One-on-One: Fazoli’s Formula Gets Good Results Despite Industry-Wide Price Pressure

By Mark Green

Carl Howard has been president/CEO of Lexington-based Fazoli's since June 208.
Carl Howard has been president/CEO of Lexington-based Fazoli’s since June 208.

Mark Green: Fazoli’s describes its category as “Premium Fast.” What differentiates it from other categories?

Carl Howard: Fazoli’s has repositioned itself over the last eight years away from being a QSR brand, which competes mainly on speed and price, and moved the brand to compete on service and food quality. While we still have a drive-through that’s similar to a quick-service restaurant, our dine-in experience is along the lines of a casual themed dining restaurant or more of a full-service restaurant. We have real plateware and silverware; we bring you the food; we have a dining room attendant who walks around and makes sure that you get more breadsticks, pre-busses your dishes. It’s just a completely different experience than fast food. But we’re much less expensive than a casual-themed dining restaurant. At a $7 price point, no one can do what we do today.

MG: How did Fazoli’s start, and how has the company developed?

CH: That’s an interesting story. It was started over 25 years ago by Jerrico Inc., which owned Long John Silver’s and Jerry’s, the breakfast concept. It started because there was a cod (fish) crisis at the time, and the people who had Long John Silver’s were concerned there was going to be an issue with being able to support their Long John Silver’s franchisees. They needed to create another (restaurant) concept on the fly, so they created something called Grazie’s, which later turned into Fazoli’s. They opened four quick-service Italian restaurants. They later sold it to Kuni Toyoda, who was an employee of Jerrico. And with financial backing, he grew it.

But it expanded too quickly, and the brand had some tough times in the early 2000s and mid-2000s. They didn’t have the team it takes to run a brand of that size. They did not have sophisticated restaurateurs running restaurants; they had doctors and lawyers and dentists, who did not pay attention to the restaurants. Competitors were out-positioning and outperforming them.

Kuni Toyoda sold the concept in 2006 to Sun Capital, a private equity company that specializes in buying fractured or damaged concepts. They hired a management team that did not have the energy to turn it around, which then led them to give me the opportunity in 2008. When they hired me the brand was in disrepair; we were on the verge of being insolvent. We had locations that were significantly underperforming, and guests were migrating away at a double-digit pace.

The first thing I did was perform a consumer trial study, mainly focusing on migration: I wanted to know why consumers were leaving. I spent a few weeks, not in an Undercover Boss situation, but actually in the restaurants before I even walked into the office – cooking food, making food, watching what was going on. I came to the assumption we were the world’s fastest Italian restaurant, but our food and service and facilities were just below average. We would cook food ahead; the quality of the experience was not good.

The good news is that the empirical data confirmed my assumptions and allowed me to talk to the franchisees and say, here’s our problem. It allowed me to talk to the ownership group about the same issues. We hired The Culinary Edge, out of San Francisco, and we completely retooled the menu. In 2010, we added a test of plateware and silverware, and bringing the food to the table instead of using pagers, and it really took off. And between 2010 and 2012, we remodeled every company(-owned) and franchise location. By the end of 2012, we had completed the rebranding of Fazoli’s, where our food came on a real plate, we had significantly upgraded our food products, had real silverware. We put service back in the dining room. The whole focus today is on quality and service, and it’s reflected in our sales performance.

MG: How many franchises and company-owned stores does Fazoli’s have now?

CH: There are 220 total restaurants. We have, right now, four under construction. And we have 123 company restaurants and 97 franchised locations.

MG: Is that a typical or atypical mix of company-owned and franchised locations?

CH: In today’s environment, it’s extremely rare that the company would hold more locations than the franchisees. I view the company as the largest franchisee. I like the position that we’re in. We could certainly change that balance, but I like having skin in the game. It keeps our team sharp. If we make a mistake, if I make a mistake, we feel it 123 times versus making a mistake with one or two company restaurants and then have it hurt 400 franchise locations. I do like that. It keeps our team much more focused on accuracy and performance. We don’t have any immediate plans to change that, although we are out there signing franchise groups on a regular basis.

MG: What is the geographic footprint?

CH: The majority of our locations are in the Midwest – Indiana, Ohio, Kentucky, Tennessee, Missouri probably make up 60 percent of our locations. We have locations and a good penetration in Texas; we have a location in California, one location in Chino Hills; we have several locations in Michigan; some in Wisconsin. But we’re really a Midwest regional chain.

MG: What franchisee support does Fazoli’s provide, and is that different from most other food franchisers?

CH: The first thing that makes us different is the leadership team that supports the franchisees. They are all ex-franchisees. Doug Bostick, the vice president of franchise services, was a former franchisee of the Rally’s brand. I was a former franchisee of the Damon’s (Grill & Sports Bar) brand. We know what it’s like to sit on the other side of the table and have skin in the game. Doug and I understand what the franchisees go through on a regular basis. These individuals have, in some cases, their net worth and their entire family assets on the line, and they’ve entrusted that in the leadership team of Fazoli’s. And we take that extremely seriously. In the Franchise Business Review, we’re always one of the top 20 franchise support companies in the United States.

It starts with our franchise business consultants. The average number of locations they oversee is roughly 20-25 units, and that is about 50 percent less than most franchise business consultants in our industry oversee. Their territory and span is much smaller, and that allows them to have much more interaction based upon what the franchisees need. We try to make a visit at least once a month and give our franchisees a fresh perspective of what they could be doing differently to drive sales or profit.

Our communication with our franchisees is very collaborative. We don’t ever refer to the franchise agreement or have discussions like that. We have collaboration discussions of what we could do to outcompete and outperform in this industry. Franchisees have the exact same objectives we do. We want to be best in class; they want to be best in class. The fact that their priorities are aligned with ours makes it a great working relationship.

MG: Is Fazoli’s high company-owned-to-franchise ratio structure the result of a business strategy, or did it just evolve that way?

CH: How it happened is, there was a fast-food company called Rax Roast Beef, and Rax went into Chapter 11 in 1992 and again in 1996. When that happened, Kuni Toyoda bought many of the Rax restaurants and converted them into company locations, some of which survived and are still around today. We found it that way when Sun bought it. Sun sold it in 2015, and now Sentinel Capital Partners, a different private equity company, owns Fazoli’s. The location structure just kind of came about.

MG: Do your franchisees tend to have individual locations or multiple locations?

CH: Probably 50 percent are single-restaurant operators and 50 percent have multiple locations. Our largest franchisee has roughly 20 locations in the Louisville and Nashville markets. Some of our smallest franchisees are beginning on a development deal of one of three. We have some legacy franchisees operating one unit who have been in the system for a long time.

MG: What is a typical return on investment for a franchisee?

CH: We try to model under three years. So cash-on-cash investment is pretty strong. We try to model a company restaurant that, when we put our cash into it, we receive our cash back in three years or under.

MG: Fazoli’s reports 13 consecutive quarters of same store sales growth and a 5.1 percent year-over-year increase through July – this is counter to the overall industry figures. Why are you doing better, or why are they doing worse?

CH: I’ll start with the second part: Why is the industry coming under pressure right now? We’re in a very unique situation that we haven’t been in for eight or nine years – last time it happened was around the Great Recession, and before that it was in the mid-’90s. Right now the dollar is so strong, and the commodity and cattle and chicken crops have been so strong; there’s a supply-and-demand situation that has benefited everyone, but it’s really benefited grocery stores.

When the dollar gets really strong, we stop exporting our commodities; countries stop buying our products. We have an influx of supply, but the demand really doesn’t change much. So it’s a fight for share between us and the grocery stores. In periods when the dollar is strong and crop growth and cattle are so strong, the grocery stores actually can be at negative inflation. Restaurants are never at negative inflation; every year, restaurants consistently take between 1.5 and 3 percent in price increases just to keep up with the cost of labor. Well, grocery stores have been operating at a negative inflation since the beginning of the year. You see grocery stores taking share away from restaurants and restaurants not performing.

Some restaurant groups – the two large ones, McDonald’s and Wendy’s – were ahead of this curve as they should be, and they rolled out significant deals, like two meals for $5, or four for $4. They were very successful for several months, until the other brands jumped in. Now everybody’s got a four for $4 or a $5 meal box. It’s leveled out the playing field again, and none of those brands are being enriched from that.

Fazoli’s, on the other hand, has our own unique positioning. No one can do what we do, as I said, at a $7 price point. The brand’s really right for the times. We can still provide a much better experience in our restaurants than you can get at the grocery store or replicate at home, and we’re not done. We’re constantly working on improvement. We’re working on our facilities. At the end of the day, we’re just different. We’re better, and we’re less expensive than our competitors. And it’s a good business model. We’ll be 14 consecutive quarters and 74 out of 78 months after September; it’s off to a flying start.

MG: Fazoli’s is pursuing aggressive growth in 2016. Tell us about your current expansion plans and the strategy behind that. And why are you doing it now, versus, say, two years ago or two years from now?

CH: I don’t know that you would call it aggressive, but we’re in expansion mode. We’ll open 12 locations in this fiscal year. Our goal is 16 next year. We just signed nine new franchise groups in July with commitments to build 22 locations, which is a record for us – we haven’t signed nine new franchise groups in several years, let alone in one month. And we’re getting a lot of activity; our interest sheets are large. And because the brand’s performing so well in this environment, we continue to get a lot of attention.

But the reason why now is the time to be a franchisee of Fazoli’s is because the return on investment is strong, our positioning is great, we’re unique – we’re different from chicken, Mexican, burger-and-fries, so it complements your portfolio if you already have something like that. And in six months to a year from now, some of the things that we’re going to be doing are really going to surprise people. We’ve got some major consumer upgrades in test and what we call “Fazoli’s 3.0.” And we’re going to do it without having to charge.

MG: When the company or a franchisee is looking to set up a location, what kind of location metrics does Fazoli’s look for or require?

CH: We use a site analytical company called Buxton (of Fort Worth, Texas), which has done a great deal of research on our brand. Buxton helps us determine whether a site is approved or not approved. We also have a director of real estate, Perry Pelton, who will tour the market and the city with the potential franchisee or existing franchisee or for a company location. He will use that information and his 20-some years of experience at McDonald’s along with the Buxton site analytical report, and we’ll come to a conclusion on whether or not it’s the right location for a Fazoli’s. Type in the location, and Buxton’s tool will type out what the performance of the location should be. It’s based on the demographics of the neighborhood, traffic counts, how much retail is surrounding that site. It’s a pretty in-depth site-selection process. It’s more about demographics, but it’s about the right demographics.

MG: What are your company’s current expectations for the economy, the broader economy, in the near term, say through 2017?

CH: I don’t see any dramatic changes occurring between now and the end of 2017, regardless of who gets elected. Unfortunately, wage policies promoted by the current Democratic leadership are making it very difficult for restaurants. The fight for a $15 minimum wage – at first it was $10.10, and some cities did that, and then let’s get to $15 – and the Department of Labor putting in a new overtime exemption threshold of $47,470 really puts a lot of strain on the restaurant industry. We’re one of America’s largest employers. And we employ a lot of the people that really need work, whether it’s your first job, during which we’re giving you life-skills training, or people who can’t find work in a different environment. The government has made it more difficult for us. But from an economy standpoint, I don’t think anything we see through next year is going to change – there’s no indicator out there that we’re going to have some recession or anything else.

MG: What is your perspective on the minimum wage increases being advocated and enacted in a growing number of communities including Lexington and Louisville?

CH: It’s going to push businesses to think differently about employment and technology. In the long term it will cause job reduction as some of the pieces our employees do today will be replaced by technology. This push for higher minimum wage at such a rapid pace – when you go from $8 an hour to $15, you are raising the rate almost 100 percent. You’re going to see large brands make changes to keep their labor costs in line because they can’t afford to pay everybody 100 percent more. They can’t pass along that cost to the consumer and still be in business.

It’s going to be really, really hard on these lower-volume restaurants and small businesses that need it the most. Chains like us and larger will survive, but people who have one or two restaurants, who are barely getting by, the independent operator: It’s going to be traumatic for them. It’s just poorly thought out. The lobbyists of the restaurant association could have done a better job of trying to communicate this.

But when people are asked to vote, “Do you want to make it $8 or $15?” everybody’s going to punch the $15 button, and they won’t realize what they’re actually doing. Take a look at what McDonald’s just rolled out in New Jersey – a kiosk system. It’s an effort to get rid of cashiers. If you look at what’s going on in casual themed restaurants, they’ve got little boxes at the table to place your orders and everything else, it’s an effort to reduce the number of servers that they have to employ. This is all in response to the labor piece.

MG: Wendy’s is testing kiosks, too.

CH: Of course. They have no choice.

MG: What is the profit margin these days in the quick-serve, fast-casual, fast-premium sector?

CH: The net profit at the end of the day? The majority of the restaurant chains out there are between a nickel and a dime for every dollar that they take in.

MG: There’s a lot of discussion in all business sectors about workforce development and skill levels. How would you describe the skill level of the workforce candidates Fazoli’s is encountering and hiring currently?

CH: I don’t know that it’s been dramatically different from one generation to the next. I love the employee group that we’re hiring. I love working with the new kids who are coming up; they have great attitudes. And our older group that’s coming in and working – maybe this wasn’t what they planned 30 years ago when they started out in the workforce, but they’re very appreciative of their position, and they’re great to work with as well.

MG: What are the broad trends in consumer preferences?

CH: Consumers like customization. Customization, fresh, made-for-you are three really important pieces. The proliferation of fast-casual probably shows us that. They like to customize their food as they go through the line. It’s fresh. It’s made for them. “Feeling” is very important. You’ll see artificial ingredients become a bigger and bigger deal. Farm-to-table is, I think, a niche. What’s important is the feeling that the consumer’s getting a healthy, fresh, made-for-them product that they have some ability to customize.

MG: How does Fazoli’s track these consumer preferences?

CH: For a small company in Lexington, Ky., we have some really sophisticated executives on our team, constantly following the trends, participating in national boards or panels, and staying in the know. We’re addressing the customization to healthy, fresh and made-for-you. We’ve added a build-your-own-pasta section. We make everything fresh-to-order; nothing is made ahead, and our pasta doesn’t drop and start to cook until you place your order. We’re working on other things to improve the freshness and healthiness and the wholesomeness of our menu items by next summer.

MG: Does Fazoli’s have its own test kitchen and recipe development department?

CH: We do. We have completely redesigned our home office since I’ve gotten there. We have a test kitchen. We have a focus-group room to bring in people right there in our office. And we have a full, operating kitchen in the back. Rick, who is our R&D chef and director of R&D, does a great job. We’re much more sophisticated than what people would realize.

MG: You’ve added a couple of corporate positions recently. What is the size of the corporate staff?

CH: We have roughly 100 corporate people, from field operators to home office to executive teams. The overall company has about 4,000 employees who work at Fazoli’s throughout the country.

MG: Of the hundreds of franchise food providers, who is Fazoli’s primary competition?

CH: We believe Olive Garden is a primary competitor of us. Of our current guests, if they would not go to Fazoli’s, where would they go instead? Nowadays, that’s the Olive Garden. You see Panera in that group, Chick-fil-A, Applebee’s, Subway and McDonald’s.

MG: Do you have a closing statement?

CH: Besides saying thank you for the opportunity, people should definitely keep an eye on Fazoli’s. If they haven’t been in for a long time, they should go in and give it another shot. I think they’ll be really impressed with the food quality and service they get for a $7 price point. We’re not your old Fazoli’s. We’ve put a lot of time and attention into quality, and you’ll see that during your experience.


Mark Green is executive editor of The Lane Report. He can be reached at [email protected]

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