Fresh Choice, Inc. History

Address:

2901 Tasman Drive, Suite 109
Santa Clara, California 95054-1169
U.S.A.

Telephone: (408) 986-8661
Fax: (408) 986-8334

Public Company
Incorporated: 1986 as Gourmet California, Inc.
Employees: 2,200
Sales: $76.7 million (1996)
Stock Exchanges: NASDAQ
SICs: 5812 Eating Places

Company Perspectives:

Fresh Choice's goal is to create a distinct dining experience that combines the selection, quality, and ambiance of full-service, casual restaurants with the convenience and low-price appeal of traditional buffet restaurants.

Company History:

Now entering its second decade, California-based Fresh Choice, Inc. is a chain of comfortable but casual self-service restaurants which offer a selection of food stations and serve freshly prepared Sizzlin' Pan Pastas, soups, and baked goods along with a signature salad bar containing more than 40 make-your-own-salad ingredients. The Fresh Choice all-you-can-eat buffet includes over 50 recipes, including salads, soups, pasta dishes, and muffins, as well as a fresh fruit and specialty dessert area. Fresh Choice aims for tasty and satisfying--yet healthy--food choices, as an economical way to get the five to nine daily servings of fruit and vegetables recommended by the U.S. Department of Agriculture. Fresh produce is delivered four times a week, all foods are prepared from scratch each day, and many menu items are prepared in exhibition cooking areas, stressing the emphasis on freshness. In 1997, Fresh Choice operated and owned 48 restaurants in three states, with a concentration in northern California and other sites in Washington and Texas. At most Fresh Choice restaurants, lunch costs $5.99 and dinner is $7.49 per person for an all-you-can-eat buffet, not including beverages. The company's target market includes families, business professionals, students, and senior citizens, and it depends on a high rate of repeat business. The company also makes its food available for take out, catering, and retail.

Beginnings in Sunnyvale

With no experience in the restaurant business beyond dishwashing, Martin Culver and Brad Wells purchased a failing restaurant in Sunnyvale, California, in 1986. The first two years of operation were a learning period for Culver and Wells, who named their new restaurant Gourmet California. In 1988, they began an expansion program, merging with Moffett Partners, Inc., adding a second location in Sunnyvale, California, and renaming the restaurant Fresh Choice. Guiding its geographic decisions for new restaurant openings, Fresh Choice employed a plan of clustering restaurants in areas with highly educated and nutrition-minded residents. Education demographics were of primary importance in site selection, for Fresh Choice's staff believed that educated customers paid more attention to personal health. Income and population density are two other factors which come into play. The philosophy of clustering restaurants allows each market area to take advantage of operating and advertising grouping, as well as brand-name recognition and the discouragement of competition. This philosophy resulted in the opening of new restaurants in California in 1989.

In addition to clustered openings, Fresh Choice invested about 1.8 percent of sales on marketing, most notably, humorous radio commercials. Customer loyalty in its home communities was also generated through community service efforts, including fundraisers for local schools, employee volunteerism, donation of food, and sponsorship of local sports teams. School fund raisers served as new store promotions, whereby students sold dinner tickets to pre-opening parties for Fresh Choice restaurants to raise $2,000 to $3,000 for their school. Volume discounts were achieved through dependence on one national supplier for all non-produce business, and produce costs were kept low by contracting with growers for a full year.

Sales in 1990 were $15.1 million, with net income of $500,000. Expansion continued, with new California restaurant openings. The following year, revenues increased to $23.6 million, and net income jumped accordingly to $800,000. Continuing to look to the health-conscious California consumer, Fresh Choice introduced a line of foods called Healthier Choice in 1991, featuring no fat or cholesterol content.

Public Offering in 1992

In December 1992, the company went public with 22 restaurants. Its initial offering was underwritten by Montgomery Securities and Alex. Brown & Sons Inc., with 1,112,500 shares of stock and net offering proceeds of $12.7 million. Shares were priced at 13 when the company went public, and they surged to 24 quickly, astonishing the analysts. Sales for that fiscal year were $37.1 million, a 57 percent increase over the previous year. Net income also rose to $1.4 million. Stock prices that year closed at 22. Overall, the company now employed slightly over 1,000 people. In 1993, expansion continued to drive sales, with revenues rising to $53.6 million and net income surging to almost three times the previous year's achievements at $3.1 million. The company sold 850,000 shares at $25 per share, with net proceeds of $19.6 million.

Expansion began in new markets, with 14 restaurant openings in southern California, Texas, and Seattle, Washington, in 1993. The company now operated a total of 36 restaurants, and had a track record of generating profits at new restaurant sites after only 30 days. Specifically, that profit comprised about $330,000 annually at each site, on just under $2 million in sales. An exception to this rule were two restaurants opened in Fresno, California.

The Dallas, Texas site--the first inland restaurant--was opened in that city's Restaurant Row. Psychographic research, purchased from PepsiCo, indicated that Dallas would be an ideal location for Fresh Choice. The company was optimistic about the Dallas opening, since the area displayed lower taxes and housing prices than the San Francisco Bay Area. Menu changes were implemented to appeal to the Texas market, including hotter chilis and rice dishes and a baked potato and steamed vegetable stand. However, the company's executives held their breath, admitting publicly that they had never faced as much competition as that presented by the other stores on Restaurant Row.

Entry into East Coast Market

In 1994, the company opened 15 restaurants to bring its grand total to 43 sites, including its first East Coast breakthrough in Washington, D.C. The Washington, D.C., store was considered to be a vital entry to the East Coast market, with Fresh Choice looking for an area where it might quickly cluster 20 to 25 restaurants. Sales for that year increased to $77 million, but net income remained just slightly above the previous year's figure, at $3.2 million. Fresh Choice was named one of the 100 Best-Performing Companies in America by the Los Angeles Times. Since going public, Fresh Choice had been a favored Wall Street pick and a seemingly unstoppable chain. However, at the end of 1994, Fresh Choice said goodbye to the smooth sailing expansion that characterized its first eight years of existence.

Early in 1995, Fresh Choice announced a plan to open 8 new restaurants, and seven were in fact opened. Revenue that year continued to increase, reaching $84.3 million, but for the first time, the company incurred a loss. In the second half of 1994, profitability had begun a steady decline, and a 1995 $27.8 million deficit was recorded in the net income category. Stock price had declined sharply, from $32.50 to $19.87, along with earnings per share, and the company's chief financial officer Sam Petersen left ship. After a brief interlude, a new CFO from outside the company, David Anderson, was hired in 1994. Anderson, former executive vice president and CFO of Pacific Western Bancshares, Inc., was teamed up with Carol Nolan, who had been promoted from director of finance to CFO when Sam Petersen left the position. Nolan was reassigned to the new position of vice president of finance.

Increasing competition, as well as the cannibalization of its existing restaurants, partially drove the loss. The company's key competitors are family restaurants and all-you-can-eat chains, including Bertucci's, General Mills, Hometown Buffet, Sizzler, and Soup and Salad. Many of these competitors have been in business longer than Fresh Choice, therefore possessing a larger market presence and more resources. Other problems included declining same-store sales (especially at lunch), the perception that the restaurant did not offer a value, and patron dissatisfaction with lines. In addition, costs outside California were a quarter to a half percent higher, due to the expense of shipping California produce. California restaurants were also hurt by the economy and the rains.

A further problem was pricing; in 1993, Fresh Choice had tried raising its dinner price from $6.99 to $7.25 with disastrous results. It seems that customers were not willing to pay over $7 for a meal without a "real" entree. The restaurants rolled back their prices to regain a following. In 1995, the company returned to a dual price structure, which it had used until 1990. Under dual pricing, customers pay $4.95 (lunch) to select salad, bakery, and dessert items; and $5.95 (lunch) for soup or pasta with baked goods. A third, combo price was offered for unlimited access to all choices. Entrees began to feature more meat, nuts, and cheeses, including gourmet pizzas and hearth-style breads stuffed with herbs, walnuts, and vegetables.

A major change implemented in 1994 was the introduction of scatter bars, allowing customers to select their items from several locations around the restaurant, eliminating bottlenecks, long lines, and the unpleasantness associated with waiting. Other methods instituted to bring the company back to its previous Wall Street status included the addition of a server to the operation, as well as baked potatoes and more filled pastas on the menu. By changing building materials, the company also cut its per unit investment by 10 percent.

Lynch In, Culver Out: 1995

Fresh Choice had been criticized by Wall Street analysts for its lack of seasoned executives appointed from outside the company, and in March 1995 the company brought in Charles Lynch, former Saga Corp. and Greyhound Corp. chairman, as chairman of the board. Lynch succeeded cofounder Martin Culver, who was to remain as president and CEO of the company, which now comprised 53 restaurants. Investor Richard Rainwater of Texas acquired 9 percent of the company's stock, telling the San Francisco Chronicle that he believed the company could be turned around. Two months later, Culver severed all professional ties with the company he had cofounded, stating publicly that it was time for a managerial change. Culver remained Fresh Choice's largest shareholder. One day later, marketing director Steve Pieters, a longtime associate of Culver's, followed suit and left the company. Charles Lynch was given the additional title of chief executive. Stock prices rose by a cumulative 20.8 percent, to $11.63, in the two days after Culver's announcement.

Lynch's first action was to disclose the $1.3 million shortfall incurred during the first quarter of 1995. Immediately, he pulled the reins in on expansion, and ordered a review of the 55 restaurants in operation. Lynch publicly addressed the confusion caused by price increases and rapidly rotating menu items in restaurant operations, and turned efforts toward major regrouping. However, in October, Fresh Choice stock was trading at between $6.50 and $7.50--down from the previous year's high of $20.25--and average unit volumes had fallen from $1.99 million in 1994 to a projected 1995 figure of $1.55 million. Lynch responded by bringing previously subcontracted janitorial services in-house, reducing the frequency of food rotation, and cutting corporate staff by 30 percent. He began work on a new restaurant prototype with lower development costs. The company's takeout business was also expanded in order to achieve better profits. Advertising costs were raised from 2.5 percent of sales to 3 percent. Finally, Lynch launched initiatives to endow general managers with entrepreneurial interests, tying bonuses to the bottom line more than they had been in the past.

Significantly, leadership continued to turn over amid these financial struggles. In December 1995, Fresh Choice hired former Bennigan's leader Robert Ferngren as president and chief executive, essentially filling the position vacated by Culver. In addition to serving as president of Bennigan's, Ferngren had worked at America's Clubhouse Grill, a folded chain. A new vice president of marketing, Tim O'Shea, was also hired. A 1995 net loss of $27.8 million was realized on $84.28 million in sales (a 9.5 percent revenue increase over the previous year).

The company continued to struggle in 1996, with steady operating losses between the end of 1994 and the first quarter of 1996. A profit was achieved in the second and third quarters of 1996, but the fourth quarter returned to loss status. Fiscal 1996 net sales decreased to $76.7 million, and the net loss was just under $2 million.

In a major restructuring with the goal of returning to profitability, Fresh Choice had spent $23.9 million on closing 11 restaurants and partially writing down assets to estimated fair value in some remaining stores. Business was ended in the Washington, D.C., area, through the sale of restaurants in Maryland and Virginia to Fresh Fare Enterprises, with an agreement not to compete in the Baltimore and Washington, D.C., area for four years. At the end of 1996, Fresh Choice operated 48 restaurants, down from 55 the year before. Menu expansion took place in the form of Sizzlin' Pan Pasta, a line of pan-sauteed pasta recipes prepared continually through the day. Only one new restaurant was opened in 1996--a prototype located in Roseville, California, which cost the company $763,000 in cash, a considerable savings over the previous costs of over $1 million. The Roseville store featured a warmer, more inviting decor and a more efficient layout. Menu changes included new items such as Madras chicken salad, reggae chicken salad, and smokehouse cheddar soup, and new uniforms with fruit and vegetable graphics were implemented, along with the expansion of beverage offerings to include espresso and fruit smoothie stations. Comparable store sales decreased 5.9 percent, leading the company to focus, once again, on rebuilding the bottom line.

Amidst Struggles, Company Prepares for the Future

A plan for profitability, implemented in 1997, included the reduction of general and administrative costs by store closings and efficiency measures, a private offering with Crescent Real Estate Equities Limited Partnership of Dallas with net proceeds of approximately $5.2 million, new menu items, the incorporation of design concepts from the new Roseville location in five remodeled stores, the redesigning of training programs to enhance customer service and satisfaction, and the strengthening of the company's management and board of directors. Significantly, a new president and CEO, Everett Jefferson, and a new CFO, David Pertl, were brought on board to lead the new campaign. Robert Ferngren had resigned to become vice president of Rare Hospitality, Inc. in Atlanta, after only a little more than a year in office. Jefferson was previously chairman of Cucina Holdings, Inc., the Sacramento-based operator of Java City coffee-roasting company and 40 cafes. Jefferson announced plans to examine new options for the company, including: the return of the frequent-diner punch card; positioning of cash registers at the end of the line to eliminate the perception of long waits; the addition of protein items such as rotisserie chicken as an "add-on" selection at an additional price; and an increase in advertising expenses.

In addition to these measures, the company began to thoroughly examine other opportunities for building business, including a marketing campaign aimed at converting first-time customers into repeat diners, new openings and acquisitions in California and Texas, take-out business, catering, morning meals, and the addition of more protein to the menu (in response to results of customer surveys). The aggressive marketing campaign included an advertising blitz with the company's first television commercials.

In April 1997, the company purchased three Zoopa restaurants in the Puget Sound area of Washington state, which it would operate under the Zoopa name. Charles Lynch announced that the purchase would broaden Fresh Choice's market position, as the first step in the current return to growth strategy.

The Zoopa purchase was another step forward, but the question remained whether Fresh Choice would ever regain the profitable status it realized prior to its overambitious expansion. Problems over the years included the fluctuation of stock prices (ranging from a high of $32 to a 1997 level of $3), the departure of key senior staff, susceptibility to adverse economic conditions in the San Francisco Bay Area, and the lower level of response to healthy eating options outside the state of California. The company, it seems, will only return to long-term profitability with the implementation of a thoroughly researched long-term plan by a committed senior staff who will ride the ship through the storm.

Fresh Choice, Inc. History

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