Whiz-kid Smith takes a whirl with Friendly

Nation's Restaurant News, August 22, 1988 by Peter Romeo

Whiz-kid Smith takes a whirl with Friendly

CHICAGO -- Three years after tarnishing his whiz-kid image in an ill-fated attempt to forge a restaurant kingdom, Donald N. Smith is putting his empire-building skills to the test again through his company's purchase of the 850-unit Friendly chain.

Tennessee Restaurant Co., which already operates the 334-unit Perkins family reataurant system, has agreed to acquire Friendly, an ailing competitor, from Hershey Foods Corp. for $375 million in cash.

The transaction would immediately transform Tennessee Restaurant into a titan within the family restaurant market, with more than 1,100 units generating some $975 million annually in sales. Only the Denny's chain, a subsidiary of TW Services, encompasses more family oriented restaurants.

Wilbraham, Mass.-based Friendly and Memphis-head-quartered Perkins will be operated as separate chains, a Tennessee Restaurant spokeswoman stressed.

"They will be kept totally, absolutely separate, with no overlap of management whatsoever," she declared.

The one link between the two chains' management will be Smith. He plans to assume the chairmanship of Friendly while continuing to serve as chief executive of Perkins.

Friendly president John Cauley will retain his job "for the foreseeable future," the Tennessee Restaurant spokeswoman said.

"Friendly has a very solid management team and a good penetration of its market," she said. "There are a lot of strengths in the concept. It has a lot of potential. But it's not living up to that potential."

"If Don brings his expertise in turnarounds to the situation, that potential could be realized," she added.

In 1987, Freindly saw its profits slide from the prior year by 9.5 percent, despite a 6.6 percent rise in sales, to $572 million.

While increased competition dampened sales, margins were bashed by an acute labor shortage that forced the chain to pay top dollar for even low-level restaurant employees.

Friendly has attempted to pull out of the slump by slashing its headquarters staff, changinmg advertising agencies, adopting new employee retention techniques, and touting the value of such new menu items as 99-cent children's meals.

"Friendly's sales should finish the year with a 5 percent improvement," noted a recent report by Stephen Carnes, an analyst for Piper, Jaffray & Hopwood in Minneapolis. "The recent programs to increase consumer service levels, enhance employee benefits, and improve profitability should get Friendly back on track in 1988."

Smith declined to say what tactics he might employ to foster a turnaround at Friendly.

"Stuffice it to say that there is a very strong image of quality or halo to the Friendly name," he commented during a brief telephone interview. "It goes without saying that all other pieces can be adjusted to take advantage of that halo."

"Don is not going to go in and make any broad-brush, full scale changes," the Tennessee Restaurant spokeswoman commented. "He'll go in and study every piece of the business before he does anything."

The technique has paid off for Smith in the instance of Perkins, a 33-year-old pancake chain that Tennessee Restaurant took over in 1985 from Holiday Inns. Since then, Smith and a hand-picked team of seasoned industry veterans have outfitted Perkins with a new look, menu, marketing program, building prototype, training center, and research-and-development facility.

For the six months ended June 30, Perkins reported a net income of $4.5 million, for an 18 percent increase over the figure for the first half of 1987.

As chairman and chief executive of Tennessee Restaurant, Smith said, he will continue to keep an eye open for acquisition candidates.

The company, which is based here, is a partnership of Smith, Holiday Inns, and the oil-rich Bass brothers of Fort Worth, Texas. It owns 51 percent of Perkins, which is organized as a limited partnership, and 100 percent of Perkins Management Co., which operates Perkins.

Tennessee Restaurant was formed to buy ailing restaurant companies which Smith could then rejuvenate by tapping the expertise he amassed as a high-level executive of McDonald's, Burger King, Pizza Hut, and Taco Bell during the late 1970s and early '80s.

Between his 36th and 42nd birthdays, Smith racked up a string of head-turning successes as he moved from one giant chain to another. His midas touch made him one of the restaurant industry's brightest stars.

The streak ended in 1983 when he stepped down as president of Pepsico's food-service division, which included Taco Bell and Pizza Hut, to try his hand at empire building. He formed a company called Diversifoods and brought into its fold 375 franchised Burger Kings and such chains as Godfather's Pizza, Luther's Bar-B-Que, Chart House Restaurants, and Moxie's.

The venture fell apart after operational problems, particularly within the then-900-unit Godfather's system, stymied Smith and his management team. After failing to take the teetering Diversifoods private in 1985, Smith resigned at the request of the company's board.