Spaghetti Warehouse, Inc.

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Spaghetti Warehouse, Inc.

402 West 1-30
Garland, Texas 75043
U.S.A.
(972) 226-6000
Fax: (972) 203-9594
Web site: http://www.meatballs.com

Public Company
Incorporated: 1972
Employees: 750
Sales: $64.9 million (1997)
Stock Exchanges: New York
Ticker Symbol: SWH
SICs: 5812 Eating Places; 6794 Patent Owners and Lessors; 6719 Offices—Holding Companies, Not Elsewhere Classified

Spaghetti Warehouse, Inc., owns, operates, and franchises full-service, family-style Italian restaurants. Each restaurant is decorated nostalgically, with antiques, stained glass, Tiffany lamps, and mismatched tables and chairs. Many even feature a retired trolley car in their dining rooms. Based in Garland, Texas, the company typically establishes outlets in abandoned factories and warehouses in the downtowns of large metropolitan areas, using any tax assistance for developing an urban downtown property to pay for the facility’s conversion to a restaurant. Spaghetti Warehouse menus feature basic pasta dishes, including 11 pasta sauces, 15-layer lasagna, manicotti, cannelloni, and chicken parmigiana. The restaurants are known for their reasonable pricing; a dinner bill—with tip and beverage—typically totals about $8.00. The company operates restaurants under the names of Spaghetti Warehouse and Spaghetti Warehouse Italian Grill in the United States and as the Old Spaghetti Warehouse in Canada.

Robert Hawk Founds a Restaurant Chain

The Spaghetti Warehouse was founded by Robert Hawk, a vice-president at Pier 1 Imports in the mid-1960s. In 1966, that company was purchased by Tandy Corporation, and after Pier 1’s initial public offering in 1970, Hawk found that his stock shares made him a millionaire. On the advice of his mentor Charles Tandy, the 43-year-old Hawk established his first Spaghetti Warehouse restaurant in Dallas, Texas, in 1972. Six months later, Hawk resigned from Pier 1 to build a restaurant chain.

Hawk built his first restaurant in a former pillow factory in Dallas’s warehouse district. The menu offered the family recipes of chef Victor Petta, Jr., who specialized in authentic Italian cooking. It was Petta who invented the restaurant’s patented system of spaghetti preparation. Attracted by the novel atmosphere and the genuine Italian fares, customers began frequenting the restaurant regularly. “The concept brings them in,” Hawk explained to Forbes, adding that “the food brings them back.”

In 1985, Spaghetti Warehouse issued its initial public offering of stock, and expansion of the chain ensued. The restaurants’ fare was relatively inexpensive to reproduce, and decor for each outlet came from such money-saving sources as the semi-annual Red Baron’s Antiques auction in Atlanta, Georgia. Here Spaghetti Warehouse purchased its antique tables, old gasoline pumps, and other outlet focal points such as a large bronze elephant. “You’ll find amazing things at auctions that you won’t find anywhere else,” James Aitkin, Spaghetti Warehouse’s vice-president of development, shared with Restaurant Hospitality. “They can be very tiring, but a lot of fun, and if you use a little common sense, you can walk away a winner,” he noted.

The company also sought sites with low acquisition costs. Warehouses and factories in inner cities represented inexpensive real estate, while development in historic areas brought tax breaks or tax credits for renovating the buildings. Spaghetti Warehouse then refurbished the buildings, using the savings from the low purchase costs of the properties. In 1989, for instance, Spaghetti Warehouse purchased a facility for $189,000 in an historic area in Oklahoma. That site generated $3.8 million dollars in sales in its first year. In all, the 1989 fiscal year ended with $28 million in sales and $1.9 million in profits.

By 1990, there were 15 Spaghetti Warehouse restaurants in operation, generating $43 million in revenues. The company ranked 140th on Forbes magazine’s list of the 200 Best Small Companies, rising to number 135 the following year.

Franchising in the 1990s

The chain negotiated its first franchise agreements for Spaghetti Warehouses in Kansas, Tennessee, and California in 1991. It established new outlets in Rochester, New York; Charlotte, North Carolina; and Tampa, Florida—in addition to planning for five new restaurants in San Antonio, Texas; Cleveland, Ohio; and Columbia, South Carolina. Spaghetti Warehouse based these expansion plans on cash raised in the company’s second stock offering of May 1991. The company raised $20 million through this effort, using the capital to pay off debts and to refurbish the first Spaghetti Warehouse restaurant.

Hawk retired as president and chief executive officer of Spaghetti Warehouse in July 1991, although he remained active in the company as chairman. Louis Neeb then assumed control of the company. Neeb joined the Spaghetti Warehouse as a director in 1989. He came to the position with considerable restaurant experience, having developed the Bennigan’s concept with Norman Brinker during the 1970s, as well as having held executive-level positions throughout the industry. Before coming to Spaghetti Warehouse, Neeb had served as president and chief executive officer of Del Taco, president and chief operating officer of Steak and Ale, and chairman and chief executive officer of Burger King.

Under Neeb’s leadership, the restaurant chain continued to grow. Seven new outlets opened in 1992, and an additional location was purchased in Austin, Texas. Nine new units debuted in 1993, with another planned to open in Houston, Texas, the following year. Much of the expansion during this time occurred in suburban areas. Within two years, Spaghetti Warehouse grew to include 31 restaurants in 15 states, six franchised restaurants, and five Old Spaghetti Warehouse units in Canada.

Then Spaghetti Warehouse embarked upon a joint venture of international scope in September 1993. Under an agreement with two Australian companies—Competitive Foods PTY Ltd. and Tarlina PTY Ltd.—Spaghetti Warehouse gained the worldwide rights to operate and franchise Fasta Pasta outlets outside of South Australia. Headquartered in Adelaide, South Australia, Fasta Pasta operated nine limited-service Italian restaurants. The chain had been active for nine years prior to the agreement.

New Leadership in the Mid-1990s

Despite Spaghetti Warehouse’s successful expansion plans, the company’s stock decreased in value by half during 1993, as its new units were unable to compete effectively, and the older units experienced slow sales. Financially compromised units proved incapable of executing a turn-around.

Hawk resigned as chairman that year, recommending Neeb for the position. Hawk continued to serve as a consultant and as a member of the board of directors. Neeb remained as chairman for only 90 days before being dismissed by the board owing to “philosophical differences” over Neeb’s strategies, which came as a surprise to the executive. According to Hawk in Nation’s Restaurant News, Neeb “felt strongly that the company was headed in the right direction. However, from the board’s viewpoint, the results just weren’t there, and after two and one-half years, the board felt it was obliged to take some action.” Hawk resumed the duties of president and chief executive officer until a replacement for Neeb was hired.

Hawk agreed that expansion was in order, although not at the level Neeb espoused. He chose to slow the expansion started by Neeb, finding the new suburban stores too costly to build. Hawk thus postponed their development until a method of reducing start-up costs was determined. The executive told the Nation’s Restaurant News that “we are going ahead and closing on several sites for future stores, but we are just going to put those in inventory so that when we develop the new plan for the suburban store, we will be able to go forward immediately without having to wait six months to find a location.”

Hawk’s priorities at the time included improving sales at Spaghetti Warehouse’s older units, especially those faced with potential patrons anxious about venturing to old factories in urban downtowns. He established task forces to reconsider the viability of these underperforming units and decreased prices at Spaghetti Warehouse restaurants, while expanding their wine lists and adding imported beers to their offerings. Finally, he eliminated some corporate staff and added personnel to key areas. For example, he hired Ray Petta, nephew of founding chef Victor Petta, in 1994 as the food and beverage director to reestablish the original recipes featured by Spaghetti Warehouse.

In July 1994, Phil Ratner, former president and chief executive officer of Acapulco Restaurants, Inc., joined Spaghetti Warehouse as president and chief executive officer. Ratner revealed to the Nation’s Restaurant News: “I’ve been in Mexican food for 15 years, and obviously Spaghetti Warehouse is in the ethnic category. But it’s all new for me. It gives me a chance to learn a whole new business, and that’s exciting.” Known as an effective leader with solid experience in the industry, Ratner expected to make a positive impact on Spaghetti Warehouse.

Company Perspectives:

Every day at Spaghetti Warehouse we roll hundreds of meatballs by hand. Sauces are prepared fresh from scratch following authentic Old World recipes. We use real domestic and imported cheeses in our recipes. Fresh vegetables and meats are purchased from local suppliers. Our lasagna is layer after layer of fresh meats, cheeses, noodles, spices, and sauce. We slice fresh eggplants, use whole boneless and skinless chicken breasts and veal for our parmigiana entrees. We serve authentic San Francisco sourdough bread hot out of the oven. … We are proud of our restaurants, our employees, and our food. Our goal is to provide the best overall dining value in the market.

Repositioning the Company for the Future

Within a year of Ratner’s appointment, the company began reporting losses. Rumors of a takeover circulated in 1995 as the company endeavored to command attention in the highly competitive casual dining market and among suburbs often unfriendly to the Spaghetti Warehouse concept. According to one analyst commenting in Restaurant Business: “Clearly, Spaghetti Warehouse needs to act, since their traditional concept sales have been stagnant for several years.”

In September 1995, Spaghetti Warehouse issued a stock offering for growth opportunities. The company then launched Cappellini’s, a family restaurant in Addison, Texas, in December. Located in a former Spaghetti Warehouse restaurant site, Cappel-lini’s resembled an Italian vineyard and offered family-style meals in shared serving bowls and platters. The company also developed the Italian Grill concept for its restaurants. Much like Spaghetti Warehouse, the Italian Grill served an expanded menu with steaks and pork chops, as well as featuring updated decor.

These moves helped to reposition the company in the marketplace in 1996. Spaghetti Warehouse closed seven underperforming units in February 1996—in Hartford, Connecticut; Buffalo, New York; Rochester, New York; Providence, Rhode Island; Columbia, Georgia; Greenville, South Carolina; and Little Rock, Arkansas—leaving 30 restaurants in operation. As H. G. Carrington, Jr., senior vice-president of finance at Spaghetti Warehouse, told the Nation’s Restaurant News: “We had to make the decision to close poorly performing stores to focus energy on the further development.”

By the third quarter of 1996, Spaghetti Warehouse put in place a restructuring plan to strengthen its competitive position, improve cash flow, and increase profitability. Based on its continued success in Canada, Spaghetti Warehouse opened its seventh Old Spaghetti Factory there, while determining to re-evaluate its properties elsewhere. The company sold an alternative location in Austin, Texas, that it had purchased earlier and sold its Richmond, Virginia, operation to a franchise. Spaghetti Warehouse also wrote off its investment in the Australian chain Fasta Pasta at this time and closed Cappellini’s in December 1996.

In 1997 Spaghetti Warehouse converted five of its traditional restaurants to Italian Grills, and the company instituted improvements at its other outlets. “We’ve added greater variety and brightened the restaurants,” Robert Bodnar, treasurer and controller at Spaghetti Warehouse, reported in the Nation’s Restaurant News, adding “We’ve improved portion sizes and products, and the response from consumers has been very favorable.” The results of the changes were seen quickly, with financials for the quarter ending March 30, 1997 showing improvement.

In April 1998, the Dallas firm Conquest Partners attempted to acquire Spaghetti Warehouse for $47 million, plus debt refinancing and transaction costs—about $58 million total. This offer—just as another that followed it—was rejected by the company, as both offers undervalued Spaghetti Warehouse’s stock in light of its now-favorable sales results from the Italian Grill restaurants. With the conversions, Spaghetti Warehouse sales increased 6.4 percent over the previous year in fiscal 1997, and the company planned to turn six to eight additional units into Italian Grills in 1998. The first traditional Spaghetti Warehouse was converted during the first quarter. The Pittsburgh, Pennsylvania, location followed in May, with the transformation of 50 percent of all units completed by the end of the year.

Spaghetti Warehouse expected to convert the remainder of its restaurants to Italian Grills in 1999. The company also anticipated opening three or four Italian Grill units during the year. The restaurant chain expected modest expansion in the future, perhaps a 20 percent increase in earnings for 1999.