Fazoli'S Management, Inc. Business Information, Profile, and History

Company Perspectives:

Our vision is to become "America's Favorite Italian Family Restaurant Company." This is one heck of a goal, but read closely. We don't wan t to be the biggest for the sake of being big; we simply want to be t he best. We strive toward this goal everyday and support it through g uiding philosophies and values that together form our unique and vita l company culture.

History of Fazoli'S Management, Inc.

Fazoli's Management, Inc., is the operator and franchiser of the Fazo li's Italian fast-food restaurant chain. One of the most popular and fastest growing restaurant concepts in the country by the late 1990s, Fazoli's grew rapidly in its relatively short history. The company o perates and franchises over 380 restaurants throughout 32 states. Faz oli's is owned by Seed Restaurant Group Inc. (SRG). SRG chairman and CEO Kuni Toyoda owns 40 percent of the company.

The Early Years

Although the Fazoli's restaurant concept was created in 1989, Fazoli' s Systems, Inc., was actually formed in 1990, when the chain consiste d of just five restaurant locations in Lexington, Kentucky. At that t ime, the restaurants were owned and operated by Jerrico Inc., which w as also the parent company of the Long John Silver's seafood restaura nt chain. Jerrico decided to focus solely on developing Long John Sil ver's, however, and Fazoli's was put up for sale. Entrepreneur Kuni T oyoda--Jerrico's Asian franchise vice-president--joined forces with J apan-based Duskin Co. Ltd. and purchased the tiny restaurant chain. T hey formed Seed Restaurant Group Inc. to own and manage the enterpris e, and Fazoli's Systems, Inc. became its subsidiary.

When Toyoda acquired the Fazoli's chain, the restaurants were selling a pretty equal mix of pizza and pasta items. Toyoda decided that it would be almost pointless to compete in the well-established pizza in dustry, especially because Fazoli's did not offer home delivery. Ther efore, Fazoli's began phasing out pizza and instead focused mainly on its pasta selections. Toyoda upgraded the ingredients that Fazoli's used, while also making changes such as the creation of larger portio ns and a shift toward cooking the pasta more firmly (known as "al den te").

The early 1990s marked a trend toward health consciousness in the Uni ted States. Grocery store shelves were lined with "fat free," "low fa t," and "reduced fat" alternatives to most popular items, and Toyoda realized that he could capitalize on this trend with the Fazoli's con cept. In the August 1995 issue of The Lane Report, he noted, "Pasta i s here to stay, simply because the Italian segment is the most popula r ethnic segment. Pizza used to dominate, but now people are so used to eating pasta. They know what good pasta is." He began marketing Fa zoli's as a more healthful alternative to the traditional fast-food m enu of burgers and fried foods.

Toyoda also promoted Fazoli's as an affordable alternative to most fu ll-service casual restaurants. Each Fazoli's restaurant featured an a mple, comfortably decorated dining room where the manager was likely to be seen serving patrons hot breadsticks as they ate. Dine-in custo mers were treated to an unlimited supply of the breadsticks, as well as free drink refills. A typical individual check at Fazoli's was und er $4, while a family of four could usually eat there for less th an $15. For those prices, each customer was buying six to eight o unces of food, whereas most hamburgers were only two ounces.

Fazoli's soon began opening more restaurant locations, focusing at fi rst on gaining a presence in small- and medium-sized towns. For one t hing, real estate prices were usually lower in such areas, and the he althful, low-cost Fazoli's concept appealed to their residents. Fazol i's also benefited from the fact that its restaurant set-up was flexi ble enough to allow the company to purchase other failed restaurant b uildings and convert them, rather than having to actually build all o f its new structures.

From the start, the new company placed a great emphasis on customer s ervice. New employees were required to complete a one-week training s eminar, while store managers underwent a five-week program. Rather th an focus most of its attention and resources on adding restaurants an d increasing in size, Fazoli's focused instead on making sure each of its locations was able to properly represent the company's principle s. According to Toyoda in a 1998 issue of Kentucky Business Viewpo int: "We could grow faster, but we don't want to grow fast.... It takes time to develop competent general managers that really underst and Fazoli's system. We tend to focus more on service."

Rapid Expansion in the Mid-1990s

Within a couple years, however, the chain was, in fact, expanding rap idly. By 1992, the company had grown to include over 35 Fazoli's rest aurants. It almost doubled that figure in 1993 by adding 25 additiona l locations, giving Fazoli's a total count of 62 restaurants througho ut the states of Kentucky, Florida, and Indiana. Of those, 53 were co mpany-owned and none were franchised.

Not only did the company expand quickly in terms of the number of res taurant locations, it also exponentially increased the amount of sale s that each location achieved each year. When Toyoda took over the op erations of Fazoli's in 1990, the average unit volume for each of the five restaurants had been about $500,000 per year. Within five y ears, that figure had increased to around $1 million per year. Th is made expansion quite easy financially, because start-up costs rang ed from $150,000 for conversions to $500,000 for newly constr ucted buildings. At those costs, most locations could turn a profit i n the first year of operation.

Fazoli's expanded its prototype unit as well, from 2,800 square feet and 100 seats, to over 3,000 square feet and 140 seats. This helped e ach unit handle higher volumes of dine-in business. In 1994, the comp any's takeout orders represented only 30 percent of its total sales. Most of the restaurant's business was done in its dining room, with a bout 60 percent of it taking place during the dinner hours.

In early 1994, the company brought aboard Toyoda's former boss at Jer rico--Ernest Renaud--as a marketing vice-president and special consul tant. Renaud, who was already a board member of Fazoli's parent, Seed Restaurant Group, had actually done a lot of the start-up work on th e Fazoli's chain in its early years. Along with Toyoda, he set out to help the young enterprise compete with the other players in the fast -food Italian niche, including market-leader Sbarro and Pizza Hut's F astino's concept. A goal was set to open at least 120 Fazoli's units by 1996.

In late 1994, Fazoli's began testing the potential for food court and strip mall versions of its restaurants to achieve success. This move may have come about as a means of competing with Sbarro, which opera ted most of its units within shopping malls. Fazoli's knew, however, that its strength was in its freestanding restaurants, and it therefo re continued to expand mainly in that area. The company posted 1994 s ales of $59 million.

By mid-1995, the company had grown to include 112 units in 120 states . Of those, only 30 were franchised. In the June 19, 1995 issue of Bu siness First--Louisville, however, Ernest Renaud stated that the vast majority of new units in the coming years would be operated by franc hisees. This would help the company offset the cost of start-ups, as each franchisee would pay a one-time $25,000 fee for Fazoli's rig hts, in addition to all start-up costs and 5 percent of the restauran t's gross annual sales each year.

In August 1995, Fazoli's made headlines when Nation's Restaurant News published its "Second 100 Chains" rankings, based on growth in three different areas. Fazoli's was ranked third in the area of systemwide sales growth, second in the growth of company-owned units, and first in the growth of franchised units. At year's end, the chain was comp osed of 164 Fazoli's restaurants, each of which generated an average of $964,000 in annual revenue.

Continued Success in the Late 1990s

Within a year, Fazoli's units numbered 214 in 23 different states thr oughout the country. Meanwhile, in a surprising move, Seed Restaurant Group introduced a new Italian restaurant concept called Bella Notte in 1996. According to Toyoda in a 1998 issue of Kentucky Business Vi ewpoint, "We try to duplicate Trattoria, the neighborhood, casual res taurant in Italy where people go to have fun over great quality food. " While some may have felt that the company was potentially diluting its market base and creating competition for Fazoli's, Seed did not s ee it that way. Bella Notte would be pricier than Fazoli's, with an a verage individual check double that of its older sibling. In reality, the new entry would more appropriately serve as competition for such established Italian restaurants as the Olive Garden chain.

Entering 1997, the company was altering its market strategy slightly as it moved into bigger cities. Its most recent entries into larger m arkets dictated that the company needed to change its advertising str ategy in order to maintain the sales volume it had achieved in smalle r locales. Regional television advertisements surfaced. The company k new that it was important for things such as the Fazoli's tagline--"R eal Italian. Real Fast."--to be in the public eye and permeate the po tential consumer's awareness.

Toyoda invested himself mainly in his employees, however. In a Januar y 21, 1997 article about him in Nation's Restaurant News, he c ontended, "To be a success in a people-driven industry like ours, you definitely have to take care of your people." Not only did he ensure that the company operated on its founding principles of open communi cation, idea sharing, teamwork, and excellence, but he also actually invested in his employees. Toyoda offered half of his 50 percent owne rship of the company to his management team. (The other 50 percent wa s owned by Duskin Co. Ltd.)

Corporate management also began offering each of its restaurant units incentives for maintaining a high level of customer service. Each mo nth, a "mystery shopper"--that is, a customer who actually reports ba ck to the company about the level of service received--visited Fazoli 's restaurants on multiple occasions. Any unit that received scores o f 90 or higher three times within a month received bonuses for all of its employees.

In late 1997, and early 1998, Fazoli's received more accolades within the industry. Restaurant Business released its list of top 50 growth chains in July 1997, and Fazoli's was ranked seventh overall. The company also received a number seven ranking in terms of sales i ncreases, and a number 13 ranking with regard to increases in number of units. The following March, Restaurants and Institutions ra nked quick-service restaurant chains on multiple attributes; Fazoli's came out on top in overall rankings, as well as in the areas of valu e and service. Fazoli's also ranked second to Starbucks in the atmosp here rating, and third in cleanliness--just barely behind Starbucks a nd Bruegger's Bagel Bakery.

In December 1997, Fazoli's opened its 300th restaurant. As the compan y entered 1998, Toyoda began announcing that some time in the near fu ture, the company would be going public in order to fund a true natio nwide expansion campaign--a public offering had failed to materialize due to unfavorable market conditions. In 1999, Fazoli's announced th at it had signed 150 franchise agreements to open 150 new restaurants by 2004 in Texas, Utah, Nevada, and Georgia.

Fazoli's in the New Millennium

Fazoli's entered the new millennium on solid ground. Forty franchise restaurants opened their doors in 2000 in new markets including Las V egas, Washington DC, and Minneapolis-St. Paul. Twenty-eight franchise locations were launched the following year. The company's strong gro wth led to a deal with McDonald's Corp. in 2002. The nonbinding agree ment was structured as a joint venture to open up to 30 Fazoli's in t hree U.S. markets. The deal also gave McDonald's the option to buy Fa zoli's at a later date. McDonald's, which was struggling to shore up earnings, hoped its investment in the Fazoli's chain would bolster it s bottom line. Meanwhile, Fazoli's eyed its union with McDonald's as a way to further expand its burgeoning restaurant chain. McDonald's c hanged its strategy in 2003, however, and decided to end the venture.

Popularity of low-carb diets such as South Beach and the Atkins diet forced Fazoli's to rethink its menu strategy during this time period. In early 2004, the company launched its Smart Italian marketing camp aign which featured eight menu items with eight grams of fat or less. The company's culinary and research development division also worked to create new menu items featuring more vegetables and protein. Late r that year, the company hired dietitian Elizabeth Somer to help deve lop healthy low-calorie dishes.

In 2005, the company announced it was eliminating the trans fat found in partially hydrogenated oil from its breadsticks. According to the company, trans fat was created artificially by bubbling hydrogen gas through vegetable oil in a process called partial hydrogenation. Sci entific studies demonstrated that trans fat could raise cholesterol l evels and increase the risk of heart disease. As such, many food manu facturers began looking for ways to reduce or eliminate trans fat fro m their products.

Fazoli's became the first quick-service chain to promote zero trans f at menu offerings in a print and television advertising campaign. An ad that ran in the March 31, 2005, edition of USA Today claime d Fazoli's offered over 50 entrees with zero grams of trans fat. Chie f concept officer Greg Lippert explained the strategy in an April 200 5 Nation's Restaurant news article claiming, "Our intent is to position Fazoli's as a health-friendly alternative to quick-service brands offering fried food. ... For the most part we're accomplishing this change without changing our menu."

The low-carb craze ate into company profits during 2003 and 2004 and Fazoli's experienced declining same-store sales. While revenues appea red to be on the upswing in 2005, the company began to develop a smal ler store format that would be found in strip malls. The 2,800 square feet prototype was slated to debut in Summer 2005. Management believ ed the smaller, less expensive store concept would allow the company to continue its expansion in the years to come.

Principal Competitors: Noble Roman's Inc.; Sbarro Inc.; YUM! B rands Inc.

Chronology

• Key Dates:
• 1989: The Fazoli's restaurant concept is created.
• 1990: Fazoli's Systems, Inc., is created.
• 1993: By now, there are 62 restaurants throughout the states o f Kentucky, Florida, and Indiana.
• 1995: The Fazoli's chain is composed of 164 Fazoli's restauran ts, each of which generate an average of $964,000 in annual reven ue.
• 1997: Fazoli's opens its 300th restaurant.
• 1999: The company opens its first restaurant in Utah.
• 2004: Dietitian Elizabeth Somer is hired to help develop healt hy low-calorie dishes.
• 2005: Fazoli's eliminates the trans fat found in its breadstic ks.