P. F. Chang's China Bistro, Inc. History

Address:

5090 North 40th Street, Suite 160
Phoenix, Arizona 85018
U.S.A.

Telephone: (602) 957-8986
Fax: (602) 957-8998

Website: www.pfchangs.com

Public Company
Incorporated: 1996
Employees: 5,000
Sales: $153.3 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: PFCB
NAIC: 72211 Full Service Restaurants

Company Perspectives:

At P.F. Chang's China Bistro we offer a high level of service that is educated in the cuisine and accommodating to your every, unrealized need. Sauces are made tableside and servers make recommendations for selecting dishes that will balance your meal. The result of Paul Fleming's vision is a restaurant that has been embraced by the public as well as critics across the country. P.F. Chang's has received local market awards such as "Best New Restaurant" and "Best Chinese Restaurant," and has been nationally recognized as a Nation's Restaurant News' "Hot Concept Winner." Key Dates:

Key Dates:

1993:: Paul Fleming opens first P.F. Chang's China Bistro in Scottsdale, Arizona.
1995:: Fleming opens three new P.F. Chang's China Bistros in California.
1996:: Company incorporates and new management team is brought in, headed by Richard L. Federico; restaurant chain is named one of the year's "Hot Concepts" by Nation's Restaurant News but company records first net loss.
1998:: Company goes public and returns to profitability.
1999:: Chain increases to 29 restaurants by year's end.
2000:: Company plans to open its first Pei Wei's Asian Diner.

Company History:

P.F. Chang's China Bistro, Inc.'s 40-plus restaurant chain, operating in 19 states, owes much of its success to founder Paul Fleming's unique idea of pairing oriental cuisine with American-style service. At the outset, when he opened the first of the restaurants in Scottsdale, Arizona, Fleming broke with the traditional Chinese restaurant format. With his collaborator, chef Philip Chiang, he devised a comparatively limited menu that featured far fewer dishes than the menus of typical, full-service, Chinese restaurants. Incorporating an American steak house dining style and a formidable selection of wines and cheeses, P.F. Chang's offers such additional oriental restaurant anomalies as espresso and cappuccino. Although P.F. Chang's China Bistros are stylish in decor, displaying motifs from the Ming and T'ang Dynasties and hand-painted murals, the dishes are moderately priced, partly because one of Fleming's aims was to provide high quality but affordable Chinese food for "the masses." Fleming, who still owns about 12 percent of the chain, serves as a consultant, as does Chiang. The company is managed by an executive team headed by CEO and president Richard Federico, CFO and secretary Bert Vivian, and COO Greg Carey.

1993-95: The First Five P.F. Chang's China Bistros

Fleming, a native of Louisiana who had worked in the oil business, entered the restaurant business in the early 1980s when the global oil glut devastated the petroleum industry in the Gulf of Mexico and sent Louisiana into a deep recession. He managed to gather together enough funds to open a franchise of New Orleans-based Ruth's Chris Steak House in Beverly Hills, California. Fleming had immediate success in a tough business. Eventually, he would acquire the franchise rights for Ruth's Chris Steak Houses in California, Arizona, and Hawaii, and he would also purchase other restaurant franchises, including four Z'Tejas Grills and one Nola's Mexican Restaurant. But it was not until he opened P.F. Chang's China Bistro in Scottsdale, Arizona, in 1993 that he began his own, rather unique chain. As president of Fleming Chinese Restaurants Inc., he started up and managed the first four restaurants in the fledgling enterprise. Fleming claimed that his principal motivation was his fondness for Chinese food, which he wanted to make available to all comers at reasonable prices in a less intimidating format than that of most Chinese restaurants.

As Fleming himself noted, the new restaurant chain did not just spring up overnight. Three years went into conceptualizing and planning, and two more into convincing Philip Chiang, chef and owner of the Mandarin, a popular Beverly Hills restaurant, to serve as Fleming's principal collaborator. He needed Chiang's expertise because, although he loved oriental cuisine, he had no experience in the Chinese restaurant market. Chiang's major role was to help create the recipes for the base of about 60 dishes on the restaurant's menu. His name, less one letter, became the "Chang" of the restaurant's name.

The original restaurant quickly caught on. Although it took no reservations, it became a haunt for media and sports celebrities, who were soon helping to attract patrons willing to wait up to two and a half hours just to get seated. By 1995, the shopping mall restaurant, with just 6,000 square feet of space and 175 seats would be generating $4 million in sales, with about 70 percent coming from evening meals and 30 percent from lunches. During this time, Fleming had already decided to begin expanding the operation into a chain. He opted to test markets outside Arizona, first taking on the California market, where nouveau cuisine and novelty played well but competition for a market niche could be fierce. Fleming chose Newport Beach as the locale for his second P.F. Chang's China Bistro, which opened in 1994. The next year he opened two other California units, one at the Irvine Entertainment Center and the other in La Jolla.

Fleming knew that effective management and further planning for future growth would require more time than he could give to the tasks. Even in 1995, with the opening of the P.F. Chang's China Bistro in Newport Beach, he had begun thinking about new possibilities. At the time he owned 13 restaurants, located as far apart as Texas and Hawaii, with an array of ethnic cuisines. His solution to the problem of the company expansion was to hire a team of professional managers. Although he would retain a minority 12 percent ownership of the company, he decided he would step down and let P.F. Chang's China Bistro become a separate entity outside of his control. His future role would be that of consultant and advisor.

1996-2000: Rapid Expansion under New Management

Early in 1996, the company was incorporated as P.F. Chang's China Bistro, Inc., which acquired the four units making up the chain. Fleming found the man to head the new executive team, Richard L. Federico, who, in a partnership arrangement with Fleming, took on the presidency of P.F. Chang's. He joined the company after leaving his posts as president of Brinker International's Macaroni Grill 65-unit chain and president of BI's Italian concepts. Like Fleming, he came to the Chinese restaurant market with no experience in oriental foods. In fact, unlike Fleming, he had never really acquired a taste for it. He did bring managerial experience, however. He was a cofounder of the Grady's Goodtimes concept, which originated in Knoxville, Tennessee, and was bought by Brinker International in 1988. Joining Federico in major executive positions were Bert Vivian, who served as CFO, and Greg Carey, who took on the job of COO. Vivian, who signed on in April of 1996, also came to the company from Brinker International, where he had been vice-president of investor relations. Carey joined Federico and Vivian two years later, in 1998, coming over from his post as COO at Rainforest Café.

With venture capital provided by out-of-state backers, the company began accelerating its growth near the end of 1996, when it opened restaurants in Las Vegas, Houston, and Denver. The managers were testing new markets, moving into new locales after careful demographic analyses of their prospective customer pools. They wanted to avoid the fate of the China Coast, a chain of Darden Restaurants which tried to expand too rapidly and failed. In fact, P.F. Chang's had some early growth pains, logging a net loss of $1.7 million in 1997 with revenues of $39.8 million. In part to pay down its $11.6 million debt to $2.6 million and finance the chain's growth, the company decided to go public.

The company made its IPO in December of 1998. By that time, its fiscal picture had improved; its revenue of $32.9 million for the first six months of fiscal 1998 was almost double its sales of the same period in the previous year. Moreover, to the surprise of many analysts, the company's stock fared extremely well. It grossed $49.8 million for the company when it almost immediately climbed from $12 to $18.50 per share, producing an unexpected windfall encouraging further expansion.

Of course, the chain had already been growing. It had begun a major eastward expansion in 1997, with openings in New Orleans; Dade County, Florida; Charlotte, North Carolina; and McLean, Virginia. It had also opened its second Arizona restaurant in Tempe. By the summer of 1998, when it announced plans to make its IPO later in the year, it had grown to 15 units. In that year, P.F. Chang's also emerged from the red, though barely. Its sales surged to $78.0 million, up from $39.8 million in 1997, but its debt obligations held its net profit down around $100,000.

The 1998 stock windfall allowed the company to begin accelerating its growth as well as pay down its debt. Plans called for adding an additional 21 new restaurants by the close of 1999, bringing its total to 36 units, and an additional 15 openings in 2000. They also called for new, untapped market incursions, in, for example, large metropolitan areas like New York, Washington, D.C., Chicago, and Atlanta.

The company stayed on target for the most part. Although in 1999 it actually put just 13 new units into operation, by July of 2000 it was running 39 restaurants, with a geographical spread over 30 states, and was still planning to reach a goal of 54 units by the end of the first quarter in 2001. All added restaurants, as in the past, would be company owned. With systemwide sales of $153 million in 1999, or an average unit sale of $5.15 million, prospects for realizing company goals for 2000 looked good. One problem did loom on the horizon, at least for the company's very successful restaurant in Santa Monica, California, where a public ordinance setting a minimum hourly wage of $10.69 was about to go into effect. Such an ordinance would force the restaurant to double the pay of some its staff, which would either cut deeply into its profits or, alternatively, force it to raise its prices or downsize its staff. "Living wage" ordinances, already in place in some 41 U.S. cities, were likely to spread, hitting the restaurant industry hard since it has a history of running on low wages. If P.F. Chang's China Bistro were to up its prices to counteract increased labor costs, it would certainly erode its "oriental-food-for-the-masses" customer base to which founder Fleming hoped to make his appeal.

Perhaps addressing that problem had something to do with the company's decision to develop a new concept--a casual, quick-service variation on its base restaurant, known as Pei Wei's Asian Diner, the first of which was scheduled for opening in late 2000, at Chandler, in the company's home state, Arizona. At a start-up cost of about $500,000, Pei Wei's would involve a much smaller investment than its China Bistro counterpart. Although it would include sit-down service, it would also appeal to take-out customers. Most importantly, its menu, though featuring some of the same dishes as its bigger brother, would scale down both their prices and their portions.

Principal Competitors: Advantica Restaurant Group, Inc.; Benihana, Inc.; Darden Restaurants, Inc.; Carlson Restaurants Worldwide Inc.; Panda Management Company, Inc.

P. F. Chang's China Bistro, Inc. History

Company Perspectives:

Key Dates:

Company History:

Further Reading: