Captain D's, LLC

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Captain D's, LLC

1717 Elm Hill Pike, Suite A-1
Nashville, Tennessee 37210
U.S.A.
Telephone: (615) 231-2537
Toll Free: (800) 550-4877
Fax: (615) 231-2955
Web site: http://www.captainds.com

Limited Liability Company
Founded: 1969 as Mr. D's
Employees: 6,600
Sales: $300 million (2002 est.)
NAIC: 722211 Limited-Service Restaurants

Operating out of Nashville, Tennessee, Captain D's, LLC operates the Captain D's seafood restaurant chain, devoted to the "fast-casual" dining concept. The company owns and operates some 300 of the chain's more than 560 units, with the balance owned by franchisees. Captain D's restaurants are found in 22 states, mostly located in the South. In recent years the chain has established units at military bases, allowing Captain D's to go international with the 2003 opening of a restaurant on the Okinawa Air Force Base in Japan. Captain D's operates for lunch and dinner, its regular menu featuring a variety of fried, baked, and broiled fish and shrimp dishes, as well as seafood-stuffed crab shells and seasonal items. The chain also offers its Coastal Classic menu, which includes seafood recipes from across the country and such dishes as fried coastal flounder, fried gulf coast oysters, Southern style catfish, and shrimp scampi. Captain D's is a private company controlled by the investment group Lone Star Funds, following more than three decades under the ownership of Shoney's, Inc.

Tracing Company Origins to 1969 and Shoney's, Inc.

The origin of Captain D's is linked to Danner Foods, which merged with Shoney's, its longtime corporate parent. Shoney's was established in 1947 by Alex Schoenbaum, growing out of a single drive-in restaurant located in Charleston, West Virginia. In 1951 Schoenbaum began to open Big Boy restaurants as a franchisee, and two years later established his own restaurant concept, which as a result of an employee contest took on his nickname, Shoney's. Also during the 1950s another Big Boy franchisee, Nashville's Ray Danner, opened his first restaurant and soon assembled a sizable chain, which led to the 1968 formation of Danner Foods, Inc. to franchise Big Boy restaurants throughout the Southeast. In 1969 Danner went public. In that same year Danner created a fast-food seafood concept called Mr. D's, forerunner to Captain D's.

To manage the first Mr. D's, which opened in Donelson, Tennessee, Ray Danner tabbed David K. Wachtel, who would not only go on to head Shoney's but eventually run eight restaurant chains. Wachtel went to work for Danner as a teenager, washing dishes and busing tables at Danner's first Nashville restaurant. He worked at another Danner restaurant while attending the University of Tennessee-Knoxville. He began to study law, but left law school in 1965, moving back to Nashville to take a management position with Danner in 1968. Wachtel succeeded in establishing the Mr. D's seafood concept, and in 1974 it was renamed Captain D's. In the meantime, Danner and Schoenbaum merged their operations, in 1971 creating Shoney's Big Boy Enterprises, Inc. A year later it dropped Big Boy from its name, becoming Shoney's Enterprises, Inc., with Ray Danner taking over as CEO and chairman. The parent company of Captain D's was flying high in the mid-1970s, the most popular family restaurant in the Southeast. In 1976 it shortened its name to Shoney's, Inc., the same year Wachtel was named president. He succeeded Danner as CEO in 1981 as the company peaked. In addition to the Shoney's and Captain D's chains, the company's restaurants included Sailmaker and Fifth Quarter, as well as Kentucky Fried Chicken franchises. Tallied altogether, Shoney's was a billion-dollar-a-year business. Wachtel soon fell out with the autocratic Ray Danner, however, and left Shoney's in 1982.

For more than 20 years Captain D's deviated very little from the concept refined by Wachtel in the early 1970s. It competed with the likes of Long John Silver's and Arthur Treachers in the fast-food, deep-fried seafood category, a notch below the sit-down dining niche carved out by Red Lobster. The target customer was skewed toward a younger demographic, 18- to 49-year-olds. Cultural changes in the 1980s would have a significant impact on the fortunes of Captain D's. As the American people became more health-conscious during this period they began to eat more fish, a trend that benefited all seafood restaurants. Seafood consumption increased 25 percent over the course of the 1980s, peaking in 1989 with a rate of 15.9 pounds per capita. To take even greater advantage of this growing market, Captain D's introduced baked-fish items in the late 1980s. Moreover, the move decreased the chain's dependence on white fish, which starting in 1986 experienced drastic price swings. Captain D's was now able to explore alternative species. By the end of the decade, the chain totaled 610 units, of which 352 were company run. Chainwide revenues for fiscal 1989 were $400 million.

Falling Seafood Consumption in the 1990s

Entering the 1990s Captain D's looked to market to an older age group, 25 to 54 years of age. To further boost sales, the chain introduced drive-thru windows in 1990. But the start of the new decade proved to be difficult for the chain. Captain D's was not alone in its problems, as explained in a June 1991 Restaurant Business article that summarized prevailing conditions: "Sea-food restaurants, especially chains, face tremendous challenges. Their biggest problem is not how to market seafood, but how to find supplies to meet rising demand. Dwindling supplies of some species and growing competition from overseas makes seafood a difficult commodity in which to deal. The expertise needed to handle a highly perishable product, the difficulty of marketing an expensive product in an era of falling menu prices, and reported safety concerns over contamination from natural toxins and polluted water are further complications." Primarily because of a rising cost in key species—cod, haddock, sole, and scallops—due to shortages, seafood restaurants were forced to raise prices, resulting in declining sales. In 1992 seafood consumption fell to 14.8 pounds per capita. Captain D's also faced a challenge from the other end of the price spectrum. If its price points were too low, customers began to question the quality and freshness of the fish. Management sought to find the right fit for the chain in the seafood category, eventually settling to be a notch above Long John Silver's but not quite aspiring to be Red Lobster. As a result of this repositioning, Captain D's was able to regain some lost ground. The company's corporate parent, in the meantime, was encountering problems of its own.

In the 25 years since launching Captain D's, Shoney's had diversified into other restaurant concepts, such as Pargo's and Lee's Famous Recipe. It also operated an institutional supplier, Mike Rose Foods, and even tried its hand at lodging. Shoney's also suffered a public relations nightmare when it was sued for racial discrimination by nine African American former employees, which culminated in a settlement payment of more than $100 million. With sales declining and burdened by excessive debt, Shoney's initiated a major restructuring plan in early 1995. The company sold off its Lee's Famous Recipe, Pargo, and Fifth Quarter restaurants, as well as Mike Rose Foods, retaining only the Shoney's and Captain D's chains. A number of top executives, including Shoney's Chairman and CEO Taylor Henry, were also ousted. In September 1995 the company merged with TPI Enterprises, its largest franchisee.

While Shoney's restaurants continued their slide, Captain D's enjoyed a run of several consecutive years of gains in same-store revenue. The chain, which peaked at nearly 650 restaurants in 1994, also closed some underperforming units to improve profitability. It was not until 1997, however, that Captain D's began to introduce the first significant changes to the chain's business model since the mid-1970s. An instrumental player was Captain D's current president and chief operating officer, Ronald E. Walker, who took over the presidency in 1996 and was well familiar with the operation after more than 15 years of service with Shoney's. He started out in the foodservice industry as an hourly employee at McDonald's, then in 1980 became a manager trainee with Shoney's and went on to serve in a wide range of jobs with Captain D's, including restaurant manager, franchise supervisor, field operations director, regional director, vice-president of company operations, vice-president of franchise operations, and executive vice-president.

The major thrust of the Captain D's overhaul was to position the chain in the "fast-casual" segment, to take advantage of the rising popularity in casual dining. The first visible step was a diversification of the menu, accomplished by the launch of Captain D's Coastal Classics menu, a rotating set of fresh seafood items with a regional emphasis. Another two years passed before management was ready to take the next step, the introduction of a prototype restaurant interior, which featured a dockside shack with a weathered look both outside and in, and a décor that included nautical bric-a-brac, softer lighting, and tables and chairs rather than plastic booths. The casual atmosphere was reinforced by the dress of crew members, who wore tropical print shirts, jeans, and baseball caps (an approach that had the added benefit of improving staff retention). The goal was to merge the speed of fast food with the comfortable dining experience of a full-service restaurant, without the need for servers. Moreover, the new Captain D's served beer and played light rock music instead of elevator music (another plus in staff retention) and, unlike most fast-food restaurants, began to accept credit cards.

By 2000 Captain D's was the strongest division of Shoney's, which initiated a financial restructuring that provided Captain D's with a $135 million line of credit and made the chain a stand-alone subsidiary. Shoney's was now in a position to explore a number of options with the business, including selling it. Because the Shoney's restaurant division was struggling, there was some speculation that Shoney's might actually choose to cast off its signature chain and concentrate on the more successful Captain D's. The parent corporation adopted a wait-and-see attitude and took steps to revitalize the Shoney's chain, including the closure of more than 70 company-owned restaurants.

Company Perspectives:

We will give 100% guest satisfaction in order to maximize stakeholder value.

Introducing the Compact Restaurant Prototype in 2001

Of concern for Captain D's was some erosion in store sales at company-owned units. At this stage, 354 of the chain's 565 units, about two-thirds, were company owned. In 2001 Captain D's initiated a push to increase franchising, as well as to pursue refranchising, with the hope of reversing the ratio of company-owned stores to franchised operations. Moreover, the chain looked to take advantage of its strong brand recognition in the Southeast and to open new units in overlooked markets in its 22-state area of operation. Management estimated that the Southeast alone could accommodate another 800 to 835 Captain D's restaurants. As part of its effort to expand into new and existing markets and to aid in its franchising plans, Captain D's introduced a new compact restaurant prototype in 2001. The first of these units opened in Rainbow City, Alabama, an endcap property at a strip mall, which permitted the restaurant to operate a drive-thru window. Whereas a traditional 3,250-square-foot Captain D's was able to seat 128, the compact prototype, 1,800 square feet in size, could accommodate between 33 and 42 patrons. The smaller size allowed the chain to place new units where space was limited, either at in-line shopping centers or smaller freestanding retail sites. In addition, these units were cheaper and quicker to construct and needed less equipment than a traditional Captain D's restaurant—all of which translated into lower start-up costs for franchisees. The units maintained the fast-casual style of the dockside seafood shack of the larger restaurants, but relied on a more efficient kitchen layout and self-service beverage and condiment stations that allowed the smaller Captain D's to serve the same number of meals as the larger, traditional units but with less labor costs. Because the smaller format had limited seating, the floor design included a bar-height counter for single customers and, to prevent smaller parties from tying up larger tables, many four-seat tables were replaced with two-seat tables.

The smaller Captain D's format was ideally suited for a new potential growth area for the chain: military installations. In late 2001 the chain opened its first restaurant at a military location, and its first West Coast outlet, at the Travis Air Force Base in northern California. Some three years earlier the Army Air Force Exchange Service acquired worldwide franchising rights to Captain D's for all U.S. military installations. Because there were approximately 150 military exchange food courts around the world, this new avenue for growth held great potential for Captain D's. After setting up other domestic military units, in 2003 the chain opened its first international store on the Okinawa Air Force Base in Okinawa, Japan. This unit was also the chain's first military base restaurant offering sit-down and drive-thru service.

Ownership of Shoney's, Inc. changed hands in early 2003 when Lone Star Funds, a Dallas-based real estate-related investment group, agreed to pay approximately $20 million in cash and assume more than $250 million in corporate debt. As a result, Shoney's was taken private. Lone Star announced that it intended to operate both the Shoney's and Captain D's restaurant chains, putting an end, at least temporarily, to speculation that Captain D's might be spun off as a separate enterprise. Regardless, the future looked promising for Captain D's, due to the rising popularity of seafood restaurants in a nation that was becoming dominated by Baby Boomers entering their peak dining-out years who had a tendency to opt for seafood when eating away from home. Moreover, supply of suitable fish and stabilized pricing helped to fortify the category. With backing from Lone Star, Captain D's launched a major ad campaign to help the chain sustain its growth into the foreseeable future.

Key Dates:

1969:: The company's predecessor, Mr. D's, is established by Danner Foods.
1974:: Danner Foods merges with Shoney's, Inc.; Mr. D's changes name to Captain D's.
1996:: Ronald E. Walker is named president.
1999:: The chain introduces the wharf-style seafood shack prototype restaurant as part of its move into the fast-casual category.
2001:: The company's first military unit opens.
2003:: Lone Star Funds purchases Shoney's and Captain D's; first international military unit opens.