed was neither a traditional Greek dish nor the Mexican style of chili familiar in other regions of the United States. Using a blend of mild but flavorful spices, Lambrinides made a thin brown chili that was more a sauce than a meal in itself. The classic Skyline dish was a so-called "three-way," which was a plate of spaghetti topped with chili topped with cheese. This was a distinctly Cincinnati way of eating chili, and the dish became something of a fetish with the natives. Cincinnati spawned many other chili restaurants, including Gold Star, another well-known regional chain.

The Lambrinides family ran the restaurant for years. The Lambrinides sons were entrusted with mixing the spices, and the exact blend was a closely guarded secret. In 1965, the business expanded when Skyline began packaging and selling frozen chili and chili with spaghetti to groceries. Skyline also opened new restaurants and franchised the Skyline concept in the Cincinnati area. The company built a central facility to make chili for its various locations. This kept the Skyline recipe consistent throughout the small chain. Skyline at times franchised to fellow Greek immigrants. Pete Perdikakis became the chain's youngest franchisee when he bought a Skyline franchise in 1974 when he was 22 years old. He was still running the restaurant in the early 2000s. Three of the Lambrinides brothers, Lambert, Christie, and William, remained closely involved in the management of the company from its inception through the mid-1990s. Skyline had become the chili champion of a self-professed chili town by the mid-1980s. At that time, the company began to consider expanding beyond its immediate environs.

First Expansion Wave in the 1980s

Almost all the stock in the privately held company was owned by Lambrinides family members until 1984. But in that year, the three Lambrinides brothers sold 4 percent of the company's stock to Thomas Bell, who became chief executive. Bell had been the head of accounting and auditing for the restaurant clients of management consultant firm Arthur Young & Co. He came into Skyline with bold plans for taking Cincinnati chili beyond Cincinnati. At that time, the company had fewer than 30 locations. Bell hoped to spend the next five years bringing the total to 200. His long-term goal was to roll out Skyline nationwide, with as many as a thousand stores. Bell was enthusiastic about Skyline's menu, and he was sure people outside Ohio could be convinced to enjoy Skyline's style of chili. He also thought the company had a great asset in its frozen food line. After the restaurants picked up in a new market, Skyline could then go in and sell the frozen entrees to area groceries. Initially, Bell hoped to bring off the nationwide rollout while keeping Skyline a private company.

Bell's plans took off quickly. Nearly 50 franchised Skylines opened, mostly in and around Ohio. But some new restaurants were as far away as West Virginia, Florida, and South Carolina. The company revamped the packaging for its frozen goods, now emphasizing that the chili was "Cincinnati-style." About 20 percent of Skyline's revenue came from frozen food sales by 1985, and total sales that year were $7.6 million. The company was profitable and growing, although there were some indications of problems. Several new franchises closed down because of lack of customer interest. The Hilton Head, South Carolina Skyline shut down, as did a location in Zanesville, Ohio and another in Tallahassee, Florida, where the restaurants seemed isolated from the parent company's regional reputation. Even so, Skyline kept two franchises in Florida and hoped to move into neighboring Georgia.

By 1986 Skyline had almost 50 franchised units in operation, along with nine company-owned restaurants. To fuel its growth and to pay down debt, which had risen to about $3 million by 1986, Skyline decided to sell shares to the public. The company launched a stock offering in December 1986, and raised $4.1 million. Family members and management held on to 60 percent of the stock. The company then worked on developing new menu items and opened more stores, both company-owned and franchised. Skyline revamped its strategy somewhat after the stock offering, opening much smaller restaurants. Whereas Cincinnati-area Skylines were about 3,000 square feet on average, the company began focusing on smaller buildings, from only 1,600 to 2,000 square feet. Skyline CEO Bell told the Cincinnati Business Courier (May 18, 1987) that this was the company's new "meager approach." Bell claimed large store size was cutting into profit margins, though he maintained that Skyline's restaurants outside Cincinnati were doing very well. By 1988, the chain had grown to 78 units, and Bell hoped to maintain slow and steady growth of some 15 to 20 new restaurants a year. Sales increased to $14.4 million for 1988, compared with $12.7 million in 1987. But net income shrank slightly, and Skyline's national rollout seemed sluggish.

The company went to inventive lengths to promote new restaurant locations, especially those far from Cincinnati. When the first Skyline opened in 1989 in suburban Washington, D.C., the company contacted Cincinnati college alumni associations to locate former Cincinnatians in the capital. Skyline engineered a group of "chili fanatics," who camped out for days before the restaurant opened. When the ribbon was finally cut, more than a thousand people had shown up to indulge themselves in a hometown chili frenzy. At the time, Skyline's marketing director claimed he was afraid the chain would become too popular and grow too quickly along the East Coast. But soon after, Skyline CEO Bell resigned. Lambert Lambrinides, son of the founder and then chairman of the company, conceded that growth had been stagnant. Skyline picked its new CEO from the ranks of its board of directors, naming William G. Kagler to the post. Kagler had been president of the large grocery chain Kroger. Apparently Kagler's fiery personality had led to conflicts with Kroger's chairman, and Kagler had resigned from Kroger in 1986. Skyline was of course a much smaller company than Kroger, and unlikely to be able to compensate Kagler at the level to which he had been accustomed. But the little company must have appeared a challenge to Kagler. Lambert Lambrinides told the Wall Street Journal (May 24, 1989), "It was a surprise to us that he took the job." Kagler immediately announced that the company's growth was over-extended, and within months Skyline had closed a number of unprofitable restaurants.

Revamping in the Early 1990s

Skyline cut back, getting out of markets such as Washington, D.C. that proved insupportable far from where the chain was known. The company sold off some facilities and built a new commissary and warehouse, replacing the existing plant, which was 30 years old. Kagler upped advertising and promotions in markets closest to Cincinnati, hoping to revive the chain in the Ohio region before pushing again for a bigger national presence. And Skyline still reigned over Cincinnati chili parlors. A New York Times (September 5, 1990) food reviewer called a trip to Skyline "a rite of citizenship" for people new to the city. Although rival chili chain Gold Star had as many as 70 outlets within Cincinnati (compared with about 80 nationwide for Skyline), Skyline was still apparently what people thought of when they thought "Cincinnati chili."

After Kagler took over, Skyline had not opened new franchises, and the number of stores held steady through the mid-1990s. In 1993 the company began to look to expand again. It had continued to run outlets in Cleveland and Dayton, Ohio, and in Indianapolis, Indiana and Louisville, Kentucky. Skyline hoped to put more restaurants into those markets, which also would open the way for more sales of its frozen grocery items in those cities. Research had helped hone the Skyline formula. The company found that its restaurants with table service, rather than cafeteria-style service, tended to do better. The company decided to stay away from strip malls and mall food courts in favor of freestanding locations.

Company Perspectives:

In 1949, on a hilltop overlooking Cincinnati, Ohio, Nicholas Lambrinides and his sons opened a small restaurant and began serving what would soon become a Cincinnati icon—Skyline Chili. The name came from the impressive view of the city's outline against the sky and has since become synonymous with a unique dish known as Cincinnati-style chili. Today, there are more than 100 Skyline Chili restaurants in four states, a credit to the vision of Nicholas Lambrinides and his sons—men who had the determination to perfect a truly new dining experience way back in 1949.

Then in 1994 the three Lambrinides sons all retired, along with William Kagler. Kagler stayed on as head of franchise planning, but the chief executive position went to the former chief operating officer, Kevin McDonnell. Sales and earnings were on the rise by 1994, and McDonnell hoped that a cautious, less ambitious expansion plan would work this time around. The company seemed to have stabilized. By 1997, revenue had grown to $33 million, a new high, and Skyline pulled in $1.7 million in profit.

Acquisition Skirmish in 1997

In 1997 Skyline received an unsolicited buyout offer from a Michigan company called Meritage Hospitality Group, Inc. Skyline's board quickly refused Meritage's first offer, of about $25 million. Meritage was a publicly traded company that owned hotels and restaurant chains. It had recently taken on debt to buy a 26-chain franchise of the Wendy's hamburger restaurant in western Michigan. Meritage was not profitable and had little cash flow with which to pay its heavy debt load. Among Meritage's creditors was a well-known Cincinnati financier named Carl Lindner. Lindner was in a position to take over Meritage if it could not pay him back. Meritage made a second offer for Skyline shortly after its first was rejected. This aroused speculation that Lindner was trying to get hold of Skyline through Meritage. Meritage withdrew its second offer in April 1997.

Next, Skyline management got together with Fleet Equity Partners, a private, Rhode Island-based equity group, and put together a new buyout deal. The deal was worth about $24 million, and it left Kevin McDonnell and other senior managers in place. Despite noises from Meritage that it would make a third offer for Skyline, board members and stockholders quickly approved the Fleet Equity buyout. Skyline became a private company again in 1997, 11 years after it went public.

Regional Chain in the 2000s

By the late 1990s, Skyline had about 70 units in and around Cincinnati and 45 more in other nearby markets. Chainwide, sales had grown to $100 million. By 2000, the chain was ready to expand again. But it planned to move slowly, staying within 500 miles of its home base. Skyline's CEO McDonnell saw lots of room for more Skylines in cities near Cincinnati. The company hoped to put 40 Skylines in Columbus, Ohio over the early 2000s, and then to build up similar mass in other cities in its orbit, such as Indianapolis and Louisville. By that time, other companies had demonstrated that strong regional growth could be a winning formula. McDonnell compared Skyline to In-NOut Burgers, a California-based hamburger chain, and the Southern charmer Krispy Kreme Donuts. Krispy Kreme had grown steadily within the Southeast in the late 1990s, and finally went public to much Wall Street admiration in 2000. Skyline was similar to these regional specialty chains in that it had intense customer loyalty.

Although it had not done well marching into unfamiliar territory like Washington, D.C., Skyline seemed loved and respected throughout its Ohio territory. When the original Skyline, on Glenway Avenue, closed in 2002, a civic group auctioned off 150 ladles that had been used there through the years. The auction, held on e-Bay, sparked a fervor, and bidding started at close to $20 (for a single ladle). But Skyline's vice-president for marketing told the Cincinnati Post (April 24, 2002): "That Skyline has developed a cult following isn't news to us." Strong customer support seemed to be the key to Skyline's success. McDonnell hoped to be able to expand Skyline to ten times its current size by opening more units solely within a 500-mile ring around Cincinnati.

By 2004, Skyline's principal markets outside Ohio were Lexington and Louisville, Kentucky, and Indianapolis, where it had long had a presence. The company began to move into Michigan, and also looked for new opportunities in Florida. Skyline had six Florida outlets by 2004. Florida had strong ties to Ohio, as many Ohioans retired there. The manager of a Tampa-area Skyline claimed that about three-quarters of the restaurant's customers had some tie to Cincinnati. So even though geographically the Florida restaurants were far from the company's home base, it still fed off the reputation Skyline had built up in Ohio. Company revenue was estimated at about $30 million for 2003, and the outlook seemed good for a more controlled push into new markets.

Principal Competitors

Gold Star Chili, Inc.; Wendy's International, Inc.; Culver Franchising System, Inc.

Key Dates:

1949:: Nicholas Lambrinides and sons open the first Skyline restaurant in Cincinnati.
1965:: The company moves into frozen grocery items.
1984:: The company brings in Thomas Bell, begins expansion.
1986:: A public stock offering is made.
1989:: Bell resigns; former Kroger president William G. Kagler becomes CEO.
1994:: Kagler and three founding Lambrinides sons retire.
1997:: A management group and Fleet Equity take the company private.
2000:: Skyline prepares for more concentrated regional expansion.