Furr’s Restaurant Group, Inc.

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Furr’s Restaurant Group, Inc.

3001 East President George Bush Highway
Richardson, Texas 75082
U.S.A.
Telephone: (972) 808-2923
Fax: (972) 808-5713
Web site: http://www.furrs.net

Public Company
Incorporated: 1959 as Furr’s Cafeterias, Inc.
Employees: 4,700
Sales: $184.9 million (2001)
Stock Exchanges: American
Ticker Symbol: FRG
NAIC: 722212 Cafeterias

Furr’s Restaurant Group, Inc., based in the Dallas, Texas, suburb of Richardson, owns and operates 92 family-style cafeterias in 11 states under the names of Furr’s Family Dining, Furr’s Family Buffet, and Bishop’s Buffet. The six Bishop’s units are located in Iowa and Illinois, while the remaining Furr’ s restaurants are located mostly in the Southwest. In addition, the company operates Dynamic Foods, a Lubbock, Texas, food purchasing, processing, and distribution center that services all of the company’s restaurants, providing as much as 85 percent of the food served system wide. To take advantage of excess capacity, Dynamic Foods also sells to a limited number of outside customers.

Postwar Boom for Cafeteria-Style Restaurants

Cafeterias originated in New York City and spread throughout the North, but due to a number of factors in the early decades of the 20th century they fell out of favor. The cost of city real estate as well as higher wages made them a unattractive investment. Moreover, cafeterias during the Depression were stigmatized as haunts for undesirables. While cafeterias faded from the scene in the North, they found fertile ground elsewhere, especially in growing Southern cities in the years following World War II. There was little difficulty in finding a large enough, inexpensive parcel of land that could accommodate a restaurant and parking lot, and low labor costs also contributed to making cafeterias a viable investment. Because few restaurant chains operated in the South, cafeterias were able to flourish in the region. While they offered a variety of inexpensive dishes, they also presented a décor that appealed to a family clientele. Cafeterias in the South were viewed as a place to eat after church on Sunday rather than as a hangout for petty thieves and bums. As a result, cafeteria chains formed and spread throughout the South in the postwar years.

The connection of the Furr’s name to cafeterias dates to 1947 when forward-thinking Texas supermarket magnate, Roy Furr, began to combine dining with one of his grocery stores, a combination that was years ahead of its time. Furr was born in McKinney, Texas, in 1905 and gained business experience working for his father at the Kirkland Mercantile Company. After graduating from the University of Oklahoma, he taught school, then in 1923 moved to Amarillo, Texas, where he and his father established the Furr Food Store. He moved to Lubbock in 1929 and bought six grocery stores that formed the basis for a supermarket chain that expanded throughout West Texas and eventually into Colorado and New Mexico.

Furr’s first cafeteria was built next door to one of his Odessa, Texas, grocery stores, opening in March 1947. The venture was successful, but the site only offered enough parking space for 25 cars. Furr decided to sell both businesses, but elected to only rebuild the supermarket. One of his employees, a baker named Cliff Andrews, boasted that if Furr would build a super cafeteria and let him manage it, it could “run circles around your supermarket.” Furr agreed, and in April 1956 a Furr’s Cafeteria, double the size of the original and offering five acres of parking, opened under Andrews’s management. The operation proved so successful that Furr opened a second cafeteria in April 1956, and four more units by May 1959. The burgeoning chain to this point had been operated under Furr’s Supermarkets. In June 1959, the business was spun off into a separate corporation christened Furr’s Cafeterias, Inc. Roy Furr’s son, Don Furr, who had been acting as director of the operation, was named president, and Andrews was named vice-president.

Furr’s Cafeterias grew steadily, numbering 11 units by the end of 1962. To be certain of a consistent quality of food throughout the chain, the company in 1968 acquired the Lubbock-based Plains Meat Company, which it renamed Quality Control Kitchens, supplying meats, cooked foods, and bakery items to Furr’s Cafeterias. This operation would ultimately become the Dynamic Foods subsidiary. On November 12, 1969, Furr’s Cafeteria went public, issuing 260,000 shares of stock. Aside from cafeterias, the company also opened a pie shop in Lubbock in 1969, and another in Odessa in 1971. By the time of Roy Furr’s death in 1975, Furr’s Cafeterias owned and operated 57 units located in seven states.

Kmart Acquires Furr’s Cafeterias in 1980

The Furr family business empire of restaurants, supermarkets, convenience stores, grocery warehouses, and realty company did not fare well during Roy Furr, Jr.’s tenure. By 1979 the company was forced to file for bankruptcy. The supermarket assets were acquired by West German investors, while Furr’s Cafeterias was purchased for $70 million by Kmart Corporation in May 1980. For Kmart the move into the restaurant business was part of an aggressive diversification and expansion plan that included the acquisitions of Builders Square, Waldenbooks, and Pay Less Drug Stores. Kmart hoped to complement its department stores with the addition of Furr’s Cafeterias on the same pad. In 1983 Kmart added a regional buffet chain when it paid $28 million for Iowa-based Bishop Buffets, founded in Waterloo, Iowa, in 1920 by Benjamin Franklin Bishop. Kmart opened new units under both the Furr’s and Bishop’s names but essentially allowed them to operate independently. By November 1986, however, Kmart, saddled with debt from its diversification efforts, was looking to focus on its core retailing business and decided to unload its restaurant assets, which had grown to 133 Furr’s Cafeterias, spread from Texas to California, and 35 Bishop’s Buffets located in the Midwest.

In January 1988 Kmart completed the sale of Furr’s Cafeterias and Bishop Buffets to investor Michael Levenson’s Cavalcade Holdings of Lubbock, Texas, for $237.5 million in a leveraged buyout. Levenson then packaged the assets in a limited master partnership, Furr’s/Bishop’s Cafeterias L.P. and sold 11 million units at $10 each, which were then listed on the New York Stock Exchange.

The 38-year-old Levenson never graduated from college, instead gaining business experience from a family-owned bank in New Mexico where he served as president. Fascinated by the oil and gas industry, Levenson relocated to Texas in the late 1970s to buy and sell oil and gas leases. He then became interested in the takeover exploits of entrepreneur T. Boone Pickens and decided to make his own takeover attempts in order to gain control of a company to run. He bid unsuccessfully on Texas oil companies Tesoro Petroleum Corp. and Texas American Energy, as well as Hawaii’s Aloha Airlines. In 1986 an investment banker introduced him to the cafeteria business when shares in the closely-held Wyatt chain became available. After some research into cafeteria-style restaurants, Levenson became convinced that the industry held untapped potential. He failed in his attempts to acquire Wyatt over the next two years, then learned that Kmart was interested in selling Furr’s and Bishop’s, and turned to Dean Witter Reynolds and other banks for the money to acquire the assets.

Levenson was extremely aggressive in his approach to the restaurant business. He quickly initiated a turnaround program that included cutting employee benefits and other overhead costs, and launched a marketing campaign with a budget that far exceeded that of his competitors, approximately 2.5 percent of revenues compared to 0.5 percent. Levenson brought other changes to the cafeteria concept as well. In remodeled units, the dessert and beverage sections were separated in order to avoid slowing down the entree and vegetable line. He introduced bakeries, take-out counters, and even separate rooms for children. He also launched all-you-can-eat promotions at many of his poorer-performing units. In short order he succeeded in boosting traffic to Furr’s and Bishop’s, causing some financial analysts to take notice and recommend the company as a good buy.

Levenson also began closing less productive units, especially Bishop’s Buffets that were located in fading strip malls. Like owners of other southern cafeteria chains, Levenson harbored ambitions of expanding to the North, talking openly about his desire to explore such territories as Chicago, New York, and New Jersey. Nevertheless, he also rejected the Kmart strategy of building new units, maintaining instead that the cafeteria business was mature and that the better course was to grow by acquisitions. Operations would then be consolidated to realize increased efficiencies while at the same time gaining greater buying power and marketing clout. Levenson had also not forgotten about Wyatt Cafeterias. In 1986 he had signed a standstill agreement with the chain in order to take a look at the company’s books, and now that the agreement had expired he began to renew his play for Wyatt, which if successful would have made Furr’s/Bishop’s the largest cafeteria chain. Once again, however, his acquisition hopes were dashed, and Wyatt was instead bought up by an employee stock ownership plan.

Company Perspectives:

Since 1947, Furr’s has placed home-cooked value and variety right around the corner. We are committed to providing quality food at reasonable prices. We offer a well-balanced menu with a variety of home-cooked favorites, including carved meats, baked fish and chicken-fried steak, fresh salads and vegetables, oven-baked breads and our famous desserts. Our wide selection of home style foods will please any group, large or small. Whether you choose from our “by-the-item” or “all-you-can-eat” pricing alternatives, you’ll always receive great value at Furr’s.

It was unlikely, however, that Levenson would have been able to take on the debt required to purchase Wyatt. He was already suffering under onerous interest payments that severely limited the possibility of growth. Moreover, Levenson acquired Furr’s and Bishops at a time when the entire cafeteria segment was entering a slump. Chains, unable to successfully penetrate to other regions of the country, had overbuilt in the South. Increased cafeteria competition was also aggravated by the influx of fast food chains that lured away customers who no longer cared to wait in lines. For many, cafeterias were now seen as a bastion for senior citizens, leading to erosion in the young family business. In March 1991 Levenson converted the partnership to a corporation but was subsequently unable to pay a dividend that he had promised shareholders. Not only was the company steadily losing money, it was charged with falsifying the registration statement when it was converted to a corporation. In December 1992, Levenson settled the matter by agreeing to pay a $50,000 fine to the Securities Exchange Commission without admitting or denying any allegations.

New Leadership in 1993

In June 1993 Levenson’s reign at Furr’s/Bishop’s came to an end when shareholders enlisted 28-year-old investment banker Kevin E. Lewis to succeeded him as chairman and restructure the company’s debt. Long-time fast food executive William Prather, former CEO at Hardees who had been brought in as a consultant, was then named the company’s new chief executive. In a subsequent buyout, Lewis gained 60 percent of Levenson’s outstanding stock and Prather 40 percent. Over the next four years most of Lewis’s efforts would be devoted to restructuring the debt load incurred from Levenson’s leveraged buyout, which continued to cripple the company, preventing it from performing necessary remodeling. In addition to the Furr’s and Bishop’s restaurants, Lewis and Prather also inherited several minor ventures, including some liquor stores and two El Paso Barbecue restaurants. In October 1994 Prather elected to resign as CEO in order to take the El Paso operation and strike out on his own. According to Prather, his decision resolved some internal issues at Furr’s/Bishops. “With both Kevin and me there, we were top-heavy,” he explained.

Now serving as both chair and CEO, Lewis finally succeeded in completing a recapitalization plan in January 1996. He stayed on as CEO for an additional year, as the business stabilized and the company posted net income of $8.4 million on revenues of $197.4 million for fiscal 1996. He then announced that he was stepping down as chief executive. Board member Kenneth Reimer, formerly of Tony Roma’s, took over on an interim basis, and three months later Ted Papit was hired as president and chief executive. The former CEO of Black-Eyed Pea Restaurants expressed enthusiasm for the recent opening of a new unit that replaced one that had burned down. Insurance money essentially funded a prototype restaurant that offered patio seating, a food-court-style serving arrangement, and a carry-out market. Papit also envisioned new marketing ideas. The situation at Furr’s/Bishop’s, however, was not as rosy as portrayed. In fiscal 1997, the company would again lose money, reporting a net loss of $5.4 million on revenues that had fallen to $193.5 million. Moreover, the company’s stock, which traded around $2 per share in early 1996, began to steadily fall in value, eventually bottoming out at below 50 cents.

Papit’s tenure at Furr’s/Bishop’s would be brief. After six months at the helm he announced he was resigning, then changed his mind only to become caught up in an unusual shakeup. In the spring of 1998 one of Furr’s/Bishop’s major shareholders, TIAA-CREF, the country’s largest pension system, nominated its own slate of board members, which it then succeeded in installing. The unprecedented move was taken, according to a proxy statement, because “Teachers believes there is something fundamentally wrong at the company and the company has been operated for far too long for the benefit of a few rather than all the stockholders.” The statement charged that the board approved “high consulting fees, executive compensation, and golden parachutes to certain members.” Furthermore, the statement noted, “Notwithstanding the management’s arguments that the company is on the verge of a turnaround, Kevin Lewis, as chairman of the board, recently completed selling all of the shares he owned in the company.”

With Lewis ousted, Papit resigned and was replaced as chief executive on an interim basis by board member Suzann Hopgood, who had been on the previous board before resigning to join the TIAA slate. As it searched for a permanent CEO, the board approved a $20 million capital-improvement program intended to upgrade 20 restaurants. In October 1998 the company hired a new president and chief executive: Phillip Ratner, former head of both Spaghetti Warehouse and Acapulco Restaurants. Also within the first six months of taking control, the board decided to move the company’s headquarters to Richardson, a suburb of Dallas, although Dynamic Foods would be left in place in Lubbock.

Under Ratner, Furr’s continued to spend money on capital improvements, primarily to remodel existing units and to upgrade its computer and information system, as well as to improve the operations at Dynamic Foods. From the summer of 1998 through 1999, the company remodeled 30 of its restaurants, while closing down several that were underperforming. In February 2000 it opened a new unit under the Furr’s Family Buffet banner that employed a “scatter-bar” concept that had proven popular with such restaurants as Golden Corral. Nevertheless, the company remained primarily committed to the straight-line cafeteria business. Also in that month the company changed its name to Furr’s Restaurant Group. Although it was clearly making strides in turning around its financial condition at a time when other cafeteria chains faced serious problems, Furr’s was unable to meet the $50 million market capitalization requirement of the New York Stock Exchange, and in August 2000 moved to the American Stock Exchange.

Key Dates:

1920:: Benjamin Franklin Bishop opens his first restaurant in Waterloo, Iowa.
1947:: Roy Furr opens his first cafeteria in Odessa, Texas.
1959:: Furr’s Cafeterias, Inc., is established.
1968:: Plains Meat Company, predecessor to Dynamic Foods, is acquired.
1969:: Furr’s goes public.
1980:: Kmart acquires Furr’s.
1983:: Kmart acquires Bishop’s
1988:: Kmart sells Furr’s and Bishop’s to Michael Levenson’s limited master partnership.
1991:: The Furr’s/Bishop’s partnership is converted into a corporation.
2000:: Company’s name is changed to Furr’s Restaurant Group, Inc.

After posting two consecutive profitable years at Furr’s, Ratner resigned in July 2001 to take over Marie Callender Pie Shops. In October he was replaced by Craig S. Miller, the former chief executive of Uno Restaurant Holdings Corp. With considerable experience in casual dining, Miller was charged with bringing a new perspective to the cafeteria business and building on a core base of loyal customers. Upon assuming his new job, he summarized the task ahead as one of finding “ways we can attract more guests to the restaurant and capture some of the growth in the foodservice industry that some of the cafeteria chains have not been able to keep pace with over the past several years.” The challenges proved formidable, however, and amid falling revenues and net losses, Miller resigned a year later. As the cafeteria industry continued to struggle, and Furr’s same-store sales continued to decline, the company filed for bankruptcy protection under Chapter 11 early in 2003. Whether new leadership could help restructure the cafeteria chain remained to be seen.