Arby'S Inc. Business Information, Profile, and History

History of Arby'S Inc.

A subsidiary of Triarc Companies, Inc., Arby's Inc. is a leading global fast-food restaurant chain with more than 2,800 restaurants worldwide. Arby's is distinguished within the industry by its menu, which features roast beef sandwiches. The chain expanded rapidly during the 1970s and 1980s by franchising. In 1995 the Arby's chain included about 330 company-owned stores and more than 2,500 franchise outlets.

Arby's emanated from the brainstorm of brothers Leroy and Forrest Raffel. The Raffels operated a food-service equipment business in Youngstown, Ohio, in the early 1960s, and had noticed the huge boom taking place in the burgeoning fast-food industry. It had been only about ten years since Ray Kroc had purchased the national rights to franchise the McDonald brothers' hamburger operation, and Burger King was already jumping into the franchising game with its knock-off of the McDonalds formula. Leroy and Forest, both in their 30s, wanted to get in the flourishing industry early with their own fast-food concept, but sought an angle that would separate their restaurants from the emerging group of McDonald's look-alikes. They finally settled on a menu featuring roast beef sandwiches.

The Raffels opened their first restaurant on July 23, 1964. They named the store R-B, which was a derivative of "Raffel brothers." The tiny restaurant sported ten seats and an attention-grabbing yellow roof, and employed a staff of 20 people. The first menu offered "slow-cooked" roast beef sandwiches for 69 cents, extra-large iced tea, and soft drinks. The R-B concept was a hit with customers, and the brothers quickly moved to open five more stores before the end of 1965. After that, growth was rampant. By mid-1967 there were more than 100 R-B outlets pushing roast beef sandwiches and tea. Before 1970, through the magic of franchising, the brothers had grown the chain to a whopping 300 outlets in 37 states. The menu by then had been expanded to include different roast beef sandwiches and various side items.

The concept for Arby's, as it later became called, was a bigger success than even the Raffel brothers had imagined. It seemed clear to them and other fast-food industry observers that the chain was destined to join the ranks of the fast-food mega-giants like McDonalds and Burger King. To make that quantum leap, however, the brothers needed cash. They had gotten by during the late 1960s with bank loans and help from individual investors. To sustain growth in the 1970s, they would have to take the company public. They registered for an offering in 1970. The new issues market was thriving at the time and the Raffels expected to generate a big cash war chest through the offering. Unfortunately, a Securities and Exchange Commission accounting rule change made at the time forced Arby's to delay its offering until April.

In an incredible twist of fate, Arby's initial public offering (IPO) was rescheduled for April 24. It was on that day that the new issues market virtually collapsed. Stunned, the Raffel quickly aborted the stock sale. As a result, they were left stranded without the money that they had expected to garner from the offering. Suddenly, they were in a position in which they were unable to pay their bills. The banks that had previously loaned money to Arby's quickly swooped in to protect their investment. They effectively took over the company, fired 125 of the 150 employees who staffed the firm's headquarters, and slashed services to the franchisees that were operating the Arby's outlets. Frustrated franchisees, feeling duped by their parent company, stopped paying royalties. In November 1970 the company was forced to file for Chapter 11 bankruptcy.

Despite the blistering setback, the Raffels managed to regain control of Arby's five months after the company entered bankruptcy. They spent the next few years restoring it to profitability and getting back to the place they were at before the failed IPO. They also tagged on a number of new franchised outlets. By 1975 they were operating nearly 500 outlets throughout the United States. Still, the Raffels needed more money for expansion. Rather than attempt another stock offering, they decided to find a larger company with which they could merge. The parent company could then fund their expansion.

In 1976 the Raffels reached an agreement with Royal Crown Cola to sell the Arby's chain for $18 million. Arby's, still under the direction of Leroy and Forrest, continued to flourish under the Royal Crown umbrella. Another 300 units were added to the chain between 1976 and 1979. Importantly, Arby's generated big profits and solid sales gains during this period. In 1979 Royal Crown moved its prosperous Arby's subsidiary to Atlanta. The Raffel brothers decided it was time to jump ship. They retired as millionaires, leaving a legacy of more than 800 Arby's restaurants scattered throughout the United States.

Arby's languished under new management. Indeed, the chain quickly spiraled into decline after the Raffels left, and by 1983 incompetent management had left the enterprise directionless and floundering. Unit sales slumped to a sloppy $600,000 annually at a time when some other chains were boasting a unit average of more than $1 million. Arby's was rapidly losing stature as a contender in the fast-food industry. Fortunately, a new management team was able to turn the ailing enterprise around. In 1984 Royal Crown (along with its Arby's subsidiary) was bought out by Miami financier and feared corporate raider Victor Posner through his DWG Corp. Posner tapped Leonard Roberts to serve as chief executive of Arby's.

The 40-year-old Roberts came to Arby's from Ralston Purina's Foodmaker fast-food division. A fast-food industry veteran, Roberts quickly implemented much-needed changes at Arby's and turned a critical eye to the Arby's menu. Under Royal Crown's ownership, Arby's had started offering conventional burger fare in an attempt to compete with the hamburger chains. He scaled back items that could be found in almost any fast-food restaurant and returned the menu to its traditional niche of roast beef. He then began supplementing that foundation with specialty items like deli sandwiches, chicken cordon bleu sandwiches, and roast chicken. Roberts also tightened Arby's quality standards and began hunting for new franchisees.

Roberts' overall strategy proved successful. During the mid-1980s Arby's raced near to the front of the fast-food pack, opening hundreds of stores throughout North America and even a few in Europe. At the same time, per-store sales increased, partly because the company launched an aggressive advertising campaign and pioneered unique customer service concepts like accepting credit cards and allowing customers to order by computer. By 1989 the Arby's chain had ballooned to 2,100 restaurants that were capturing annual sales of more than $1 billion, figures that made Arby's the twelfth-ranked fast-food chain in the industry.

While Arby's achieved huge gains during the late 1980s, however, trouble was brewing behind the scenes. Roberts had become dissatisfied with Posner's control. He felt that Posner was hindering Arby's growth by bleeding its cash flow, rather then reinvesting income to expand the chain at a faster rate. At one point, according to Roberts, Posner had withheld bonuses from middle managers for two straight years. In fact, several of Posner's holdings were in trouble and he had been taking cash from the profitable Arby's subsidiary to keep them afloat. Furthermore, Posner himself was in trouble. He pleaded no contest to tax evasion in 1987 and received a $7 million fine and five years probation. Shortly thereafter he became the target of an insider trading investigation.

Posner was also considering moving the Arby's headquarters to his holding company's base in Miami--a move with which Roberts disagreed. Weary of his clashes with Posner, Roberts decided to back a bid by a group of franchisees to buy out the Arby's chain for $200 million. When Posner rejected the bid, Roberts publicly criticized him. Incensed, Posner fired Roberts and replaced him with Irving Riese, who, along with his brother Murray, owned interests in about 500 restaurants. The appointment infuriated many Arby's franchisees, who felt that Reise's ownership of competing fast-food stores constituted a conflict of interest. Posner and Riese relented and Frank Belatti accepted the chief executive slot.

After Roberts left, Arby's began to flounder as it had when the company's founders had bailed out a decade earlier. Partly because of Posner's ongoing involvement with the company's operations--Posner decided in 1990 to go ahead and move the company to Miami in 1991, for example--many of the company's top executives bolted. The vice president of international development, for instance, quit just as Arby's launched an aggressive campaign to expand abroad. Other abandoned posts included vice-president of franchising, executive vice-president of operations, and vice-president of administration. With the company's management structure gutted, Arby's languished.

Some industry observers placed the blame for Arby's early 1990s demise squarely on Posner's shoulders. Although his past business successes had earned him a reputation as a savvy financier, critics charged that the 70-year-old magnate was losing his touch by the late 1980s. They contended that he essentially used Arby's as a cash cow during the late 1980s and early 1990s, collecting franchise fees and dumping them into his portfolio of holdings. Indeed, by the early 1990s Arby's was just one of a group of Posner's holdings that were worth an estimated $26 billion. He owned companies, real estate, and securities throughout the world.

Posner's life and business exploits comprised an intriguing tale. He started out working in his Russian-immigrant father's grocery store in Depression-era Baltimore. He dropped out of high school and used his savings to start building low-cost housing. By the time he was 25 he was a millionaire. He began buying up vast amounts of real estate up and down the east coast. He eventually began buying companies at a rapid pace, and, according to critics, running many of them into the ground. "He was a horrendous manager," said childhood friend and attorney Ira Elegant in the Herald in 1994. "He'd drain the companies until there was nothing left."

Posner's fortunes began to change in the mid-1980s. Legal problems mounted as years of questionable business practices were placed under a microscope by federal and state investigators. Among many other lawsuits, shareholders sued Posner and son Steven in 1990 for plundering the giant DWG holding company. While Posner claimed to have trouble paying creditors and employees, he had drawn out $31 million in compensation and charged an average of $474 each day in meal expenses during 1991 alone. The lawsuit eventually led to the demise of Posner's empire. In 1993 a New York federal district judge banned Posner and his son from any further involvement with public companies, and he forced the Posners to give up control of their remaining holdings and to repay ill-gotten gains. Posner became critically ill with an abdominal aneurysm in 1994, while his son, facing massive debts, was forced to give up his Bentley and Ferrari (he was able to keep his Lamborghini).

Posner's financial downfall left his companies, including Arby's, looking for new owners. Triarc Companies Inc. was created as a successor to the failed DWG Corp. It effectively purchased the assets of Arby's and RC Cola. Named as president and chief executive of Arby's was Don Pierce, who had formerly overseen three PepsiCo-owned food chains, including the venerable Taco Bell. Pierce immediately intensified Arby's expansion drive, which had continued during the early 1990s despite the Posner turmoil. He also began revamping the outlets to evoke a Montana "big sky" feeling of the Old West. He was helped by a new management team that was now free of the detrimental influence of Posner. Shortly after taking the helm, Pierce moved the company's headquarters to Fort Lauderdale.

Arby's continued to expand through franchising during the early 1990s. By 1993, in fact, Arby's was operating more than 2,600 outlets in the United States, Canada, Asia, the Middle East, Mexico, Latin America, Europe, and the Caribbean. During 1994, under Pierce's direction, the company added another 200 stores to bring the global total to about 2,800. As a result, total store sales vaulted from $1.52 billion in 1992 to about $1.8 billion during 1994. Meanwhile, profitability improved and management made plans to continue to expand Arby's globally and to increase per-store earnings. Among other achievements, Arby's opened the largest Arby's store in the world in 1995. Located in Tulsa, the 3,000-square-foot restaurant was expected to generate $1.5 million in annual receipts.

Principal Subsidiaries:Arby's U.K. Limited (United Kingdom).