Mexican Fast-Casual Chains Revamp Offerings As Parents Mull Spinoffs

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Vol. 40, No. 29 PUBLISHED EACH MONDAY • A LEBHAR-FRIEDMAN® PUBLICATION • $5/ISSUE JULY 17, 2006 Rank Group PLC Corporate eyes potential spinoff of Hard boards get Rock Cafe brand makeovers in LONDON — The iconic Hard Rock post-SOX era Cafe brand, whose high-grossing blend of edible Americana, By Sarah E. Lockyer museum-grade rock-’n’-roll arti- facts and branded merchandise Faced with increasing pressure helped inspire a generation of from regulators, stock exchanges “eatertainment” rivals, may be and shareholders, put up for sale by its British par- today’s corporate ent, the Rank Group PLC. boards — includ- Analysts responding to that ing those in food- July 4 disclosure by London-based service — require Rank have speculated that the 123 a new breed of Hard Rock Cafes and six Hard director more Rock Hotels and Casinos in more La Salsa Fresh Mexican Grill aims to re-emphasize its taqueria roots at new fast-casual units that will boast full savvy,committed and impervious than 40 countries could fetch up to bars with tequila margaritas and other cocktails. The new design seeks to spur growth for the 100-unit chain. than directors of yore. $1 billion from private-equity With the days of the rubber firms or other strategic buyers. stamp banished with the passage In disclosing the potential of the Sarbanes-Oxley Act in spinoff, Rank said it had hired 2002, the role of director has (See POTENTIAL, page 6) Mexican fast-casual chains revamp changed dramatically during the past four years. Where once board members may have been able to turn a blind eye to corpo- offerings as parents mull spinoffs rate malfeasance or abstain from hard questioning to uncover sus- Chipotle IPO inspires growth plans at El Pollo Loco, Qdoba, La Salsa pect activities, today’s directors By Lisa Jennings are more aware of the businesses they’ve been tapped to oversee, The success of this year’s initial However, some outfits that equity stake to the public as the possess more expertise in specif- stock offering by Chipotle once hoped for market conquests chicken chain plots multiregional ic areas and are less likely to Mexican Grill has inspired other are looking at bleaker prospects growth. have questionable conflicts of big players in the hot Mexican because of prolonged sales woes But Dublin, Ohio-based (See NEW, page 23) fast-casual segment to examine or internal problems at their par- Wendy’s International, which has similar moves, including one ent companies. indicated that its troubled Baja Analysts say a spinoff of the 123 stalwart brand that plans to add Among the more upbeat con- Fresh Mexican Grill chain may Hard Rock Cafes and six Hard Rock counter-service cocktails to its tenders, Irvine, Calif.-based El be spun off at some point, will Hotels could fetch up to $1 billion. growth formula. Pollo Loco is planning to offer an (See MEXICAN, page 6) Hardee’s expands Red Burrito co-branding push Clones of sister chain Carl’s Jr.’s dual-brand partner, Green Burrito, grow via retrofits By Carolyn Walkup

ST. LOUIS — Hardee’s, the 1,963- parent company CKE Restau- addition to the St. Louis-based the Green Burrito brand, whose unit brand known for such beefy rants has confirmed. Hardee’s chain, said the Mexican- signage and menu are now indulgences as the Monster CKE president and chief exec- inspired co-brand identity and included at 263 Carl’s Jr. branch- Since he became chairman of Così E S

A Thickburger, is expanding its co- utive Andrew Puzder, whose com- additional menu would enable the es. Those dual-concept units tally Inc. of Deerfield, Ill., in 2003, William C W

O branding test with the internally pany is operator or franchisor of chain to expand its customer base. sales that are about 17 percent D. Forrest, has since overseen the H S developed Red Burrito concept, 1,069 Carl’s Jr. burger units in The model for the venture is (See HARDEE’S, page 37) restructuring of the company’s board. R E H P A R G O T O H P ALSO NRN EDITORIAL: HUMAN RESOURCES: CULINARY CURRENTS: THIS Operators should respect, welcome Elliot Institute: Leaders profit by On the menu: The Italian cuisine of WEEK: diners from all backgrounds pg.13 strengthening corporate cultures pg.10 Boulder, Colo.’s Trattoria on Pearl pg.18

NATION’S RESTAURANT NEWS July 17, 2006 • 23 SPECIAL REPORT: ACROSS THE BOARD

NEWNEW DIRECTIONSDIRECTIONS FORFOR DIRECTORSDIRECTORS

Since the passage of the Sarbanes-Oxley Act, many restaurant companies have restructured

I C their boards of directors to include objective outside T

R T experience and stand up to stricter government scrutiny S

(Continued from page 1) last month to plead guilty to federal fraud charges. The up-and-comers interest. And despite all of the headaches of complying Micatrotto’s June 20 guilty plea was believed to be Deerfield, Ill.-based Così, which operates and franchises with Sarbanes-Oxley, which some have decried as creat- the first fraud conviction under rules governed by the about 110 fast-casual sandwich and salad restaurants, ing reams of time-consuming paperwork, many restau- Sarbanes-Oxley Act, a testament to its effectiveness, is part of a growing number of younger restaurant com- rant companies are finding the new complexion of their sources have said. panies that are focused on building sophisticated boards boards not only holds up under scrutiny but leads to The Securities and Exchange Commission had been of directors before the chains reach their potential. improved results. investigating Buca and its former officers since 2004, and Since Forrest’s arrival as chairman in 2003, Così has “Closer governmental scrutiny combined with in order to settle civil charges against him, Micatrotto worked to attract well-known industry names and inde- increased shareholder expectation will continue to force stipulated that he would not serve as an officer or direc- pendent directors that would help the chain reach its the issue of improved corporate governance,” says David tor of any public company in the future, the SEC said. mission of becoming a large national player and leader Mansbach, managing director at HVS Executive Search Buca isn’t the only restaurant company to suffer in the self-described “premium convenience” category. in Mineola, N.Y., a division of the restaurant and retail from weak corporate governance, as Winston-Salem, “When I was doing the architecture for the Così board industries-focused consulting firm HVS International. N.C.-based Krispy Kreme Doughnuts Inc. still is facing … what I looked for first was strong industry experience, “Shareholders, investors and board director candidates accounting investigations by the SEC and others for in both operations and finance,” Forrest says, “second, understand that the ‘new’ board member needs to have a possible fraud under the tenure of chairman and chief experience in helping public companies through a specific expertise and spend time to achieve the results executive Scott A. Livengood. growth curve … and third, strong technical skills in the expected.” Red Robin Gourmet Burgers Inc. also faces an SEC governance of public companies.” investigation related to the use of chartered aircraft and Currently, only one director, Creed L. Ford, remains Boards fulfill their watchdog mission travel and entertainment expenses by Michael J. Snyder, from the company’s former board that served prior to The goal of today’s board members is to put an end to the Greenwood Village, Colo.-based company’s former Forrest’s hiring and during Così’s turbulent initial public the fraudulent behaviors epitomized by the high-profile chairman, president and chief executive. offering and subsequent failure to meet expectations in collapses of Enron Corp. and WorldCom earlier in the As Così Inc. chairman William D. Forrest explains, the late 2001 and through 2002. decade as well as some of the restaurant industry’s own relatively recent increase in scrutiny from both the feder- Ford was kept on, Forrest explains, because of his vast debacles, including the June convictions of three former al government and from more active shareholders, is “for experience in the restaurant business, having started his Buca Inc. executives. the most part good.” career under Norman Brinker and eventually serving as Joseph P. Micatrotto, former chairman and chief exec- He says: “I think people that are going on the boards chief operating officer at Brinker International Inc. utive of Buca, the 104-unit parent of the Buca di Beppo of public companies have a greater awareness of what Currently, he is chairman and co-chief executive of Fired and Vinny T’s dinnerhouse brands, and two other former that means and put more thought into whether they Up Inc., parent company of Johnny Carino’s Country executives of the Minneapolis-based company agreed will serve. And that’s a good thing.” (Continued on page 24)

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DIRECTORS GO IN NEW DIRECTIONS

(Continued from page 23) entrench Parker into The mature mavericks Italian restaurants and Gumbo’s Louisiana a long-term employ- Yet there still are numerous high-profile restaurant Style Café, and the president of Ford ment contract and a executives serving as both chief executive and chair- Restaurant Group, a Chili’s Grill & Bar hefty payday. man at successful entities, including Julia A. Stewart franchisee. Tim Taft, the cur- at IHOP Corp. and Michael A. Woodhouse at CRBL In addition to Ford, current board rent chief executive Group Inc. members include Robert S. Merritt, the of The Colony, Texas- Both say the board of directors at their respective former chief financial officer at Outback based Pizza Inn took companies thought it was nothing less than “appro- Steakhouse Inc., which has since changed the helm in the wake priate” for them to serve first as chief executive — its name to OSI Restaurant Partners Inc., of this corporate- both taking over from long-term veterans — and then based in Tampa, Fla. There, Merritt governance failure, transitioning into the role of chairman as well. agreeing to take a Stewart officially added the title of chairman in first-year salary May, and she says she has noticed a difference in her of $1. board-level activities. “Corporate-gover- “I have taken a more active role in aspects of the nance issues were a board, frankly because I am chairman,” she says. big concern about a “For instance, in areas of corporate governance and year and a half ago,” oversight I interject my opinion more, which is Taft says. “Those absolutely appropriate as chairman.” issues, in terms of While Stewart is a newly elected chairman, she In May Julia Stewart added the accountability and in has served as president, chief executive and director role of IHOP board chairman to terms of the processes of Glendale, Calif.-based IHOP, which operates or her responsibilities as chief that a company should franchises about 1,252 namesake restaurants, for executive of the Glendale, have in place, all of the past four years. Calif.-based company. those things were not IHOP, like the companies mentioned earlier that

S as prevalent as they look to fill board member slots with independent W E

N are today.” directors, boasts a fully independent board, with the H S

A He credits the company’s majority investor, exception of Stewart. Directors’ experiences range L P

S Newcastle Capital Management LP, and its chairman from private investor and consultant to executive / Y E

L and chief executive, Mark E. Schwarz, who serves as recruiters and corporate law. L A

M Pizza Inn’s chairman, with helping to reconstruct the “I know this is going to sound cheesy, but I love a ’ O

D board around the issue of accountability. tapestry,” Stewart says. “A board should be made up L A

R “Boards can evolve along with a long-term CEO, of different kinds of people, different perspectives, … E G but most of the time you need fresh blood so there is and the tapestry is not just different backgrounds, more questioning,” Taft says. “Newcastle always it’s different colors and sexes, you want that diversi- helped the company grow from five units in 1990 to brings the question of why, and it forces you to look ty. You definitely don’t want a rubber stamp.” more than 1,300 restaurants today, a feat that at yourself and your processes, where before that sit- She continues: “From my knowledge, I think for a Forrest says is exactly what Così wants to do. uation was clearly too comfortable.” really long time a lot of publicly held restaurant “[Merritt] built a chain into a national brand,” Pizza Inn’s board boasts industry veterans like companies had only restaurant people on them, … Forrest says. John D. Harkey Jr. of Consolidated Additional heavy-hitting restaurant experience Restaurants Inc. and Robert comes from board member Michael O’Donnell, cur- B. Page, a longtime Shoney’s Boards can evolve along with rently the chairman, president and chief executive of franchisee, as well as inde- Champps Entertainment Inc. and former president pendent directors like Ramon a long-term CEO, but most and chief executive of Sbarro Inc. D. Phillips, who most recently Outside directors include Mark Demilio, chief served as chairman and chief of the time you need fresh blood, financial officer of Megellan Health Services Inc., executive at financial services so there is more questioning. one of the largest public health care corporations. firm Hallmark Financial ” “It wasn’t that [Così] didn’t have quality people Services Inc. — TIM TAFT [on its former board,]” Forrest says. “But the compo- Both Così’s Forrest and CHIEF EXECUTIVE, PIZZA INN sition didn’t benefit from strong industry experience Pizza Inn’s Taft say the separa- and connections below the CEO level.” tion of the chairman and chief Forrest, who has worked as a corporate restruc- executive roles makes the most and I’ve noticed that it is changing.” turing executive since 1988, explains that there are sense at their respective com- Woodhouse, the chairman and chief executive of two traits common to broken boards: the board panies, unlike at many mature Lebanon, Tenn.-based CBRL Group Inc. was becomes disconnected with reality, or it is too close to restaurant companies, where the chief executive also one of the harbingers of change related to board com- management to “ask probing questions and then con- serves as chairman. position. He says that after the company, which now firm the answers independently.” “The chairman gets to focus from an 80,000-foot operates the 543-unit Cracker Barrel Old Country Pizza Inn Inc., operator or franchisor of nearly view,” Taft says, “which frees me up to manage on the Store chain and operates and franchises the 164-unit 400 Pizza Inn restaurants, was one restaurant com- ground level, which is important in a turnaround Logan’s Roadhouse chain, went public in 1981 and pany that fell victim to Forrest’s later example of a mode.” the original investors and board members looked broken board. In late 2004 and 2005, Pizza Inn fired Forrest echoes that it is management’s role to toward retirement around the year 2000, it was time its chief executive and chairman, Ronald W. Parker, “define strategy and execute,” and the board’s respon- to rebuild the company’s board. and filed a still-pending lawsuit alleging a scheme to sibility to provide “governance and accountability.” (Continued on page 26)

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DIRECTORS GO IN NEW DIRECTIONS

(Continued from page 24) not to be identified. “It was the right time for rebuild- “The new folks on the board, ing,” he says, referring to when he was they do not have the same agen- elected chief executive in August 2001. da [as restaurant operators],” he “Not that the former board wasn’t suc- says. “They are looking at cessful, but we were becoming larger money on a balance sheet, and and more complex.” to make Wendy’s a possible Woodhouse says the transition of takeover target. … The face of CBRL’s board from being heavily the industry has changed over restaurant- and investor-related to a the years. … we no longer live board filled with experts in various and die with the customer, it areas like finance, retail, corporate gov- has become more strategic war- ernance and human resources mirrored fare than hospitality.” what was occurring “in the greater Pizza Inn’s Taft says his sys- environment.” tem’s franchisees also were “We really extended our diversity Under the direction of reluctant to accept investors as directors. not just from a skills standpoint, but Michael A. Woodhouse,oodhouse, “Franchisees were led to believe that [Pizza Inn’s] also from an ethnic and minority above,above, CBRLCBRL GroupGroup addedadded new buyers were the bogeyman, and to consider standpoint,” he says. outsideoutside boardboard membersmembers withwith what they do suspect,” he says. “But anyone that The other piece of the puzzle was retailretail experienceexperience toto improveimprove helps us do a better job, I’m for.” the increased scrutiny of board activity itsits giftgift shopshop operations.operations. In a much less hostile move than what had occurring in 2000 and 2001, prior to the occurred at Wendy’s, CKE Restaurants Inc. elected Sarbanes-Oxley Act in 2002. to its board in April a managing director from hedge Woodhouse says he set out to improve corporate gov- activist investor Nelson Peltz. fund Pirate Capital LLC, a Norwalk, Conn.-based ernance at CBRL prior to SOX enactment in order to Woodhouse says that when he helped build CBRL’s vehicle that now holds an almost 12-percent stake in be ahead of the game and boast best practices in cor- board it was not from a defensive posture as more and CKE. Matt Goldfarb, a managing director at Pirate porate governance. more aggressive investor activity came to light. and now a board member at CKE, said in a state- As of last January CBRL has a 98 out of 100 rat- “I was thinking what I need and what do share- ment that he was supportive of management’s ing in the corporate governance quotient from holders need,” he says. efforts and “looked forward to making a valuable Institutional Shareholder Services, a watchdog and contribution” to the future of the company. research organization in Rockville, Md. It is one of The activist curveball In a previous regulatory filing, Pirate Capital had the top 10 highest scores across all industries. CBRL isn’t the only company dealing with vocal said it was looking for Carpinteria, Calif.-based Yet, Woodhouse says, “if you set out to improve shareholders attempting to push their agendas onto CKE, which operates and franchises about 3,160 corporate governance on a checklist basis, you get a their boards of directors. In some cases, like at restaurants under the Hardee’s, Carl’s Jr. and La better score but not better governance.” Wendy’s International Inc. and CKE Restaurants Salsa Fresh Mexican Grill brands, to undertake a CBRL’s board announced in mid-March that the Inc., active hedge funds have been successful at large sale leaseback transaction and use the pro- company would undergo a massive restructuring gaining director slots. ceeds to buy back company shares. effort including a refinancing of up to $1.25 billion, a Wendy’s, which operates and franchises more After receiving a director seat at CKE, Pirate share repurchase up to $800 million and the divesti- than 9,900 restaurants, was one of billionaire turned its attention to OSI Restaurant Partners, ture and future initial public offering of shares in its investor Peltz’s first restaurant targets. At the calling for the company to spin off its growth con- Logan’s concept. Dublin, Ohio-based company, Peltz succeeded in cepts including Carrabba’s Italian Grill, Bonefish According to company statements, the moves CBRL placing three executives onto the company’s board to Grill and Lee Roy Selmon’s and to halt new unit undertook were decided as part of the company’s help push through his plan for a divestiture of the growth at the flagship Outback Steakhouse until strategic review conducted by its board of directors, Tim Hortons chain, cost-cutting at the namesake margins improve. and not due to pressure, as reports indicated, from hamburger chain and the exploration of strategic In addition, Pirate, which holds a 5.8-percent alternatives for the Baja Fresh chain. The three stake in OSI, stated in the filing that it has become executives were from Peltz’s investment fund, Trian “increasingly frustrated with [OSI’s] misallocation of Fund Management, which at the time of the board capital and inability to manage the company’s assets election held about an 8-percent stake in Wendy’s. in a return-focused manner.” In addition to the vast restructuring Wendy’s Finally, Pirate promised that a proxy battle could agreed to undertake, some analysts speculated that be in the works should OSI management not take the retirement of longtime Wendy’s chairman and the suggested steps. chief executive Jack Schuessler was really an ouster “Either the existing board of directors will take by the board of directors, which had bowed to pres- immediate steps to unlock shareholder value by sure from the new Trian-sponsored directors. instituting the measures outlined,” the company said A Wendy’s franchisee in upstate New York that in a filing, “or the 2007 proxy season will include sev- operates about 10 restaurants says most fran- eral new director nominees.” chisees he is familiar with are unhappy with the Sources have indicated that as long as hedge fund Trian board members and view them as outsiders and private-equity activity continue to mushroom looking for a short-term gain. The franchisee asked throughout the restaurant industry, a growing number of companies will be forced to consider these When three of his executives joined the board of investors as nominees for director seats. n Wendy’s International, investor Nelson Peltz prescribed a divestiture of the burger brand’s Tim Hortons chain. [email protected]