In era of failing restaurant chains, Fazoli's is comeback kid

Lexington-based chain making bold moves

ssloan@herald-leader.comMarch 12, 2011 

Lexington has a rich history of launching restaurant chains, but they tend to age poorly.

Long John Silver's, which began on Southland Drive, is now on the auction block, as owner Yum Brands looks to unload it and A&W, which was transplanted to Lexington from Michigan for a time.

The Jerry's chain, which was founded in Lexington in 1947, met a worse fate with few continuing to dot the Kentucky landscape.

And though its history was written down the road in Corbin and later in Louisville, even Kentucky Fried Chicken has struggled in recent years in the United States, relying on foreign countries for growth.

So it might come as no surprise that Fazoli's, started in Lexington in 1988, fell into a slump, too, hemorrhaging more than 150 restaurants in recent years. But unlike its Central Kentucky-born brethren, the fast-food Italian chain has begun to bounce back under the guidance of the former CEO of the restaurant chain Damon's.

On Monday, the Lexington area's eight locations will debut a number of new features, everything from real plates and better-quality menu items to brighter interiors and a person once again dedicated to handing out breadsticks in the dining room.

The upgrades have led to the hiring of about 70 new employees locally among an estimated 1,000 workers to be hired nationwide as the changes are rolled out.

Coming soon to Lexington is an even more radical change: The chain's lone menu item that has remained untouched will be upgraded. Yes, Fazoli's signature breadsticks are becoming longer, fluffier and even gooier, said CEO Carl Howard.

"Carl and his team have not just created, but implemented, one of the best brand turnarounds of the last 10 to 15 years," said Dennis Lombardi, an executive specializing in restaurants with design development company WD Partners in Columbus, Ohio.

'Dying by a thousand cuts'

The tale of the chain's downturn has much to do, ironically, with its growth. The company grew explosively after its launch, peaking at 403 restaurants. But it was a struggle to grow sales at stores that had been opened at least a year, a common industry measure that factors out the boost that can come from openings.

"We haven't finished positive on that since 2002," Howard said. "And in the history of the brand, we've only done it four times.

"Fazoli's wasn't necessarily growing at the core; it was growing through new restaurants."

If the growth wasn't enough of a distraction from the core business, another soon followed. Company leaders planned to sell the chain to McDonald's, but the fast-food giant opted against the deal. The company finally sold in 2006 to a private equity firm, Sun Capital Partners of Boca Raton, Fla.

In the meantime, Howard, who was hired in 2008, said the brand was "dying by a thousand cuts."

"They were making cuts to quality, to people, and ... you had double-digit decreases in same-store sales and guest count," he said.

What might have been the lowest point came when the company closed overnight 28 stores in Arizona and Florida.

"We were losing a half a million dollars in Florida and a million dollars in Arizona annually," he said. "It was tough to close that many locations, but it was the right thing by the brand."

Down to 240 restaurants, the need to change for the company was clear, but could it be done?

A complete overhaul

Howard and his 83 Lexington headquarters employees embarked on a plan to touch all areas of the restaurants. Last year, they opened new restaurants for the first time in three years and tested some concepts:

New menu and higher-quality food: The company hired an in-house chef to develop new dishes, a half-dozen of which will debut next week. Among them is a pepperoni-filled breadstick.

On the healthier front, the chain is launching a line of chopped salads that use Fazoli's own dressings, said Chief Marketing Officer Cathy Hull.

And coming soon might be a pick-your-pasta offering with the restaurant allowing customers to choose from whole-wheat and bow-tie pastas, among others, and then a sauce of their choice.

"It really gives us an opportunity to customize, which is something consumers are looking for today," Hull said.

The new dishes might be the most noticeable changes, but all of the menu has been touched. The tomatoes in the marinara and meat sauces are being pressed in a different way to better retain flavor, and the chain now buys chicken that it says has been processed less.

Even the iconic breadstick is in for a makeover.

"It blows our current breadstick away," Howard said. "It's softer and gooier."

The company is spending $100,000 on new pans to make the revamped breadsticks, which will be longer and are expected to debut in Lexington in the next 30 to 60 days. They'll continue to be offered in unlimited quantities for dine-in customers.

The change is driving up costs for Fazoli's with each breadstick going up 1.8 cents from about 10 cents currently.

Prices haven't risen since October 2008, but the company plans to increase them by about 2.5 percent over the course of the year.

"Some of that is just the pressure that's being placed on commodities," Howard said of the prices on food such as corn, which has doubled in the past six months.

Renovated restaurants: Walk inside any Lexington Fazoli's, and you'll notice a brighter look. Bright reds and whites are throughout the redesigned interior, which also features redone woodwork.

"The decor is more modern," Howard said. "It's not a picture of Italy from 1930."

The goal is to make the locations more inviting, and the company plans to spend $3.5 million in the next three months to upgrade the remaining 84 company-owned restaurants that haven't already changed.

Improved service: The company is adding back employees in each dining room to carry around baskets of breadsticks.

Employees will also bring food to customers' tables instead of requiring them to pick it up at the front counter.

New tableware: The company is replacing its disposable plates and utensils with melamine plates and metal silverware.

"We were selling $6 food and presenting it like a $3 experience," Howard said. "Now we're still selling $6 food, but we're presenting it like a $10 experience."

The company tested adding glasses instead of paper cups but found that 20 percent of guests wanted a to-go cup.

Stuff of 'visionaries'

The changes represent the best of what the company learned last year, when it opened a prototype restaurant in Dayton, Ohio.

In the year since opening the new store in Dayton, sales improved 7.6 percent in the market. In Kansas City, Mo., and St. Louis, sales are up 8.8 percent and 9.7 percent in the six months since opening.

"The changes have been really positive for the chain," said Valerie Killifer of FastCasual.com, a restaurant industry news site based in Louisville. "The menu items they've added and upgrades they've made have in my opinion really hit the mark."

Added Sam Oches, associate editor of QSR, a restaurant industry magazine: "They seem to be visionaries. ... They're really striving for something different and so far it's really proving to be successful."

The company did drop one prong of its strategy, though. When Fazoli's opened the Dayton store, it did so without a drive-through, because Howard thought that business could be made up with curbside pick-up. Not so.

"It was my mulligan," he joked, explaining the company will seek to add locations with drive-throughs.

One such location would be in the Lexington area, where the chain has eight stores. Howard is looking to expand elsewhere, too. Fazoli's is investigating what are called "non-traditional" locations, such as inside retailers and airports or on college campuses. A store recently opened inside a St. Louis-area Wal-Mart. The company is also adding a half-million dollars to its franchise recruitment budget next year.

With the turnaround coming along, Howard is setting his sights even higher:

Fazoli's is exploring the acquisition of another existing Italian eatery to be operated independently but by the same headquarters team.

"It's got to be the right fit, right price and something that doesn't compete too close with our existing restaurants," Howard said.

Killifer, of FastCasual.com, speculated the target might be mall fixture Sbarro. That chain has struggled recently and has hired bankruptcy and restructuring attorneys, The Wall Street Journal reported Monday.

If Fazoli's is indeed hoping to buy the chain, "they would have everything to gain," Killifer said.

Howard declined to comment further.

If Sbarro is being looked at, it would be another turnaround effort, much like Fazoli's has been so far.

"It used to be every restaurant was negative consistently all the time," said Rob Hearden, president of the Fazoli's Franchise Association and owner of three stores. "Now there are only maybe four franchisees running negative and everyone else is positive."

When the franchisees are happy, so is Howard.

"I'm not scared to answer my phone anymore," he said. "I used to cringe when my phone rang because it was normally an unhappy franchisee ...

"Sales are up, the morale is completely different, and we're putting money back into the business."

As Hull, the Fazoli's marketing executive, put it, "we're not all the way to bright," but she said the chain has "come a long way in a very short period of time.

"We're not building a restaurant every other week yet, but we'll be hot again."

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