Friendly Ice Cream Corporation Business Information, Profile, and History

Company Perspectives:

Our vision is to be the leading casual full service restaurant/ice cream shoppe and premium retail ice cream brand in the Eastern United States--known for operations excellence, great signature foods, famous ice cream shoppe desserts, sparkling clean facilities, prompt, friendly service and dedicated, talented people--resulting in outstanding customer loyalty and consistent profitable growth.

History of Friendly Ice Cream Corporation

Friendly Ice Cream Corporation is one of the top names in ice cream in the northeastern United States. The company has nearly 530 Friendly's company-owned and franchised restaurants in 16 states and distributes packaged ice cream products to more than 4,500 retail outlets. Friendly was purchased from the Hershey Food Corporation in 1988 by the Tennessee Restaurant Company, headed by fast-food wunderkind Donald N. Smith. Since that time it has often struggled toward profitability, having shouldered a sizable amount of debt in Smith's leveraged buyout. Friendly was taken public in 1997 to help reduce this burden. Cofounder Prestley Blake purchased $2 million in company stock during 2001 and has publicly criticized Smith's leadership abilities and spending habits. Blake filed suit against Smith in 2003, claiming he misused $3.5 million in corporate funds.

Early Years

In the summer of 1935 two brothers, Curtis and Prestley Blake, decided to go into business for themselves in Springfield, Massachusetts, by opening an ice cream shop. The 18- and 20-year-old Blakes borrowed $547 from their parents to finance the venture, naming their shop "Friendly Ice Cream" as a pledge to both themselves and their customers that they would offer warm and caring service. The Blakes made their own ice cream in a two-and-a-half-gallon freezer they had purchased with the borrowed money. The first four days they served the ice cream in cups, but when they decided to offer double-dip cones for a nickel, business began to take off. As the warm weather of that first summer waned, the brothers realized they would need to offer more than just ice cream to keep customers coming in over the winter. After taking a poll of their patrons, they decided to add hamburgers to the menu. By the following summer the Blakes were doing well enough to hire an additional employee, and in 1940 they opened a second shop in West Springfield, Massachusetts.

The United States entered World War II the following year, and in early 1943 the Blakes closed their shops for the duration. Curtis joined the service, while his older brother worked domestically for the war effort. They put signs in the windows of their restaurants announcing that they would be closed "until we win the war!" Following the cessation of hostilities, they returned to civilian life and reopened their shops. They expanded again in the late 1940s, with new locations in Longmeadow, Massachusetts, and Thompsonville, Connecticut. By 1951 a total of ten shops were open in the two states. This year saw the introduction of take-home half gallons of ice cream and expansion of the restaurants' menus to include more ice cream products and a variety of sandwiches. The company also built a manufacturing plant in West Springfield to produce ice cream for the growing chain.

Over the next two decades Friendly Ice Cream expanded into other states throughout New England and the Mid-Atlantic region, establishing an especially strong presence on Long Island. The company constructed its corporate headquarters and a new manufacturing plant in Wilbraham, Massachusetts, in 1960. In the late 1960s the Blake brothers took Friendly Ice Cream public with a stock offering. By 1975 the chain had more than 500 restaurants, and that year the company opened a second manufacturing and distribution plant in Troy, Ohio. Restaurant menus had expanded over time to offer breakfasts, chicken, seafood, salads, and more, although ice cream products continued to account for a major share of the company's business.

1979 Purchase by Hershey

Chocolate maker Hershey Food Corporation, seeking to diversify, purchased Friendly Ice Cream for $162 million in 1979. By this time Friendly had more than 600 restaurants in 16 states and annual sales of $200 million. Hershey began to aggressively expand the chain, opening more than 100 restaurants within the next five years. In 1984 the company opened its first outlet in Florida, and by the following year, as it celebrated its 50th anniversary, there were 740 restaurants and 34,000 employees. Although annual sales figures had more than doubled since the Hershey buyout, all was not entirely well. Sales growth was mostly due to newly opened restaurants, not increases in per-store sales, and the growing legions of fast-food chains such as McDonald's were cutting into Friendly Ice Cream's business. To catch up, the company began experimenting with new strategies, one of which was a guaranteed five-minute delivery of lunch items on a special menu. The new Express Lunch concept was promoted with a series of television ads.

Despite this and other efforts, Friendly was still not performing as well as Hershey wished, and in September 1988 it sold the company to Chicago-based Tennessee Restaurant Company (TRC) for $375 million. TRC had been founded in the mid-1980s by Donald N. Smith and a group of investors to purchase and manage restaurant chains. Smith was considered a star in the restaurant world, having doubled Burger King's profits while serving as its president from 1977 to 1980 and later heading PepsiCo's restaurant division where he boosted profits 600 percent in two years. Smith was given credit for the success of PepsiCo unit Pizza Hut's popular Personal Pan Pizza concept, as well as the introduction of a successful breakfast menu during an earlier stint at McDonald's. TRC had purchased the 330-unit Perkins Family Restaurants chain in 1985, and the acquisition of Friendly made it the second largest operator of family restaurants in the country. Smith took the title of Friendly CEO and board chairman, in addition to his roles as chairman and CEO of TRC.

TRC immediately began to take stock of the company's strengths and weaknesses and scheduled more than 100 underperforming restaurants for closing within the next year and a half. These were located mainly in Virginia, Florida, and Ohio, with the company's New England stronghold remaining untouched for the most part. The brand name also was changed, with a possessive "s" added to the end. Other changes included layoffs of 60 people at the corporate level, the planned revamping of all of the stores in the chain over the next several years, and folding the company's manufacturing and distribution operations into the newly created Food Service Division. Friendly also began to distribute its ice cream to supermarkets, starting in Albany, New York, and expanding throughout New England. Products ranged from half gallons of ice cream to pies, sundae cups, and cakes. The desserts were grouped in a display that highlighted the company name, which served to cross-promote the restaurants. When frozen yogurt began to take the country by storm, Friendly also added this to its product mix. Looking at other income possibilities, the company opened a firehouse-styled restaurant concept called Company C Rotisserie and Grille in a closed Friendly's in Wyoming, Ohio. The experiment was only a limited success and was not developed further.

Still Struggling in the 1990s

Despite the optimism engendered by Donald Smith's successful track record, Friendly Ice Cream's turnaround was moving slowly. In 1992 Consumer Reports ranked the company's restaurants last among 14 family food chains, citing surveyed customers' dissatisfaction with the food quality, service, and atmosphere. CEO Smith acknowledged the chain's problems, telling the Sunday Patriot-News Harrisburg, "The Blake brothers came up with a concept that evolved into something a notch above fast food. When we bought the chain, that image had become blurred." He declared his intention to continue to upgrade the company's reputation. Ongoing renovations to Friendly's restaurants, a program called "Focus 2000," included removal of booths, adding more family-sized tables, hiring additional serving staff, expanding carryout windows, and upgrading dinner menus. In 1994 healthier items such as roasted chicken and baked codfish were added. Typical entrees were priced at between $5.70 and $6.40, which included several side dishes. Sales per restaurant were up, and the company's annual revenues were growing slightly each year. Efforts to expand overseas also were being made, with ventures under way in the United Kingdom and the Far East.

By mid-1997 the company had renovated nearly 90 percent of its restaurants. It was on track to profitability, but the debt load and stiff competition in the marketplace had kept the balance sheet in the red since the purchase by TRC. In July the company announced a new franchise program, selling 34 of its restaurants in Delaware, Maryland, Virginia, and Washington, D.C., to DavCo Restaurants, which agreed to open a total of 100 more locations within ten years. A new limited-service ice cream shop concept, Friendly's Cafe, also was planned. In November Smith took Friendly public, offering $90 million worth of stock and floating $200 million in senior bond notes in an attempt to reduce the debt load. Unfortunately, in early 1998 the price of fresh cream began to climb steeply, eventually tripling, and Friendly was forced to raise prices for its ice cream products while absorbing much of the increased expense. At the same time, stiff competition in the retail market was causing packaged ice cream sales to flatten out, and the boost in restaurant business that had been seen at renovated outlets also began to drop off. In the latter case, analysts blamed the problems on continuing inconsistent service and a plethora of confusing menu additions. Friendly's stock, which had risen from an opening price of under $18 to more than $26 per share in six months, dropped to less than $5 by the fall.

At the end of 1998, the company announced that it would be closing its Troy, Ohio manufacturing and distribution center, moving those operations to the Wilbraham plant and a new facility in York, Pennsylvania. The move was intended to save shipping costs, as Friendly no longer had restaurants in Ohio and York was much closer to its East Coast stronghold. Friendly also pulled out of ventures it had launched in China and the United Kingdom. In early 1999 the company announced the appointment of a new president and chief operating officer and a new chief financial officer. The stock price was inching upward again, and analysts were applauding the new moves. Friendly rolled out a new product in the spring, the "Cyclone" soft-serve ice cream cone, which could be purchased with a variety of mixed-in additions such as candy, cookie, and fruit pieces. This was the company's first soft-serve ice cream product ever and was brought out in part in response to the success of McDonald's new McFlurry dessert. Friendly announced that it would be the company's largest new product introduction ever, with advertisements to run on both television and radio. Billboard ads and coupons in Friendly supermarket displays rounded out the campaign. The company also announced that it was stepping up the pace of franchise openings, with 25 scheduled for 1999 and 50 to 70 per year to follow.

Halfway through its seventh decade in business, Friendly Ice Cream Corporation continued to struggle to extricate itself from a period of sluggish sales and management difficulties. It was starting to look like CEO Donald N. Smith's goal of reinvigoration might be closer to fruition, as the debt load had been reduced and new measures to streamline operations were taking hold. Competition from the company's rivals was strong, however, and there was still work to be done before the company's health would be fully restored.

Problems Continuing in the New Millennium

Indeed, problems followed Friendly Ice Cream into the new millennium. In March 2000, the company announced that it was shuttering 80 restaurants. A few months later, NASDAQ threatened to pull its listing after Friendly stock fell below the $5 per share minimum. As such, the company moved to the American Stock Exchange.

Debt continued to plague the company in 2001. Friendly was forced to close more stores and lay off nearly 100 employees. Cofounder Prestley Blake made the decision that year to save what he called "his baby." Blake paid more than $2 million for 892,000 shares of the company, which secured his position as the largest shareholder. Blake immediately set out to discredit CEO and Chairman Donald Smith. In a very public and bitter battle, Blake blamed Smith for the company's debt. In 2003, Blake filed suit against Smith, claiming he misused $3.5 million in corporate funds. The funds in question were expenses related to a Lear Jet shared with The Restaurant Co. The suit remained unsettled in 2005.

Friendly President and COO, John Cutter, took over as CEO in 2003 while Smith remained chairman. Blake's antics continued the following year at Friendly Ice Cream's annual shareholder meeting. He offered the company a low-interest $50 million loan out of his own pocket. In return, Friendly had to force Smith to repay the alleged $3.5 million in misused funds. Blake offered the loan for a second time in 2005, but Friendly management refused to accept.

While Friendly Ice Cream fended off the negative publicity brought on by Blake's claims, it also was hard at work revamping Friendly Ice Cream's operating structure and strategy in order to shore up profits and sales. In 2004, it re-franchised 27 restaurants in Florida, Ohio, and New Jersey. The firm also looked to expand in the Florida market and signed deals with Jax Family Restaurants and Central Florida Restaurants to grow the Friendly brand throughout Florida. It also updated its menu, adding new offerings including the Carb Fabulous and Lighter Choices menu. A line of decorated ice cream cakes was launched in 2004. The cakes were available in supermarkets as well as in its restaurants.

Restructuring efforts began to pay off and comparable store sales were up during the early years of the new millennium. The company hit a snag in 2004, however, when weak restaurant sales, high cream and commodity costs, fierce competition, and cool Northeast weather forced sales and profits to slide. Nevertheless, Friendly Ice Cream remained focused on four key strategies: improve the dining experience in its restaurants; expand through franchising and re-franchising; increase higher margin revenues; and continue to enhance and build shareholder value. The company celebrated its 70th anniversary in July 2005. While it had faced challenges in recent years, management was confident that the Friendly's brand would continue to put a smile on faces for years to come.

Principal Subsidiaries: Friendly's Restaurants Franchise Inc.; Restaurant Insurance Corporation.

Principal Competitors: Carvel Corporation; Denny's Corporation; International Dairy Queen Inc.

Chronology

• Key Dates:
• 1935: Brothers Curtis and Prestley Blake open an ice cream shop.
• 1943: A second shop opens in Springfield, Massachusetts.
• 1951: By now, ten shops are open in Massachusetts and Connecticut.
• 1979: Hershey Food Corporation purchases Friendly Ice Cream for $162 million.
• 1984: The company opens its first outlet in Florida.
• 1988: Hershey sells Friendly to Chicago-based Tennessee Restaurant Company (TRC) for $375 million.
• 1997: Friendly Ice Cream goes public.
• 2001: Cofounder Prestley Blake becomes the company's largest shareholder.
• 2003: Blake files suit against Smith claiming he misused corporate funds.