AFC Enterprises, Inc

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AFC Enterprises, Inc.

5555 Glendridge Connector, NE, Suite 300
Atlanta, Georgia 30342-4741
U.S.A.
Telephone: (404) 459-4450
Toll Free: (800) 222-5857
Fax: (404) 459-4533
Web site: http://www.afce.com

Public Company
Incorporated: 1992 as America's Favorite Chicken Company, Inc.
Employees: 1,527
Sales: $143.4 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: AFCE
NAIC: 722211 Limited-Service Restaurants; 533110 Lessors of Nonfinancial Intangible Assets (Except Copyrighted Works)

AFC Enterprises, Inc., controls Popeyes Chicken & Biscuits, the third largest fast-food chicken chain in the United States behind KFC Corporation and Chick-fil-A, Inc. The Popeyes chain, specializing in a New Orleans–style fried chicken that is spicier than most conventional recipes, consists of approximately 1,830 units, with only about 30 of these owned by the AFC parent. The remainder are franchised. There are more than 1,480 U.S. outlets, located in 44 states and the District of Columbia, and around 345 entirely franchised international units, located in Puerto Rico, Guam, and 24 foreign countries. Total worldwide sales for the Popeyes system of franchises and company-owned outlets were $1.61 billion in 2005; corporate revenues stood at $143.4 million.

POPEYES' EARLY YEARS

The first Popeyes was opened by Al Copeland in June 1972. Copeland's success with Popeyes is a classic rags-to-riches tale. A native of New Orleans, Copeland dropped out of tenth grade at age 16 to help support his ailing mother and, after working for some time as a soda jerk, was hired by his older brother who ran a chain of donut shops. At 18, Copeland sold his car for capital to open his own one-man donut operation, thereby becoming his brother's first franchisee. He quickly turned the shop into the chain's biggest moneymaker and went on to spend ten modestly successful years in the donut business. The opening of a Kentucky Fried Chicken store in New Orleans in 1966, however, caught Copeland's eye when he saw that KFC, with a shorter workday, was making about four times as much money per week as his donut shop. Inspired by KFC's success, Copeland used his donut profits to open a restaurant in 1971 named Chicken on the Run.

After six months of operation, Chicken on the Run was grossing only $1,100 a week, $900 short of the breakeven point, which prompted Copeland to close the store and begin planning for another donut shop. In a last-ditch effort at success in the chicken business, however, he chose a spicier Louisiana Cajun–style recipe and reopened the restaurant under the name Popeyes Mighty Good Fried Chicken, after Popeye Doyle, Gene Hackman's character in the 1971 film The French Connection. In its third week of operation, Copeland's revived chicken restaurant brought in $2,100 of receipts, breaking the profit barrier for the first time.

Copeland opened his second Popeyes in New Orleans about a year later, by which time the original location was selling more than $5,000 worth of chicken a week. By the end of 1974, there were 15 Popeyes in operation, and within only two years of opening the second Popeyes the number had grown to 24. Unable to find a bank willing to finance the chain's early expansion, Copeland relied upon the company's own cash flow. In 1975, what would become the company's most popular advertising campaign was launched, featuring the "Love That Chicken" jingle performed by local musician Dr. John. The jingle became wildly popular in New Orleans, so much so that it was once spontaneously sung in unison by the Superdome crowd at a New Orleans Saints football game.

Copeland began franchising Popeyes in 1977 and brought in his brother Bill to handle the expansion program. At the time, there were about 50 company-owned stores in the chain. Although the Popeyes system increased its sales in 1977 to $21.5 million, approximately $5 million more than the previous year, the company recorded a $391,381 net loss. In 1978 the company nearly folded when the chain's rapid expansion led to overextended credit. Rather than scale back the pace of growth, however, Copeland continued his aggressive marketing tactics and proceeded with developing a strong territorial franchising system. By mid-1978, Popeyes restaurants were located in 28 cities, for a total of 125 units ranging geographically from El Paso to Miami to Detroit. That same year, company-owned stores averaged more than $12,000 in sales per week, while franchised units brought in roughly $9,000. Popeyes' advertising continued to emphasize the company's New Orleans roots, featuring local landmarks and the jazz music of Louisiana-based artists. Popeyes' menu included, along with its trademark spicy chicken, homemade onion rings, corn on the cob, deep-fried clams, and Louisiana Dirty Rice dressing.

DECADE OF EXPANSION

By the early 1980s, Popeyes was the third largest fast-food chicken chain, behind KFC and Church's. Under Popeyes' corporate structure, company-owned stores, which numbered 76 in November 1982, were held by Al Copeland Enterprises, Inc., while the 239 outside-owned franchises were overseen by a subsidiary of Al Copeland Enterprises named Popeyes Famous Fried Chicken and Biscuits. In the Popeyes system, stores were franchised five at a time; buyers paid $25,000 for the first unit and $10,000 each for options on the other four. Franchisees typically operated 15 to 20 restaurants in an area for which they were licensed. By late 1982, Popeyes restaurants were located in five countries, with a roughly half-and-half mix between urban and suburban sites. Copeland Enterprises' sales for 1982 were about $185 million, about $20 million higher than in 1981. New menu items included chicken tacos, barbecued beans, red beans and rice, and, most important, a new biscuit. The biscuit alone was responsible for a more than 20 percent unit-sales increase. To ensure consistent product quality, all mid-level managers were required to participate in a two- to three-day training course in biscuit preparation at company headquarters.

In 1983 Popeyes began test-marketing breakfast items, including grits, eggs, and fried potatoes, and sandwiches made with Popeyes' popular biscuit. Beer and wine were also tested in some stores. In 1984 Copeland Enterprises launched a chain of more upscale full-service Cajun-American restaurants, appropriately named Copeland's. Debuting in New Orleans, Copeland's featured a 100-item menu overseen personally by its owner. The same year, the Popeyes chain consisted of about 400 outlets in 35 states and five foreign countries, generating sales of $250 million and earnings of $6 million. Sales slumped somewhat, however, in part as a result of McDonald's newly introduced Chicken Mc-Nuggets, which brought in about $1 billion. Popeyes was slow to counter with its own version because of Al Copeland's dissatisfaction with the quality control of his company's entry into that market.

COMPANY PERSPECTIVES

Popeyes is legendary for its flavor. Over the years, the flavor of our chicken—and the just plain great taste of our other menu items—has made flavor a major differentiating factor for Popeyes. From the early days of Popeyes, it was always the look, smell, and tastes that came to define what New Orleans–style cooking at Popeyes was all about. And that hasn't changed much today. We have been and always will be known for the great taste of our food and the uniqueness of our menu.

By the mid-1980s, with a personal fortune of close to $100 million, Copeland had become a noted celebrity around New Orleans. His hobbies included racing 50-foot powerboats, touring New Orleans in Rolls Royces and Lamborghinis, and outfitting his Lake Pontchartrainhome with lavish Christmas decorations, including half a million lights and a three-story-tall snowman. Copeland's wealth was derived primarily from his 100 percent ownership of Copeland Enterprises and his 95 percent interest in the Popeyes franchising arm. By 1985, Copeland Enterprises operated about 100 company-owned Popeyes outlets, approximately half of them in the New Orleans area. The chain's total of more than 500 stores included locations in Puerto Rico, Panama, and Kuwait. Popeyes' most visible advertising campaign in 1985, produced by its new agency, Doyle Dane Bernbach of New York, depicted eating spicy Cajun-style chicken as a "hair-raising experience." Customers eating the chicken were shown with their hair literally standing on end after tasting the product. The spots continued to use the ten-year-old "Love That Chicken" slogan. In 1985 the Popeyes system spent 3 percent of gross sales for advertising expenditures, a relatively low figure for the industry. The following year, Popeyes separated from its agency and began producing its commercials in-house.

In 1986 sales for the entire Popeyes system reached $420 million. That same year, Popeyes began to test-market Cajun popcorn shrimp in nearly 100 Chicago and New Orleans stores, as well as home delivery in New Orleans and Houston. In New Orleans, where four of 50 company units were involved in the experimental home delivery program, a central computer relayed orders to the appropriate Popeyes outlet. The program was discontinued in 1987, however, as its high costs resulted in a $4.7 million loss for Copeland Enterprises, leaving the company in the red for the year. Also in 1987, Popeyes introduced 39-cent miniature chicken sandwiches called Little Chickadees, consisting of a Cajun-spiced one-ounce square chicken patty, pickles, and a mayonnaise-based sauce all on a toasted bun. The sandwiches were a response to plans by KFC to launch a similar product. Popeyes advertising budget for 1987, between $12 million and $17 million, was spent, in large part, on a new campaign showing Popeyes as the clear winner in side-by-side taste tests with KFC and Church's.

Popeyes grew to 700 units by 1988. For the first time, Copeland realized that Copeland Enterprises had outgrown its management structure, and that he needed to delegate some of his responsibilities. As a result, he created the positions of president, chief financial officer, and executive vice-president of operations. Copeland then recruited a pair of executives from Church's in a move that brought accusations of company secrets being given away by defectors. Later in the year, Copeland made a play for control of Church's with an unsolicited $296 million bid. (The Church's Chicken chain had been founded in 1952 in San Antonio, Texas, by George W. Church, Sr., under the name Church's Fried Chicken to Go; the company went public in 1969 as Church's Fried Chicken, Inc., a chain approaching 100 units in size.) The move came on the heels of a 1987 takeover attempt by the former president of Church's, Richard Sherman, whose $12.25-a-share buyout offer was declined by company management.

KEY DATES

1972:: First Popeyes is opened by Al Copeland in New Orleans.
1975:: "Love That Chicken" jingle first appears in Popeyes advertising.
1977:: Copeland begins franchising Popeyes.
1985:: Popeyes chain totals more than 500 units.
1989:: Parent company of Popeyes, Al Copeland Enterprises, Inc., buys Church's Chicken chain.
1991:: Copeland Enterprises files for bankruptcy.
1992:: America's Favorite Chicken Company, Inc. is created as new parent company to Popeyes and Church's.
1996:: Company changes name to AFC Enterprises, Inc.
1998:: Seattle Coffee Company and Cinnabon International Inc. are acquired.
2001:: AFC is taken public.
2003:: Seattle Coffee is sold; AFC is forced to restate earnings for its three previous years because of accounting problems.
2004:: Company sells Cinnabon and Church's to concentrate solely on Popeyes.

In February 1989 Church's agreed to be acquired by Al Copeland Enterprises, Inc. for $392 million. Under the terms of the agreement, $11 per share was paid for the first 86.5 percent of Church's stock, and the remaining shares were swapped for 0.44 shares of newly created preferred stock in the merged company. The new company, named Al Copeland Enterprises, Inc., controlled about 17 percent of the $10 billion fried chicken market, but together the two chains were still only about one-third the size of KFC. Within a couple months of the takeover, Copeland fired 12 percent of Church's staff, including Ernest Renaud, the company's president and chief executive. Copeland himself replaced Renaud as CEO and also became chairman of Church's board, while James Flynn, president of Copeland Enterprises, became Church's president.

The acquisition of Church's soon proved to be lethal to Copeland Enterprises. To finance the acquisition, Copeland Enterprises borrowed about $450 million from a group of lending institutions led by the Canadian Imperial Bank of Commerce (CIBC) and Merrill Lynch and Company. This move, however, created interest costs of at least $100,000 a day and could not be covered by Church's revenues, which had been declining since 1985 to the point of a $14.5 million loss in 1988. Since a far higher percentage of Church's outlets were company-owned than Popeyes, Copeland Enterprises began selling Church's franchises to their managers in an effort to raise money. The drive brought in only $21 million, however, and in 1989 Copeland Enterprises reported a net loss of $35.9 million on revenue of $415 million, a loss due in large part to interest payments of $55.6 million to CIBC and Merrill Lynch.

EMERGING FROM BANKRUPTCY

In November 1990 Copeland Enterprises announced itself in default on $391 million in debts and that it was in danger of bankruptcy if payment was demanded by one of its lenders. The company, operating at a net loss of more than $11 million for the first three quarters of the year, failed to make payments due in September of $3.3 million in bridge-loan interest and $4.2 million on principal. By that time, Popeyes had overtaken the struggling Church's chain for the number two spot in market share, garnering 11.4 percent on sales of $547 million at 783 stores, to Church's 10.7 percent on sales of $514 million at 1,163 outlets.

Copeland Enterprises filed for bankruptcy law protection in April 1991 when attempts to restructure its debts failed. During the summer, a settlement plan appeared imminent that would have resulted in Merrill Lynch owning about 85 percent of the company. The tentative agreement also called for Al Copeland to relinquish ownership of the company and his secret recipe and to receive $31 million in cash, five Popeyes stores, and a company jet. In return, Copeland would have a $3 million personal debt to the company forgiven and would retain a contract to supply the chain with spices. When Merrill Lynch began to withdraw its support for this plan, however, the court invited CIBC (which was acting as an agent for a syndicate of former Copeland Enterprises lending institutions), Copeland Enterprises, and Copeland himself to submit individual reorganization plans. The plan submitted by CIBC called for full ownership of the company to be given to CIBC, for Merrill Lynch to come up empty-handed, and for Copeland to continue receiving royalties for his ownership of the Popeyes recipe. Under the plan entered by Copeland, Copeland would retain ownership of the company while creditors would receive reduced debt payments after the company emerged from bankruptcy.

In October 1992 Judge Frank Monroe chose the CIBC reorganization plan, modified to give Merrill Lynch a small stake, and shortly thereafter America's Favorite Chicken Company, Inc. (AFC) was created as the new parent company to Popeyes and Church's. Having established headquarters in Atlanta, AFC also assumed control of Copeland Enterprises subsidiary Far West Products, a manufacturer of foodservice equipment such as refrigerators, freezers, and fryers under the Ultrafryer Systems brand. Named AFC chairman and chief executive was Frank J. Belatti, former president of Arby's Inc., the fast-food roast beef sandwich chain that Belatti had led through a turnaround in his stint there from 1985 to 1991, during which time the chain doubled its number of units and increased its annual sales from $750 million to $1.2 billion.

REVITALIZED AND DIVERSIFIED

In November 1992 Belatti announced a 100-day action plan for Popeyes and Church's. The plan, which was launched in 1993, included programs to enhance the system's image, to improve employee and franchise relations, and to upgrade operational efficiency and quality. The reimaging program, which involved the remodeling of hundreds of Church's and Popeyes restaurants at the cost of millions of dollars, helped boost same-unit sales. The Church's chain, which was seriously neglected during its short period of ownership by Copeland Enterprises, gained its first new units in years. It also gained near autonomy from the Popeyes chain, as AFC divided its two chains into completely separate groups, with competition between the two actively encouraged. During 1993 AFC also entered into an agreement with Canada-based Cara Operations, Ltd., under which Cara added Church's menu items to more than 160 Harvey's restaurants and committed to opening more than 50 stand-alone Church's restaurants throughout Canada.

Under Belatti's leadership the Popeyes and Church's chains grew even stronger in 1994 and 1995 when AFC opened more than 440 new restaurants. Systemwide sales for 1995 hit $1.39 billion, a marked increase over the $1.12 billion of 1992. Dick Holbrook, who like Belatti had previously worked at Arby's, was named president of AFC during 1995. The following year, Los Angeles-based investment company Freeman Spogli & Co. gained a 58 percent interest in AFC for about $320 million, as well as several seats on the company board. CIBC's stake in the company was thereby reduced to about 18 percent. The infusion of capital from Freeman Spogli helped AFC reduce the heavy debt burden it had been carrying since its formation. Also during 1996, a year in which the firm showed its first profit in its short existence, America's Favorite Chicken changed its name to AFC Enterprises, Inc.

The name change was precipitated by a repositioning of the company, through which AFC aimed to expand beyond fast-food chicken outlets. Dubbing itself the "Franchisor of Choice," AFC envisioned itself as a holder of a portfolio of brands, each of which would be highly sought after by franchisees. By keeping franchisees profitable, happy, and thereby loyal, AFC hoped that its franchisees would choose to buy another AFC franchise when they were ready to expand. The company, therefore, set out on the acquisition trail, with its first purchase coming in May 1997 when it spent $11.8 million for the 165-unit Chesapeake Bagel Bakery chain. Added during 1998 were Seattle Coffee Company for $68.8 million, and Cinnabon International Inc. for about $64 million. Seattle Coffee was a maker, wholesaler, and retailer of specialty coffee under the Seattle's Best Coffee and Torrefazione Italia brands, and it ran coffee shop chains under both brand names, with about 50 of the former and 15 of the latter. Seattle-based Cinnabon ran a chain of bakeries featuring rich, oversized cinnamon rolls, with most of the 214 company-owned and 144 franchised outlets located in malls. Following these additions, AFC Enterprises pared back its brand portfolio in 1999, selling Chesapeake Bagel Bakery to New World Coffee–Manhattan Bagel, Inc., thereby exiting from the increasingly crowded bagel shop sector.

In addition to diversifying its portfolio of franchisable brands, AFC Enterprises also expanded aggressively overseas during the second half of the 1990s. Faced with the powerful Starbucks Corporation in the United States, AFC concentrated on international growth for the Seattle's Best Coffee chain, signing development agreements for 225 new units in the Middle East, Japan, Taiwan, and Indonesia. During 1999 AFC signed its first Asian development agreement for the Cinnabon chain, with 42 units slated to open in Thailand, Singapore, and Vietnam by 2004; AFC also reached agreements to franchise 107 Cinnabons in the Middle East and 15 Cinnabons in Venezuela. By decade's-end the company had approximately 550 of its various branded outlets outside the United States, nearly triple the 192 such units that existed at the time AFC was formed in 1992. The company also initiated a minority advancement program called "The New Age of Opportunity," which recruited, trained, and assisted minority franchisees and suppliers. Community-minded, Belatti was credited as the visionary behind "The New Age" program as well as AFC Enterprises' large-scale support of Habitat for Humanity, a charity building low-priced houses for low-income families. From 1992 through 1999 AFC helped construct more than 200 such homes.

Although AFC's Franchisor of Choice era was in its infancy, the early results were encouraging. Corporate revenue for 1998 was $609.1 million, a 26 percent increase over the $483.8 million of 1997. Systemwide sales increased 13 percent in 1998, reaching $1.8 billion, and then passed the $2 billion mark the following year. AFC had more than 3,300 restaurants overall at the end of the century, with commitments for hundreds more new outlets worldwide. The company also had managed to erase the last of the debt that had been carried over from the bankruptcy of Copeland Enterprises.

REFOCUSING ON POPEYES

In 2000 AFC opened 361 new restaurants, bakeries, and coffee shops. In June of that year the company sold its Ultrafryer restaurant equipment manufacturing division to an investor group for $5.2 million. Late in the year, AFC announced plans to accelerate its efforts to convert outlets from company-owned to franchised units, aiming to sell as many as 500 outlets to franchisees over the next several years. More than 130 units were converted in 2001 alone. In March 2001 AFC completed a long-anticipated initial public offering (IPO), selling 9.375 million shares of common stock on the NASDAQ at $17 a share, raising more than $159 million.

Proceeds from the IPO were expected to fund further growth efforts, but the company was forced into a retrenchment when problems were uncovered with its accounting. In March 2003 AFC announced it would need to restate its earnings for 2001 and 2002 because of revisions needed in its accounting for impairment charges, asset sales, cooperative advertising, and other items. A month later it announced that its 2000 results would need to be restated as well. In May 2003 AFC's CFO quit his post, and in August the company was delisted from the NASDAQ because of failure to file financial reports on time. Finally, in December, AFC released its long-delayed 2002 annual report and its restatements for the previous two years. Net income for 2000 was cut from $27.5 million to $18.3 million, while the 2001 total was reduced from $36.9 million to $15.6 million. AFC reported a net loss of $11.7 million for 2002, a loss largely attributable to a $45 million asset impairment charge related to Seattle Coffee Company. While attempting to unravel the accounting misstatements, AFC elected to divest Seattle Coffee, selling that chain and Torrefazione Italia to Starbucks Corporation in July 2003 for $72 million. Financial results for 2003 were dismal: a decline in same-store sales of 2.5 percent, a net loss of $9.1 million, and a 12.5 percent decrease in revenues blamed on the sale of 174 company-owned stores to franchisees.

Still facing a Securities and Exchange Commission investigation and several shareholder lawsuits concerning the accounting problems and financial restatements, and needing to cut costs, AFC in early 2004 thoroughly analyzed the future of its operations. The company concluded that its best course of action would be to focus exclusively on the Popeyes chain, which it felt had the greatest growth potential. Thus, in November 2004 AFC sold Cinnabon to Focus Brands Inc., owner of the Carvel Corporation ice cream chain, for approximately $21 million in cash. One month later, AFC sold Church's to the Atlanta private-equity firm Crescent Capital Investments, Inc. for around $390 million. (Cajun Operating Company was later set up to run the Church's chain.) In June 2004, meantime, Kenneth Keymer was hired to head the Popeyes chain. Previously, Keymer had stints running the fast-casual Noodles & Company chain and the drive-in chain Sonic Corporation. AFC's stock resumed trading on the NASDAQ that August.

The proceeds from the divestments enabled AFC to pay down and restructure its debt, but the company in June 2005 also paid its shareholders a special dividend of $12 per share, or approximately $353 million. AFC also settled the shareholder litigation by agreeing to a payment of $15.5 million. Annual expenses were cut by $25 million by shutting down the AFC headquarters in Atlanta and moving the corporate staff to the existing Popeyes office, also in Atlanta. In September 2005 Belatti stepped down from his position as CEO of AFC Enterprises while remaining chairman. Keymer was promoted to be the firm's new chief executive.

Results for 2005 were quite positive with same-store sales increasing 3.3 percent and systemwide sales for Popeyes jumping 4.8 percent, to $1.61 billion. The sales increase was achieved despite the devastating effects of Hurricane Katrina on New Orleans and the surrounding region. About 100 Popeyes restaurants were forced to close after the monster storm slammed ashore in late August. By early 2006, 25 Popeyes remained shuttered because of Katrina. Most of these were gradually reopened over the course of the year. In the meantime, AFC in March 2006 launched a new advertising campaign for Popeyes that used the tag line "Food with 'tude." According to company officials, the campaign sought to "resonate with customers who want quality, flavor, and a little attitude with their meals." After opening 123 new Popeyes in 2005, including 72 in the United States, AFC aimed to open more than 130 new outlets in 2006, including about 50 international units. Outside the United States, AFC was concentrating its growth efforts on Canada, Mexico, Latin America, and the Middle East.

Robert R. Jacobson

Updated, David E. Salamie

PRINCIPAL DIVISIONS

Popeyes Chicken & Biscuits.

PRINCIPAL COMPETITORS

KFC Corporation; Chick-fil-A, Inc.; Cajun Operating Company; Boston Market Corporation; McDonald's Corporation; Burger King Holdings, Inc.; Wendy's International, Inc.; YUM! Brands, Inc.