II Fornaio (America) Corporation

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II Fornaio (America) Corporation

770 Tamalpais Drive, Suite 400
Corte Madera, California 94925
(415) 945-0500
Fax: (415) 925-0906
Web site: http//www.ilfornaio.com

Public Company
Employees: 2,000
Sales: $83.14 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: ILFO
SICs: 5812 Eating Places; 2051 Bakery Products

II Fornaio (America) Corporation owns and operates 17 full-service, upscale Italian restaurants and five wholesale bakeries. The companys name, // Fornaio, is Italian for the baker. The restaurants are located mostly in California, but an II Fornaio restaurant and bakery can also be found in each of the following cities: Portland, Oregon; Denver, Colorado; Las Vegas, Nevada; and Seattle, Washington. These white-tablecloth // Fornaio Cucina Italiana (restaurants with bakeries) serve premium-quality Italian cuisine based on authentic regional Italian recipes. Each restaurant houses a retail market (known as a panetteria) offering the companys unique baked goods, prepared foods, and a variety of II Fornaio-brand products. The companys five California-based // Fornaio Panificio production bakeries offer more than 50 varieties of handmade breads and rolls as well as pastries and other baked goods for sale in the companys own locations and to quality grocery stores, specialty retailers, hotels, and other upscale restaurants. Since 1997, the Burlingame, California, bakery also functions as the Accademia del Fornaio, a training facility or School for Bakers. In 1998 II Fornaio (America) Chairman Laurence B. Larry Mindel was among select restaurant industry leaders to receive the International Foodservice Manufacturers Associations 1998 Foodservice Operator of the Year and Gold Plate award, the top distinction among Silver Plate Awards, and one of the restaurant industrys highest honors. Mindel, a self-described Italophile, also was the first American and the first person of non-Italian descent to receive the Italian governments Caterina de Medici Medal for excellence in preservation of Italian heritage and culture outside of Italy.

A New Italian Bakery Concept: 1970-86

In 1972 in Barlissinaa small village outside of Milan, Italya family of furniture and fixture makers, committed to the goal of preserving the disappearing craft of Italian artisan baking, created the II Fornaio Baking School. Carlo Veggetti and his family gathered centuries-old recipes from every region in Italy. In this school bakers learned the methods needed to prepare these traditional recipes; furthermore, the school provided the baker-students with the materials necessary for opening their own bakeries under the II Fornaio name. From this modest beginning, Carlo Veggetti developed his concept of the neighborhood baker into what eventually became the largest bakery chain in Italy.

The II Fornaio bakery concept was introduced to the United States in 1980 when the company acquired exclusive rights in the United States to the II Fornaio trademark and to certain recipes that remained central to the companys bakery concept. Howard Lester, chairman of Williams-Sonoma Co., discovered the II Fornaio bakeries during a 1981 business trip to Florence and fell in love with the Old World bakeries. He tracked down Carlo Veggetti, chairman of this largest chain of Italian bakeries, and negotiated an agreement for the rights to II Fornaio (America) in North America. According to Steve Kaufmans article titled Innovation Is House Specialty, published in the October 12, 1998 issue of the San Jose Mercury News, Lester opened eight bakery outlets by year-end 1984. The enterprise was not successful, however; Williams-Sonoma sold the company to a group of private investors who hoped to build a wholesale business by having a central bakery supply many additional outlets. When that venture also failed, reporter Kaufman noted that the investors asked Larry Mindel if he would try his hand at turning the company around. Previously, Mindel had served as president of the restaurant division of Saga Corp. and had created eight successful Italian restaurants. He agreed on the condition that he be allowed to phase out the bakeries gradually and replace them with Italian restaurants having in-store bakeries, thereby introducing a new approach to the restaurant business. Mindel later served as president, chairman of the board, and chief executive officer at II Fornaio (America) Corporation.

A New Restaurant Concept: 1987-95

The competitive distinction that Mindel had in mind was a new business strategy that, in addition to II Fornaios freestanding retail bakeries, focused on the development of full-service restaurants. He envisioned these restaurants and bakeries as showcasing baked goods produced by the companys bakeries and offering a varied menu of premium-quality Italian foods and beverages. This strategy was predicated on the development of an II Fornaio brand based on the companys authentic Italian heritage. To this end, the company incorporated a retail market into the design of each location so that guests could purchase and bring home II Fornaio-baked goods, prepared foods, and other branded products. In October 1987 the company opened its first full-service restaurant and bakery. By year-end 1995 the company had opened 11 full-service // Fornaio Cucina Italiana (restaurants with bakeries) in California and operated five wholesale bakeries.

II Fornaios strategy focused on differentiating its restaurants from other restaurants in the Italian food segment by offering creatively prepared, premium-quality Italian cuisine based on authentic regional recipes. The core menu, served at both lunch and dinner, featured a variety of dishes: house-made and imported pasta, poultry and game roasted over a wood-fired rotisserie, meat and fresh fish from a charcoal grill, pizza from a wood-burning oven, soups, salads, and desserts. Native-born Italian chefs developed all of the core menu items. Each month, as part of the companys Festa Regionale 1995 marketing program, these chefs developed special menus based on the local cuisine and culinary style of one of Italys 20 geographic regions.

II Fornaio believed that its restaurants, wholesale bakeries, and retail markets worked together to reinforce its image as a provider of authentic Italian food. The wholesale bakeries supplied the same fresh, award-winning breads and other baked goods served at its restaurants to quality grocery stores, specialty retailers, hotels, and other fine restaurants. The retail markets also offered an II Fornaio-brand Chianti Classico from a Tuscan vineyard originally planted in the llth century and designated for II Fornaios exclusive use. To create a distinctive authentic Italian atmosphere in its restaurants, the company chose designs unique to each location. Design elementssuch as terra-cotta or European slate floors, marble bars, mahogany trim, outdoor piazzas, hand-painted ceilings, and fine artwere selected to evoke the charm and elegance of a memorable dining experience in Italy. II Fornaios Sacramento restaurant received the grand prize for best new restaurant design worldwide, one of the five grand prizes in hospitality design awarded in 1995 by the national magazine known as Hospitality Design.

To foster a strong corporate culture, II Fornaio provided extensive training, attractive compensation, and significant opportunities for employee feedback and advancement. In 1995 the company instituted a Partnership Program, which provided equity participation to chefs and restaurant managers. Furthermore, II Fornaio provided medical, dental, and other benefits to hourly employees; these benefits contributed in part to an employee turnover rate that was below the industry average. At year-end 1995, II Fornaio posted total revenues of $54.14 million, compared with revenues of $38.51 million at the end of 1992 and with annual revenues of close to $6 million in 1987.

Growth in California and Elsewhere: 1995-97

In 1995 Michael J. Hislop, who had served four years as chairman and chief executive officer of Chevys Mexican Restaurants and guided that companys expansion from 17 to 63 restaurants, joined II Fornaio as president and chief operating officer. Mindel, Hislop, and seven other members of senior management continued to develop II Fornaio restaurants in both existing and new markets and to locate these restaurants at sites in affluent urban and suburban areas. The flexibility of the II Fornaio concept enabled the company to establish successful hospitality restaurants in a variety of locations, including residential neighborhoods, shopping centers, office buildings, and hotels.

II Fornaio opened its first out-of-state restaurant and bakery in Portland, Oregon, in 1996 and in January 1997 opened another full-service restaurant and bakery in Las Vegas, Nevada, in the New York, New York Hotel & Casino. In November still another Cucina Italiana e Panetteria was opened in Santa Monica, California, overlooking the Pacific Ocean. The companys fifteenth restaurant and bakery opened in December in the lower downtown (LoDo) district of Denver, Colorado, three blocks from Coors Field.

Company Perspectives:

II Fornaios mission is to provide our customers with the most authentic Italian experience outside of Italy. We realize our mission by being students and teachers of Italian culinary traditions, preparations and presentations, infusing our heritage into everything we do. We realize our mission by putting our employees first so that our customers can come first. We realize our mission by executing a profitable business strategy that rewards our shareholders without compromising the quality of our products. We realize our mission by developing an atmosphere of camaraderie and fun in all our endeavors, of celebrating every day the Italian in all of us.

Demand for the companys traditional Italian bread and pastries soon exceeded II Fornaios capacity for production. In March 1997 the company opened a free-standing 12,000-square-foot wholesale bakery in Burlingame, California. This facility allowed the company to use improved processes that enhanced the quality and consistency of its products while maintaining the II Fornaio commitment to preservative-free, handmade, authentic Italian breads. This bakery, which replaced two small bakeries and brought about a substantial increase of profits, provided freshly baked goods to all of the companys restaurants and wholesale customers throughout the San Francisco Bay area. Furthermore, to assure the continuing visibility and longevity of its heritage, in May II Fornaio (America) opened its own Accademia del Fornaiothat is, School for Bakersin this bakery.

Another 1997 highlight was II Fornaios successful completion of an initial public offering; in September the company was traded on the Nasdaq National Market under the ticker symbol ILFO. Revenues grew 18.6 percent to $72.12 million in fiscal 1997 from $60.75 million in fiscal 1996. Net income grew to $2.58 million ($0.48 per share diluted) from $1.45 million ($0.32 per share diluted) in 1996: an increase of 77.8 percent. The company shared its success by creating an employee stock-purchase program. In his 1997 Annual Report, Chairman Mindel commented that a new niche is evolving in the restaurant business, somewhere between casual dining, with an average guest check of $15 and fine dining, where a guest routinely pays in excess of $50. We call this niche sophisticated dining. Our definition of sophisticated dining applies to the handful of restaurant groups that offer great food, professional service, beautiful and worldly wise environments, but with a check average of under $25. After all, fundamentals are the reasons that people dine so often at II Fornaio. As a matter of fact, two separate company-sponsored research studies indicate that our customers dine at II Fornaio an average of sixteen times per year, a visitation frequency normally associated with quick-service restaurants, Mindel emphasized.

Further Expansion: 1998 and Beyond

In the San Jose Mercury News story mentioned above, news-writer Kaufman attributed much of II Fornaios success to its management structure, creativity, and attention to details. For instance, chefs and general managers were offered generous stock options and had to buy into the companys vision that profits would follow if quality was the top priority. One of the ways that Mindel strove to implement the companys mission of providing customers with the most authentic Italian experience outside of Italy was to take about ten chefs and managers on an annual two-week trip to Italy to immerse them in that countrys food, wine, culture, and lifestyle. Furthermore, once back home the chefs enjoyed much leeway for the preparation of food; every month they alternated the preparation of supplementary menus customized to the cuisine of one of Italys 20 regions, Kaufman pointed out. Executive Chef Maurizio Mazzon reviewed the recipes, photographed the dishes and jotted down the details of the recipesincluding instructions for proper pronunciationfor dissemination to the rest of II Fornaios chefs, wrote Kaufman.

II Fornaio opened its sixteenth unit in Seattle, Washington, in October 1998. Located in that citys Pacific Place retail/entertainment complex, the restaurant and bakery shared space with the introduction of a new concept: a fast-serve restaurant called a Risotteria. According to the // Fornaio Online Magazine, the menu featured six to eight risotto preparations, five to seven pastas, and three to four gnocchirotated seasonally along with salads, soups, antipasti, and desserts. Entered from the street level or from the II Fornaio flagship restaurant situated above, the Risotteria had an open kitchen, no tablecloths, a prominent window for to-go orders, 92 seats for the customers who chose to stayand everything was priced under $10. In an interview with Robert Klara, who gave news about this complex in the July 1, 1998 issue of Restaurant News, II Fornaio Vice-President Michael Mindel said that the company had long believed that theres an opportunity to do something more casual with a lower-price point without going down to fast food.

The Pacific Places location at the crossroads of business and tourist traffic was the impetus for the idea. A typical lunch break, Mindel noted, is 29 minutes. Weve long been looking for a way to accommodate people like that. He was quick to make the point that the Risotteria-type eating place would never be a dominant business for us. Were still a full-service restaurant, he emphasized. But even the Seattle Risotteria had a unique II Fornaio touch; for instance, Mantovana Risottoa typical lunch itemconsisted of radiochio, sausage, balsamic vinegar, and goat cheese! II Fornaio opened its seventeenth Cucina Italiana e Panetteria, a 12,000-square-foot unit, in downtown Walnut Creek, California in November 1998. This restaurant and bakery could seat approximately 160 guests. The retail bakery, offering II Fornaios signature baked goods, coffees, fresh fruit, and juices, opened at 7:00 a.m. weekdays and at 8:00 a.m. on weekends.

By year-end 1998 Michael J. Hislop had been appointed president and chief executive officer; Larry Mindel continued to be chairman of the board. Sales and profits reached all-time highs, driven by an increase of five percent in same-store sales. In addition, sales at the restaurants increased by 3.3 percent for the fourth quarter of 1998, a percentage that represented the twelfth consecutive quarter of increases in same-store sales. Expansion into new markets also helped drive earnings per share to new heights. Total revenues peaked at $83.12 million for fiscal 1998, compared with $72.12 million for fiscal 1997. Net income for fiscal 1998 increased by 21 percent to $3.1 million versus $2.6 million for the prior year.

Although II Fornaio became one of the more prominent chains in the upscale dining category, Chairman Mindel and President/CEO Hislop maintained strict standards to keep the company from becoming chain-like. All but one of the II Fornaio executive chefs were first-generation Italian and personally created half of the menus. All chefs and general managers were partners in the company. In his October 1998 interview with news writer Kaufman, Hislop pointed out that the word chain connoted a prototype and implied that the same food was served in each of the companys restaurants. Thats not the case, said Hislop. Becoming the best Italian restaurant means not only making the best Italian food but also being creative and innovative in each market where we are located.

According to Clifford Carlsens report in the December 21, 1998 issue of American City Business Journals Inc., during 1999 II Fornaio planned to open five full-scale restaurants and bakeries, thereby propelling sales to more than $100 million. Chairman Mindel told Carlsen that with expansion set at five or six new restaurant units a year, II Fornaio could reach $200 million in annual revenues within five years. We have enough money to finance expansion internally for at least the next 18 to 24 months. And since the [1997] initial public offering we have put in infrastructure and management that can take us to $200 million a year, said Mindel.

Indeed, as the 21st century drew near, II Fornaios expansion continued at a rapid pace. All was on track for a May 1999 opening of II Fornaio Canaletto, the companys 18th restaurant unitits second in Las Vegasas well as for a number of other restaurants under construction. Furthermore, with a lease in hand for a new 8,000-square-foot restaurant and bakery in Ashwood Restaurant Park, in the upscale Perimeter section of Atlanta, Georgia, II Fornaio would soon have its first // Fornaio Cucina e Panetteria east of the Rockies. According to newswriter Carlsens story mentioned above, Chairman Mindel predicted that over the next five years about one-fourth of II Fornaios locations would be in West Coast markets, with the remainder farther afield. We think there are 100 markets for II Fornaio, said the enterprising restaurateur. There are just a handful of restaurant companies that are on the radar screen of developers today, and we are one of them.

Further Reading

Carlsen, Clifford, II Fornaio Sets Table for New Round of Growth, American City Business Journals Inc., December 21, 1998.

Galli, Franco, The II Fornaio Baking Book: Sweet and Savory Recipes from the Italian Kitchen, San Francisco: Chronicle Books, 1993.

II Fornaio Online Catalog, http://www.infornaio.com/catalog.html.

Kaufman, Steve, Innovation Is House Specialty, San Jose Mercury News, October 12, 1998.

Klara, Robert, Gnocchi at Noon, Restaurant Business, July 1, 1998, p. 1.

NationsBanc Montgomery Analyst Forecasts Favorable Outlook for Restaurant Industry, PR Newswire, January 29, 1999.

Gloria A. Lemieux