Kmart cooks up plan to turn around restaurants - joint venture with DAKA International

Discount Store News, August 5, 1996

TROY, MICH. -- Thanks to a new joint venture deal with DAKA International, a Danvers, Mass.-based foodservice operator, Kmart should be able to:

* Bring in an experienced restaurant operator to upgrade its money-losing restaurant operations, much like Target has done through its own efforts and Wal-Mart has done by co-branding with McDonald's;

* Unload a $350 million operation that lost at least $15 million last year;

* Entice customers to spend more time in its stores by offering higher-quality food;

* Focus more energy on its core business;

* Get away from having to deal with a labor-intensive operation that employs 14,000 people;

* Perhaps double its per-store restaurant sales, which now run about $200,000 a year.

Those are the views of two nationally recognized restaurant consultants as to what benefits Kmart's joint partnership agreement with DAKA will bring the retailer. The arrangement turns over a 51% stake in its restaurant operations in exchange for a commitment to invest $51 million in capital to upgrade restaurants over the next three years. Kmart retains a minority stake of 49% and will invest $49 million.

The companies will jointly operate all 1,850 Kmart store restaurants (out of 2,147 units), including 550 Little Caesar pizza franchise stores and any other store restaurants opened during the 15-year life of the agreement.

DAKA operates Fuddruckers, an upscale chain of hamburger restaurants, and developed another coffee concept called French Quarter. Including other smaller chains such as Champp's Sports Bar, it operates or franchises a total of 700 restaurants and is a major player in the institutional foodservice business. Under license, DAKA operates a number of fast-food restaurants, including Dunkin' Donuts.

It's not a household name, however, such as McDonald's, said Neil Stern, foodservice consulting partner for McMillan/Doolittle, a Chicago-based retail consulting company.

Even though it lacks the recognition of a fast-food chain such as McDonald's, DAKA can bring a variety of ideas and options to Kmart's food operations, Stern said. It could easily plug in aspects of its various food concepts.

"At least it wouldn't be generic food," he said.

Kmart tried once to upgrade its food operations by becoming the largest franchisee of Little Caesar's. "It was a good idea, but Little Caesar's--known for large take-out pizzas--was the wrong chain," he said. "Its concept didn't fit with discount store customers seeking a quick snack."

Most Kmart restaurants are underperforming, Stern said, generating average revenues of $200,000 a year. In contrast, some of the better Kmart restaurants are producing sales of $500,000 a year, he said. Kmart will transfer the 14,000 restaurant employees to the joint venture payroll, it said.

The new owners will help change the culture of those restaurant employees, Stern predicted. Treated as step children in a poorly performing division, those employees now have "a snack bar mentality," Stern said, dating back to the days when their main job was selling popcorn.

Strategically, restaurants will now be more important to Kmart, Stern said, and those employees will be asked to play a more important role in store operations.

Offering a second opinion, the joint venture move will bring in more foodservice expertise and enable Kmart to focus more on its core business, said Dennis Lombardi, director of the restaurant consulting practice for Technomic, another Chicago-based consulting company.

It plans to move restaurants from the back of stores to more prominent spots in the middle or front of stores (as Target and Wal-Mart have done).

In the process, DAKA might well change the trade dress of Kmart restaurants and introduce features of its various concept restaurants, such as French Quarter coffee.

Generally speaking, retail store restaurants are non-competitive with other restaurants, Lombardi said, which is why they are moving to co-branded food operations.

Food service is more labor-intensive than retailing, he added, requiring special training to handle perishable foods that could present a safety hazard to customers.

By transferring the food-service workers, Kmart eliminates an entire operating division that presents special problems.

Improved food operations conceivably drop customers into Kmart just to eat, Lombardi said. More likely, however, is that improved food will persuade customers to spend more time in Kmart stores, he added.

"This joint venture is another action within our turnaround strategy to focus on our core discount business and build partnerships that improve the performance of all of our operations," Kmart chairman and ceo Floyd Hall said in announcing the deal set to take effect Sept. 1.

"By joining with a high-quality partner such as DAKA, we will bring a wealth of foodservice management expertise to what has been an underperforming area of our business," Hall added. "As a result, we expect to offer our customers a better place to eat and relax during their visits to Kmart, and, at the same time, significantly improve the financial performance of our restaurant operations."