Quality Dining, Inc.

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Quality Dining, Inc.

3820 Edison Lakes Pkwy.
Mishawaka, Indiana 46545
U.S.A.
(219) 271-4600
Fax: (219) 271-4610

Public Company
Incorporated: 1981
Employees: 11,000
Sales: $237.6 million (1996)
Stock Exchanges: NASDAQ
SICs: 5812 Eating Places

Quality Dining, Inc. is a holding company for a growing number of fast-food and casual dining restaurants. A multiconcept franchisee and franchiser (or “concept owner”), Quality Dining operates over 500 restaurants in 20 states. As franchisee, their operations include Burger King and Chili’s Grill and Bar Restaurants. As franchiser they have ownership of Grady’s American Grill, Spageddies Italian Kitchen Restaurants, and Bruegger’s Bagel Bakeries. Restaurant industry analysts have identified Quality Dining as one of the best-performing franchisers in the country. In 1995 the company was ranked sixth in Forbes magazine’s “200 Best Small Companies” in America.

Survival in the Early 1980s

Quality Dining owes its origins to chairman and chief executive officer Daniel B. Fitzpatrick and his brother John D. Fitzpatrick (since retired from the company), who learned the restaurant business from the ground up. Daniel Fitzpatrick—one of seven children—was just 14 years old when his father, a steelworker, suffered a debilitating stroke. It was important to the family that they all help in caring for their father at home rather than institutionalizing him. Fitzpatrick told Jan O. Spalding of Indiana Business Magazine, “We were faced with a pretty daunting task. In my neighborhood it was either starve, steal or go to work. My mother said ‘work.’” Daniel Fitzpatrick began by delivering newspapers, then moved to bussing tables at an Italian restaurant. Before long he changed jobs to work for his brother at a Burger Chef restaurant as an entry-level manager. After high school he switched to Burger King while earning his degree in business administration from the University of Toledo, Ohio. His talents earned him a promotion to director of operations for several Burger King restaurants in Kalamazoo, Michigan. By 1981 he and brother John decided to put their entrepreneurial skills to the test and acquired a franchise for two struggling Burger Kings in suburban Detroit.

As the second largest fast-food chain in America, the superbly-managed Burger King Corporation has franchised Burger King restaurants since 1954. Their “Have It Your Way” philosophy emphasizes quality service, generous portions, and competitive prices. As of January 1996, Burger King was comprised of 8,194 company-owned and franchised restaurants worldwide, making it one of the most recognized names in the industry—and a smart franchise choice for the enterprising brothers.

In the 1970s fast-food chains, particularly McDonald’s and Burger King, had successfully penetrated inner-city markets, proving most successful as lunch-time servers. Name and product recognition, reasonable pricing, special appeal to children, and convenience contributed to rapid growth in sales for most franchisers. Families living in the suburbs traveled more, and more women were working away from home, chauffeuring children and appreciating the ease of eating “on the road.” Burger King’s flagship sandwich, “The Whopper,” competed with its rival, the McDonald’s “Big Mac,” and featured what Burger King considered a competitive advantage with their “flame-broiled” burgers. By the early 1980s vigorous competition between fast-food chains warranted that more than a “concept” was needed to ensure franchise profitability.

In an interview with Richard L. Papiernik of Nation’s Restaurant News, Fitzpatrick recalled that he and his brother “scrubbed floors, cleaned the kitchens, did rescheduling and in-house training, and jumped into cooking and serving lines,” which soon paid off through a positive turnaround in profits. Joined by brothers Gerald O. Fitzpatrick and James K. Fitzpatrick, in 1983 and 1984 respectively, the company soon moved into Burger King’s South Bend, Indiana, market. Despite double-digit unemployment and inflation, and an 18 percent prime rate, they continued to develop under-performing units. Daniel Fitzpatrick told Marilyn Alva of Restaurant Business that “from May 1983 to November 1991 we opened one new Burger King restaurant every 85 days.” The Burger King Corporation recognized Daniel Fitzpatrick’s entrepreneurial leadership by naming him best operator of a multi-unit Burger King franchise in 1985.

From Fast-Food to Casual Dining in the 1990s

Increasingly throughout the 1980s and into the next decade, Americans became concerned about the nutritional quality of fast food. Changing consumer tastes, and the recognition of a ripe market in the Midwest’s casual dining (i.e. table service, as opposed to counter service) segment, prompted Fitzpatrick’s decision to expand. In 1991, after persistently pursuing Dallas-based Brinker International, Inc., Fitzpatrick’s company was finally granted the rights to develop Chili’s Grill & Bar restaurants in Indiana, Michigan, and Ohio, a geographical market Fitzpatrick was familiar with. Fitzpatick recognized the ingredients of a successful franchiser. Chili’s restaurants featured a casual atmosphere and a broadly-appealing menu including a variety of hamburgers, fajitas, chicken and seafood entrees, barbecued ribs, salads, sandwiches—and modest pricing. Fitzpatrick reported to Marilyn Alva of Restaurant Business, “We utilize the same principles we learned at Burger King: Pay attention to costs and put money back into the business.” The company soon made a move to the East Coast when it purchased the stock of Grayling Corporation, the operator of eight Chili’s restaurants in greater Philadelphia, and agreed to develop 24 new Chili’s restaurants in the Midwest and Philadelphia markets over the next seven years.

By this time Quality Dining executive John D. Fitzpatrick, original co-franchisee with brother Daniel, paid $600,000 in cash and 20,000 shares of common stock for two Burger King Restaurants in the Detroit, Michigan, market. In 1994 the two restaurants reported combined sales of $2.25 million. Agreeing not to compete with the company for a period of five years, John resigned from all positions he held with Quality Dining.

During this period Burger King increased portion sizes on several of their products while simultaneously cutting prices. Burger King advertising was spotlighted in conjunction with Walt Disney’s blockbuster movie “The Lion King.” Due to the success of their own efforts combined with the Burger King Corporation’s promotional and advertising expenditures, cooperative purchasing arrangements, and other goodwill efforts with its franchisees, Quality Dining decided to further develop their Burger King division. In an effort to expand its territories through its wholly owned subsidiary Bravokilo, Inc., Quality Dining acquired all of the issued and outstanding common stock and/or assets of Shonco, Inc., which owned and operated eight Burger King restaurants in the Detroit, Michigan, metropolitan area, and also owned the rights to construct four additional restaurants. William R. Schonsheck, previous owner of Shonco, Inc., became an executive officer of Quality Dining and the chief operating officer of their Burger King Division.

Rapid Expansion in the Mid-1990s

Fitzpatrick was determined to raise the capital needed to remain competitive, and to challenge his management team and offer stock options and rewards to employees. He had concluded that the time had come for listing his company, then Burger Services, Inc., on the NASDAQ. The stock offering had raised over $25.5 million in March 1994, following a company reorganization that made Quality Dining a management holding company with four wholly-owned subsidiaries. In October 1995, Quality Dining completed a second public stock offering, raising more than $31.5 million. Fitzpatrick told Indiana Business Magazine’s Jan O. Spalding, that “Growth should be focused, never preceding the company’s resources or the capability of the management team,” and further advised, “as you grow a company like this, one of the challenges is to make sure you have management strength at every level of the organization.”

Fortified by sales and stock revenues, Quality Dining acquired ownership of the Spageddies Italian Restaurant concept from Brinker International, Inc., releasing Quality Dining from previous franchise and development fees, royalties, and other expenses previously paid to the franchiser. Spageddies are promoted as midscale Italian casual dining restaurants, with a festive appeal, conforming to the fundamental Quality Dining ideal of large-portioned, quality, value-priced food. Spageddies’ sales for fiscal 1995 totaled $4.7 million. Further negotiations with Brinker International, Inc. resulted in the company’s end-of-1995 purchase of the Grady’s American Grill restaurant concept for $74.4 million, which included ownership of 42 Grady’s American Grill Restaurants in 16 states.

Company Perspectives:

Critical to the long-term success of our business is the Company’s ongoing commitment to exceeding guests’ expectations. Quality Dining is led by an experienced and focused management team with a passionate approach to serving our guests. We recognize that “hands-on” management style is crucial to maintaining the current service level which our guests count on. In order to strengthen our position, we added experienced management professionals throughout the organization. We are committed in the years ahead to invest in people, systems, and facilities necessary to maintain the highest level of service to our guests.

Dave Findlay, Quality Dining’s vice president of strategic planning and investor relations, told Nation’s Restaurant News that “With respect to Grady’s, it changes the profile of our company pretty dramatically. We go from a company with a majority of its revenues deriving from the Burger King business to one where the Grady’s business becomes No. 1 in revenue generation. We also have a concept that we can develop nationally, which we haven’t been able to do in the past,” he added. By the final quarter of 1995, overall restaurant sales had increased 63.6 percent from the previous year, to over $105 million earned from the operation of 59 Burger King restaurants, 18 casual dining restaurants under the trade name of Chili’s Grill & Bar, 12 bakeries under the trade name of Bruegger’s Bagel Bakery (Quality Dining franchised its first Bruegger’s Bakery in September 1994), and five casual dining restaurants under the trade name of Spageddies.

Pursuing its aggressive growth strategy, Fitzpatrick’s team soon identified bagel chains as the fastest-growing segment of the restaurant industry. As the nation’s top bagel operators, competitors Bruegel’s Bagel Bakeries, a privately owned company based in Burlington, Vermont, and Einstein Bros. Bagels Inc., of Golden, Colorado, raced to saturate the most viable markets. Established since 1983, Bruegger’s accumulated 425 retail stores in 26 states by 1996, with average per unit sales of $800,000 annually. Following Bruegger’s 1995 sales, which topped $220 million, Quality Dining moved into the arena and acquired the company for approximately 5.1 million shares of common stock, plus up to 141,450 shares of convertible preferred stock. Analysts speculated that Bruegger’s was in need of additional capital in order to meet competitive expansion strategies and decided the Quality Dining offer was better than what the open market would have provided. Relevant to their decision was the value placed on Quality Dining’s impressive operational record.

Under the new organization, Bruegger’s operates as a wholly owned, freestanding subsidiary of Quality Dining. Of the 454 Bruegger’s restaurants, 203 are company-owned as opposed to franchised, reinforcing a dual-distribution policy practiced by savvy franchisers who benefit from higher profits and increased control. Consistent with Fitzpatrick’s strategy of buying exceptional management skill along with each company purchase, Steven Finn, former Bruegger’s president and chief executive officer, was given leadership of the division. A working rapport had originated between Finn and Fitzpatrick back in the early 1980s when Finn was a senior vice president at Burger King and Fitzpatrick was a beginning franchisee. More than a decade later Finn convinced Fitzpatrick to join him in becoming a member of Bruegger’s board of directors, and soon convinced Fitzpartick of the profit potential a company like Bruegger’s had to offer. After the acquisition, the company added Nord Brue and Michael Dressel, Bruegger’s cofounders, and Steve Finn, to Quality Dining’s board.

To help expedite its Bruegger’s expansion, Quality Dining offered a $25-a-share stock issue in July of 1996, raising net proceeds of approximately $60 million on 2.5 million shares of common stock. Considered the new driving force for Quality Dining, Bruegger’s finished fiscal 1996 as the largest chain of fresh bagel bakeries in the United States. The company attributes its popularity to traditionally prepared kettle-boiled bagels which are then hearth-baked daily, producing a notably superior product. In addition to freshly baked bagels, they offer 10 varieties of branded cream cheese, deli-style bagel sandwiches, soups and other food and beverage items, including freshly roasted coffees.

Looking ahead into the late 1990s, restaurant analysts expect the bagel franchise wars to intensify. With an estimated $2.6 billion bagel-shop market to infiltrate, the country’s number two chain, Einstein Bros. Bagels, is stepping up efforts to establish the most units in the best markets. Adding more than 100 units in 10 states, Einstein Bros, bought Noah’s New York Bagels Inc., of San Leandro, California, and plans to continue opening about 300 stores per year. In January 1997, Einstein’s announced its intention to buy Fanagle A Bagel, out of Boston, Massachusetts, owners of three high-volume stores, with several more openings scheduled in New England. Also performing well is another competitor, the 265-unit Manhattan Bagel Co., from Eatontown, New Jersey, with a strong presence on both coasts. The Bruegger’s plan is to have nearly 500 stores established by the end of 1997, and some 1,000 units by 1999.

Interpreting nationwide demographic studies, San Francisco-based analyst, John W. Weiss of Montgomery Securities stated that “Bruegger’s will generate 45 percent of Quality Dining’s revenues by fiscal 1998,” according to Richard L. Papiernik of Nation’s Restaurant News. A new corporate headquarters, in Mishawaka’s Edison Lakes Corporate Park was begun in 1996 to house the increased staff, which has more than doubled since the Bruegger’s acquisition.

Overall, the restaurant industry is intensely competitive and Quality Dining is all too aware of the many well-established competitors with substantially greater financial and territorial resources, including McDonald’s, Wendy’s, Hardee’s, T.G.I Friday’s, Applebee’s, Bennigan’s, Olive Garden, Red Lobster, Chi Chi’s, Dunkin’ Donuts, the bagel chains previously mentioned, as well as a number of locally-owned, non-chain restaurants. Despite 1996 first-quarter decreased earnings—down 40 percent from the first quarter of 1994—blamed partly on restructuring charges and unusually bad weather, growing pains throughout this period are to be expected. While some critics have questioned the rapid expansion strategies of Quality Dining, Fitzpatrick, who owns 25.6 percent of his company’s common stock, has consistently relied on good management, a well-focused business plan, and quality products. He told Peter Key of The Indianapolis Star and News that “Achieving growth, requires leadership. And that means getting a company’s employees to buy into its leader’s goals. Rarely do they believe in a company per se, they believe in you; they believe in the leader or they believe in nothing at all.”