Service America Corp. History

Company History:

Service America Corp. is a leader in the highly competitive contract food service segment of the retail food industry. Service America has operations in 44 states and the District of Columbia and is ranked among the United States' top 20 retail food companies in annual sales. The company is the principal subsidiary of Servam Corp., and its operations are divided into three primary segments: vending, dining, and recreation services. The vending and dining segments provide food service to businesses, industrial and manufacturing plants, office buildings, hospitals, and educational, correctional, and government facilities. Vending and dining comprise 50 percent and 38 percent of company revenues, respectively. Recreation services make up about 12 percent of company revenues, providing concession operations primarily for convention centers and sports arenas.

When Service America was established in 1960 as United Servomation, there was no "contract food service segment" in existence. At that time, the vending industry, which later gave birth to the contract food service market, was hitting a ten-year peak. Vending machines had been introduced to Americans over 70 years earlier by Thomas Adams, who installed them on New York City's elevated train platforms to sell his Chicklets gum. After World War II the vending industry grew twice as fast as the gross national product, driven by three primary factors: rising labor costs made machines an attractive alternative to human laborers; technological advances in food preservation and dispensing equipment permitted service of hot meals, sandwiches, coffee, and soft drinks; and technological advances were made in money-changing equipment. Vendors targeted "captive" markets in factories, offices, schools, and other institutions--a huge market with plenty of potential for growth and competition. The vending industry had achieved $2.5 billion in annual sales by 1960, and with statistics showing that Americans ate one in four meals away from home, vendors and stockbrokers foresaw a fine future for vending.

Headquartered in New York City, United Servomation was formed in late 1960 as a combination of eleven vending organizations. In its first year, the company had $18 million in sales and netted $800,000. At the time, most vending companies were still selling cigarettes, candy, soft drinks, and coffee in venues like bus stations, factories, offices, schools, and hospitals. Two of Service America's perennial competitors, Automatic Canteen and Automatic Retailers of America (ARA) were already established industry leaders.

By 1965 Servomation was a $100 million public company with over 70,000 vending units in 29 states coast-to-coast. Fifty independent vendors had joined Servomation's ranks, bringing the total number of affiliates to 89. The company was so decentralized that most affiliated companies kept their pre-Servomation names, so that the company was more like a confederation than a corporation.

Most machines were located in traditional institutional sites but United Servomation also operated some completely automatic restaurants, like its Realm of the Coin at Boston Massachusetts's Madison Hotel.

In the early 1960s, vending comprised the vast majority of Servomation's sales, bringing in 87 percent of company revenues. But during the middle of that decade, the vending industry began to reformulate its mission as a service not necessarily tied to vending machines.

This change came about, in part, as a result of research linking cigarettes to cancer and other health hazards. In the early 1960s, cigarettes comprised about 30 percent of Servomation's vending sales. By the end of the decade, cigarettes only accounted for about 15 percent of sales. Many vendors saw the changes on the industry's horizon and began to concentrate on food service.

The evolution from vending to contract food service came about in three phases. First came the addition of hot and cold prepared foods to traditional lines of snacks, candy, and cigarettes. Second, the building of cafeterias and break rooms for daily lunchtime customers in institutional and industrial settings set vending machines apart from the regular work area. Finally, many vending companies began to operate standard restaurants, snack bars, and coffee shops.

Servomation entered the new market in 1963 when the company purchased A. L. Mathias Co. and began to coordinate machine sales with manual (as opposed to mechanical) service in vending's traditional, captive markets. "Servomats," semi-automatic cafeterias with a bank of vending machines and a small grill for hot dishes, were introduced in 1963.

Servomation also entered the retail food industry in 1963, opening its Singing Waters restaurant in Philadelphia, PA, and two roadside Mr. Bill's restaurants. Both units featured frozen, precooked foods that would be reconstituted on-site using microwave ovens. The company also purchased Red Barn System, Inc., a limited menu, self-service restaurant with franchises from coast to coast. The acquisitions were impressive and attracted attention to the company, but they only constituted five percent of annual sales and earnings.

The company's mainstay was still vending, comprising 70 percent of sales at the end of the decade. In 1966 Servomation acquired Minnesota Acme Vending (Minneapolis), which increased the company's annual volume by $1 million. In the late 1960s, 36 percent of Servomation's contracts were with durable goods manufacturers. Other manufacturers made up 18 percent of the company's volume, commercial, financial, and communications companies comprised ten percent, and hospitals, government and military institutions contributed 11 percent. Servomation's reliance on contracts with cyclical businesses, especially durable goods manufacturers, meant that its well-being was tied to its contractors' well-being, which had a tendency to fluctuate dramatically.

In the latter half of the decade, Servomation tried to move away from durable goods to more dependable markets. In 1967 30 percent of the company's 300 new contracts involved colleges and universities, and 12 percent were made with hospitals and medical institutions. Both markets had built-in, perennial constituencies: students and sick people.

During its first decade, Servomation posted consistent annual sales and earnings gains. These gains were based primarily on acquisitions that opened expanding markets and a welcome industry-wide price boost in 1968. By the end of the decade the company had more than 190 operating centers and branches in 38 states, 118,400 vending machines, and 11,900 employees. The long-awaited price increase, from ten cents to 15 cents for beverages, came in 1968. The 50 percent increase was difficult to implement because of customer resistance and the overhaul of thousands of machines; but with sales of 6.2 billion cups of hot coffee and soft drinks (31 percent of vending machine sales) in 1967, Servomation welcomed the change.

By the early 1970s the company's reliance on sales to durable goods manufacturers made it particularly vulnerable. The company's earnings dropped in 1970 and 1971 when automobiles and other durable goods suffered sluggish sales. Layoffs and cutbacks in these industries directly affected Servomation's profits.

The company reacted by aggressively pursuing contracts in recreation and concession food service. By 1971 Servomation had major contracts with The Forum in Los Angeles, San Diego Stadium and Sports Arena, Del Mar Thoroughbred Club, Ontario Motor Speedway, and other recreational facilities. By 1973 hospital, school, and college business provided 21 percent of the company's sales.

Servomation also tried to move further into contract food service and away from vending. By 1973 vending constituted 63 percent of sales, a seven percent drop from the beginning of the decade, and a 36 percent drop from 1960. Servomation's services had broadened to encompass a wide variety of food-related services: full-service restaurants, fast-food restaurants, concession stands, cafeterias, and mobile catering trucks.

In 1973 the company also made an important change in its image by changing the names of all its operations, which had formerly kept the name they had when acquired, to Servomation Corporation. That year the company achieved the highest profits in its history, $11.2 million, or $2.07 per share. 1974's earnings fell from that high, due in part to rising food costs that were not immediately passed on to consumers.

By the end of the 1970s, Servomation's problems had mounted. The public company underwent an anti-trust investigation by the Federal Trade Commission late in 1974 and survived a takeover threat in 1977. By September 1978 the company merged with City Investing Co.'s GDV Inc. division, an acquisition of $188.7 million. Servomation's new parents were primarily concerned with real estate, construction, and financial services. The purchase brought the company into a new decade of leveraged buyouts and mounting debt.

In 1985 Allegheny Beverage Corp. purchased Servomation for $225 million and merged it with its Macke division. The new entity, renamed Service America Corporation, emerged as one of the United States' largest contract food service management and vending operations, with a value of $1.2 billion.

Allegheny Beverage borrowed heavily to finance the purchase of Servomation, but watched sales plummet over the next two years. Many observers blamed Allegheny's management style for Service America's poor performance, citing excessive price increases and several company-wide salary freezes, which led to lower employee morale and a high turnover rate. Per-unit sales dropped more than $200,000 between 1985 and 1987 because of lost accounts and decreased volume in existing accounts.

Led by Chief Executive Officer Carr Newcomer, a group of frustrated Service America senior managers teamed up with the New York investment banking firm of Morgan Lewis Githens and Ahn, Inc. (MLGH&A), and Merrill Lynch Interfunding to purchase Service America from Allegheny Beverage in 1987. The group of investors formed Servam Corp., a private firm, to facilitate the purchase process, which began in April. Allegheny Beverage became a motivated seller when its creditors demanded payment and threatened Chapter 11. When Servam's investors lowered the purchase price from $500 million to about $450 million, Allegheny Beverage's stockholders and managers had no choice but to accept the shrinking offer.

Newcomer led Service America until mid-1989, when Steven Leipsner became the company's CEO and president. Formerly head of Marriott Corp.'s Travel Plazas, Leipsner hoped to challenge Marriott, Canteen, and ARA Service for leadership of the contract food service industry. To do so, he first focused on using more brand-name items, expanding the full-service dining segment, and encouraging employee input at all levels.

Like his predecessors in the 1970s, Leipsner hoped to steer Service America away from an emphasis on vending, which still accounted for about 50 percent of the company's total revenue, toward full-service dining.

With an eye to changing that emphasis, Leipsner began in earnest to negotiate contracts for nationally-branded food items. Research showed that adding a popular retail name to an institutional menu meant sales increases of 100 percent when properly promoted. Service America made franchising agreements with Wendy's, Dunkin' Donuts, Little Caesars, and TCBY to use their products and brand names. It put Oscar Mayer hot dogs, Tyson chicken-breast sandwiches, and Hormel hamburgers in its vending machines, and hoped for sales increases of ten percent to 15 percent.

Since competition among the top four contract foodservice firms is high, Service America has also attempted to keep up with ever-changing customer demands. National dietary trends in the 1980s and 1990s, for example, prompted Service America to introduce its "Fitness Fare" menu, which featured low-sodium, low-fat, high-fiber, low-sugar, low-cholesterol, low-calorie, and decaffeinated items. Service America also began to feature ethnic foods, especially Italian and Chinese dishes, when research indicated increased consumer interest in those products.

The company also worked to make dining at many of its full-service, in-plant facilities more appealing through themed promotions with special menus, decorations, and music. Themes included Festa Italiano, Grecian Islands, Mardi Gras Rythms, and Nifty '50s.

In early 1990 Service America had won a major dining contract: a $13 million account with Ameritech, the parent company of AT&T's Midwest operations. The contract included feeding 65,000 people per day at 22 locations, the largest foodservice agreement in Service America's history. Other big accounts of the 1990s included the U.S. Supreme Court, the U.S. House of Representatives, several General Motors plants, NASA, Jack Murphy Stadium in San Diego, California, and New York's Jacob Javits Convention Center.

Despite many advances, Service America was unable to reverse financial trends that started during Allegheny Beverage's disastrous two-year reign. When Servam purchased Service America, it also took on debt related to Allegheny Beverage's leveraged buyout in 1987. The company was also hurt by nagging economic factors related to Service America's continuing dependance on contracts with durable goods manufacturers. A recession during the late 1980s and early 1990s caused many of the factories and businesses under contract with Service America to experience reduced employment levels and even closings. At 50 percent of annual sales, Service America's vending business, with its manufacturing sector contracts, felt particularly acute financial difficulties.

Many contractor companies also lowered or eliminated subsidies that had made eating at Service America's on-site cafeterias more attractive to employees. When Service America was forced to raise prices to compensate for lost subsidies, many customers ate elsewhere, further lowering revenues.

In October 1990 the company began a two-year struggle to restructure nearly $400 million in debt. The primary holder, with almost half the debt, was GE (General Electric) Capital Corp. Within a year, Service America had reached a deal with GE and other bondholders to trade approximately $100 million of the debt for equity in the company and reduce interest payments by about $20 million per year.

But just one year and a 1992 loss of $63 million later, Service America found itself in Federal Bankruptcy Court seeking protection from creditors owed a total of $312 million in long-term debt. In the course of the bankruptcy process, Service America filed for permanent debtor-in-possession financing that will permit it to continue operations while the debt reorganization proceeds. A reorganization plan submitted by Service America gives bondholders nearly 33 percent of the company in exchange for $50 million.

Steven Leipsner was named chairman, CEO, and president of Dallas Texas's S & A Restaurant Corp., and was replaced, after a brief transition period, by Robert Beeby (a member of the board). At the end of 1992, with Chapter 11 proceedings underway, Beeby assured "normal and uninterrupted" service in the immediate future.

Source: International Directory of Company Histories, Vol. 7. St. James Press, 1993.

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