Shoney's, Inc. History

Address:

1727 Elm Hill Pike
Nashville, Tennessee 37120
U.S.A.

Telephone: (615) 391-5201
Fax: (615) 231-2621

Public Company
Incorporated: 1968
Employees: 38,000
Sales: $1.2 billion (1997)
Stock Exchanges: New York
SICs: 5812 Eating Places; 6794 Patent Owners and Lessors

Company Perspectives:

Shoney's vision is to create exceptional customer price/value through unique and competitive points of difference targeting outstanding food and hospitality in a clean, safe, fun and exciting atmosphere. Shoney's mission is to make every customer a regular guest.

Company History:

Headquartered in Nashville, Tennessee, Shoney's, Inc., is one of the restaurant industry's most respected companies. As of 1998 the restaurant chain operated or franchised over 1,300 restaurants in 34 states, including Shoney's, Captain D's, and the Pargo's and Fifth Quarter specialty restaurants. The company owned 893 restaurants and franchised 494 others.

Early Expansion

The company originated with a drive-in restaurant called "Parkette" in Charleston, West Virginia. Alex Shoenbaum opened the restaurant in 1947, then acquired a Big Boy franchise in 1951. Two years later, Shoenbaum renamed the Parkette "Shoney's Big Boy." During this time, Ray Danner was building a restaurant business in central Tennessee and opened his first Big Boy franchise in 1959 in Madison, Tennessee. He incorporated his privately owned company in 1968 as Danner Foods, Inc. One year later Danner Foods became a publicly traded company.

During its affiliation with the Marriott Corporation, the parent company of Big Boy restaurants, Shoney's restaurants doubled in size every four years. Based on a chain of family-style coffee houses along the busy highways of the Southeast, Shoney's restaurants featured a friendly, uniformed waitstaff that served from a "homestyle" menu adapted to the region.

"Danner's Way" Established

In 1972 the company dropped "Big Boy Enterprises" from its name, and Ray Danner assumed the role of chairperson and chief executive officer, while Alex Shoenbaum became a senior chairperson. Danner took an active role in Shoney's management, building the company on a foundation of hands-on, operations-oriented management. His unique style became part of the corporate culture, and his managers became "Shoneyized" or imbued with respect for efficiency and a sense of responsibility.

"Danner's Way," as it came to be known, promoted simplicity, customer satisfaction, constant striving for perfection, and management by example. His management team worked in shirtsleeves in order to be prepared to pitch in whenever and wherever necessary. Danner himself monitored everything from corporate staff practices to food service through the use of "mystery shoppers" dispatched periodically to each unit. He was also known to visit restaurants in person and to clean restrooms that did not meet his standards during his spot checks. His willingness to roll up his sleeves both proved his point and embarrassed the responsible individual, who cleaned alongside him.

Although employee standards at Shoney's were uncompromising, the rewards were enticing. The company instituted a program in which the best hourly workers could be awarded college scholarships that would help pave the road to middle and upper management positions within the company. In exchange, trainees would work nights and weekends and take college courses recommended by Shoney's. The company provided students with plenty of opportunities for advancement, maintaining five to seven manager positions for each restaurant, area manager positions for every three to four restaurants, and divisional director positions supervising ten to 20 restaurants. Furthermore, Shoney's recruited more than half of its managers internally. According to many observers, Danner's management style was the basis of Shoney's strong profits and steady growth.

New Chains in the 1970s

Opportunities in the company were not limited to work in family-style restaurants. Danner had, in 1969, begun to market a new fast-food concept featuring batter-dipped fish and related food products for sale in a chain of Mr. D's Seafood restaurants. By 1975, when the chain's name was changed to Captain D's, over 250 units were in operation. By 1980 there were more Captain D's than Shoney's, and by 1985 the seafood chain's sales constituted 30 percent of the company's total. Captain D's has consistently outproduced its competitors, including its primary rival, Long John Silver.

After discovering that its family restaurants located near motels earned over 30 percent more than stand-alone shops, Shoney's established Shoney's Inns, a lodging division which it paired with specialty restaurants called Fifth Quarter Steakhouses. The two enterprises complemented each other, and were managed separately. Within ten years the chain of inns had grown to 21, but two nagging problems with the venture had developed. First, the hotels did not return the high, quick profits of the food service operations, and second, the vastly different management requirements clashed with Shoney's (and Danner's) distinctive style. The chain was eventually sold to Gulf Coast Development, Inc. in 1991.

The Fifth Quarter concept has fared better as a growth vehicle for Shoney's. In a departure from the "family" concept, the dinner houses feature prime rib and alcoholic drinks on their menu. Despite its small size, providing less than four percent of company revenues, the Fifth Quarter chain has grown at a consistent 20 percent annually and is represented in five Southeast and Midwest states.

By the end of the 1970s Shoney's began to feel the constraints of a franchising agreement that limited its growth to an 11-state territory. In 1979 the company began to phase "Big Boy" marketing elements from its image. This was Shoney's first step toward severing its 25-year tie to Marriott Corporation. Shoney's forced the break when it built a restaurant in another Marriott franchisee's territory. Although the new restaurant eliminated all vestiges of Big Boy from its signs and menus, the other franchisee sued, thereby starting the breakup process, which was accomplished in 1984.

Shoney's was able to capitalize on its increasingly identifiable name and shift its menu and image toward a healthier concept as a result of the breakup. Disenfranchisement has enabled the company to distance itself from the "Big Boy" character's physical image and remove the signature double-decker hamburger from its menu. Since the "divorce," Shoney's has expanded its family restaurants' territory to 29 states coast-to-coast.

Continued Expansion in the 1980s

In 1981 Danner stepped aside to make David K. Wachtel the chief executive officer of Shoney's, while he remained on the board of directors. Wachtel, a product of the Shoney's management training program, had started with the company at age 16 as a dishwasher in Nashville, Tennessee, and had moved steadily through the ranks of busboy and cook to become the manager of the first Captain D's in 1969 at age 28. Wachtel immediately began to make changes in the Shoney's equation. He ended the company's 14-year franchise relationship with Heublein's Kentucky Fried Chicken for the same reason that Danner broke away from Marriott Big Boy: territorial limitations that set boundaries on growth.

Soon thereafter Wachtel bought Famous Recipe, a struggling Midwestern chicken chain. The Famous Recipe chain consisted of 225 stores founded by Lee Cummings, a nephew of Colonel Harland Sanders of Kentucky Fried Chicken fame. Shoney's worked to hone the Famous Recipe concept over the next few years by dropping unprofitable or mismanaged franchises, adopting a uniform "farmhouse" design, and diversifying the chain's menu. Management also gave the chain a more personal image by adding "Lee's" to the name and employing Cummings as concept spokesperson. By 1985 Lee's Famous Recipe had been "Shoneyized"; its sales rose 103 percent, and the chain spanned 23 states.

During this time Wachtel also introduced a restaurant innovation that revitalized Shoney's morning sales reports. The "all-you-can-eat" breakfast bar, brought on in 1981, reversed a ten-year decline in morning sales. By the end of the decade the breakfast bar boosted morning sales at company-owned restaurants to 25 percent of total sales.

Despite accelerated morning sales and a $3.4 million net profit made in selling Heublein and acquiring Famous Recipe, Danner and other board members and managers felt that Wachtel was expanding the company too quickly, and he resigned the position of chief executive officer after occupying it for less than one year. Danner then resumed the position of chief executive officer and spent the next seven years struggling to find a successor who would carry on his management ideals.

In 1986 he made J. Mitchel Boyd, a longtime franchisee and an originator of "Pargo's" specialty restaurants, chief executive officer and vice-chair. Boyd, his wife, Betty, and Gerry A. Brunetts had founded Pargo's, a restaurant in Manasses, Virginia, that featured such light fare as appetizers, pasta, salads, and sandwiches, and was expanded to include nine restaurants in Tennessee and Virginia. This restaurant was made a part of Shoney's specialty group when Boyd assumed his role as vice-chair at Shoney's.

In 1988 Danner engineered a $728 million recapitalization that paid shareholders a $16 per share cash dividend and paid Danner, who owned 19 percent of the stock at the time, $111 million in cash. The recapitalization was a clear sign that Danner was ready to hand Shoney's over to new management, and in 1989 he gave Boyd the chair.

It only took six months for Boyd's emphases on marketing and experimentation with menus and overall company image to clash with Danner's obsession with the day-to-day operations of the company. As with Wachtel, financial success did not earn Boyd any points. Leonard H. Roberts succeeded Boyd in December 1989 and has served as Shoney's chief executive officer and chairperson since that time. Roberts, known as something of a maverick in the restaurant industry, engineered Arby's Inc.'s five-year turnaround in the 1980s. However, when his relationship with Arby's Victor Posner became strained over franchisee relations, Roberts accepted the chair at Shoney's. Roberts attempted to capitalize on Shoney's organizational and management strengths, while also developing its marketing and research and development.

Roberts faced a very different task at Shoney's than the Arby's situation had demanded: he was expected to continue the financial and organizational success for which the company was known before the recapitalization. Shoney's had never had an unprofitable quarter and had in the mid-1980s been named "best managed restaurant company" in the United States by the Wall Street Transcript. At the same time, Roberts hoped to continue the territorial expansion that Danner and others had begun after the 1984 break from Big Boy. From 1984 to 1989, Shoney's had moved into Ohio and Florida, then Kentucky, Indiana, Texas, New Mexico, Oklahoma, and Maryland/Washington D.C., but the 1989 recapitalization hindered Shoney's ability to invest in expansion from within.

The 1989 Racial Discrimination Suit

Roberts faced another challenge early in his career at Shoney's. In 1989 the Legal Defense and Education fund of the National Association for the Advancement of Colored People (NAACP) brought a discrimination suit against the company. The suit, which originated in Florida, charged that Shoney's systematically discriminated against African Americans by limiting employment opportunities and job selection, creating what it termed "a hostile, racist work environment."

Shoney's signed an agreement with the Southern Christian Leadership Council (SCLC) in 1989 to invest over $90 million in minority business development, community service, and other socially responsible areas. The following year Shoney's launched an affirmative action strategy called "Workforce 2000." The program mandates equitable representation of minorities and women in Shoney's ranks. The company is using some programs that were already in place, like the scholarship program, and has added recruitment programs at 48 historically black colleges and universities to enhance its affirmative action efforts.

Although the NAACP case was not settled until late 1992, and the charges of racism still haunted the company's image in the early 1990s, its efforts had met with some quantifiable success by that time: minorities represented 30 percent of Shoney's employees. Shoney's encouragement of entrepreneurship among minority businesspeople through its Minority Franchise Development Program had increased the number of minority franchisees from two to 11 and the number of units owned and operated by minority franchisees from two to 14. The company's Minority Purchasing Program uses minority suppliers for everything from children's menus to food processing; from 1989 to 1992 annual purchasing from minority suppliers has increased from under $2 million to nearly $14 million.

Shoney's has also sought to polish its corporate image through philanthropic and community relations efforts. These include sponsorship of the Bootstrap Scholarship Awards, which honors Middle Tennessee high school seniors who have achieved academic success despite serious obstacles; support of the Southern Christian Leadership Conference; and support of the Tennessee Minority Purchasing Council's Business Opportunity Fair.

Roberts began to focus on franchising, a skill he honed while managing Arby's, and his primary goals are to add 500 franchises to Shoney's roster by the end of the 1990s and to "dominate the family segment." The company added 48 franchisees in fiscal 1991, and would have to increase that per-year figure in order to reach its goal by the turn-of-the century. One franchising deal with Thompson Hospitality L.P., one of the largest minority-run food service operators in the country, has helped Shoney's further penetrate metropolitan Washington, D.C., and keep its agreement with the SCLC. Shoney's financed the $17 million deal to convert 31 former Marriott Big Boy restaurants into Shoney's by the mid-1990s.

To that end, Roberts tripled the size of the company's research and development staff and made that department part of marketing rather than operations. One of research and development's primary concerns was menu development, a high priority on Roberts's list.

In the early 1990s the wisdom of the 1988 recapitalization became manifest. Shoney's stock nearly tripled from 1989 to 1991 and the company's value grew accordingly, from $273 million to $809 million. Additionally, the company made extraordinary progress on debt retirement, having exceeded its scheduled payments by $155 million and reduced the debt's maturity by 3.5 years. Declining interest rates have not hurt the company, either; interest on debt dropped from a peak of 12.5 percent to nine percent.

A primary financial objective for the 1990s is a 20 percent annual increase in earnings, which will increase cash flow and enable Shoney's to retire more of its debt. As the debt is diminished, the company will free up more capital to invest in company stores, research and development, and expand its specialty chain. In order to achieve that goal, Shoney's instituted Project 80/85, a plan to increase customer satisfaction by setting goals of 80 percent customer satisfaction in 1992 and 85 percent in 1993.

In early November 1992, Shoney's, Inc. received provisional approval of a settlement in the discrimination lawsuit filed by the NAACP in 1989. The settlement addressed possible monetary damages for applicants and employees of the company restaurant entities and corporate office between February of 1985 and November 3, 1992. It was estimated that between 20,000 and 40,000 current employees, former workers, and applicants would share in the settlement. Under the settlement, Shoney's made $105 million available to pay potential claims. The company also agreed to pay $26 million of plaintiff legal expenses and $4 million in various related costs. The settlement resulted in a special charge of $77.2 million against earnings for the fourth quarter and fiscal year of 1992. The company expected that substantially all of the funds would be paid over a five-year period. The lawsuit appeared to have little impact on Shoney's stock. In fact, the company's stock price rose in the days following the announcement of the settlement.

Danner's reputation suffered in the wake of the settlement, however. A defendant in the suit, Danner was accused of encouraging racial bias at Shoney's. The company's burden in the settlement was eased when Danner contributed 83 percent of the settlement by putting up some of his Shoney's stock. In March 1993 the company paid $110 for the remainder of Danner's stock. At the same time Shoney's announced that Danner would not stand for reelection to the company's board. Other than the legacy of his substantial contributions to the company's growth, Danner's connection to the company was ended.

Continued Management Turmoil in the 1990s

In December of 1992 Len Roberts resigned as chief executive officer and chairman of Shoney's, Inc. Taylor Henry, Jr., an 18-year Shoney's veteran who played a significant role in 1988's recapitalization plan, succeeded Roberts in both positions.

Shoney's moved towards decentralization of its franchising efforts, including Project 500, leaving franchising to the individual restaurant chains. A strong cash flow helped ease the company's debt burden in 1993. By May, Shoney's total debt had been decreased by $250 million, to $518 million. The company also directed some of its cash to its remodeling budget. Set at $6.6 million in 1992, Shoney's remodeling budget was more than doubled to $15 million for both 1993 and 1994. The company hoped the investment would pay off: in the past, same-store sales grew more quickly for its remodeled restaurants.

Sales fell in the mid-1990s, and the company responded with yet another change in management in early 1995. President and CEO Henry resigned, to be replaced with turnaround specialist Stephen Lynn. Several other top managers also left at that time. The company also sold its private label food division, Mike Rose Foods, and Lee's Famous Recipe Chicken.

Some of the funds for that sale went toward purchasing Shoney's largest franchisee, TPI Restaurants, in 1996. The acquisition brought an additional 176 Shoney's Restaurants and 67 Captain D's into the company fold. The same year, Shoney's signed Andy Griffith as a spokesperson for the company.

The acquisition of TPI restaurants boosted fiscal 1997 revenues to $1.2 billion, up 12 percent from 1996. However, several factors led to a net loss for the year of $35.7 million. Shoney's closed 75 underperforming units in 1997 and took an asset impairment charge of $54 million because of underperforming restaurant properties. In addition, expenses from a proxy contest came to $5.3 million.

The proxy battle was initiated in 1997 by shareholders disappointed with the company's financial performance. To help resolve the fight, Shoney's added three new directors to the board in August. One of these, J. Michael Bodnar, replaced Lynn as CEO in November 1997. The management shakeup included W. Craig Barber, who resigned as senior executive vice-president and chief financial officer. As the company's sixth CEO in a little over 10 years, Bodnar faced the daunting task of providing Shoney's with the leadership it wanted and clearly needed.

Principal Divisions:Shoney's Restaurants; Captain D's; Casual Dining group.

Shoney's, Inc. History

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