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Company Profile of Ground Round

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Company Profile of Ground Round
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Pratik Kukreja
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Company Profile of Ground Round - May 7th, 2011

Ground Round Grill & Bar, an American casual dining restaurant, was founded in 1969 by Howard Johnson's. As of January 17, 2010 Ground Round is owned by Independent Owners Cooperative, LLC, a group of 30 franchisee owners. Independent Owners Cooperative, LLC is located in Freeport, Maine. Currently, Ground Round has 30 locations in 13 states.
Ground Round was well known in the 1970's and 1980's for its children's parties, showing old time silent movies and cartoons on a big screen, a mascot named Bingo the Clown, and for passing out whole peanuts where diners were not discouraged from throwing the shells on the floor, which became one of The Ground Round's more endearing qualities that attracted families with small children; they also often gave diners popcorn with their dinner, rather than bread. The newest incarnation of Ground Round doesn't support such behavior and markets to the adult dining and cocktails crowd, although families are still welcome (a mascot called the Ground Round Hound, an anthropomorphic hound dog, appears on the kids' menu).
Ground Round was also famous for their pay what you weigh (a penny per pound) and their free popcorn. At one time in the early 1980s there were over 300 locations. Overselling by parent co. Howard Johnson's Inc. led to the near collapse of the franchise in the late 1980s. A fire at the Yonkers, New York location, in which 1 patron and another employee were killed and left several others severely injured ended the peanut shell atmosphere and cost the parent company much in a negligence suit, that was at the time the highest award by a New York State jury for punitive damages. The Ground Round in York, Pennsylvania also burnt down.
In February 2004 the franchisor for Ground Round filed for Chapter 11 bankruptcy; in the process, all 59 corporate-owned restaurants (almost half of the Ground Rounds then open) abruptly closed their doors.[1] A group of franchisees joined together in order to buy out the parent company, at the time Ground Round, Inc., and started the Ground Round Independent Owners Cooperative, LLC (GR IOC).

A pioneer in casual dining restaurant chains, Ground Round, Inc. owns or franchises approximately 190 full-service family-style restaurants, mostly in the Northeast and Midwest. In addition to its signature half-pound Ground Rounder hamburgers, the restaurants feature a moderately priced menu of Italian, Mexican, Oriental, and Tex-Mex foods, plus appetizers, entree salads, specialty sandwiches, seafood, baby back ribs, steak, chicken, and pasta. The company's restaurants, many of which have operated under the Gold Fork name since early 1997, offer a casual dining atmosphere for families as well as for adults by providing a main dining area for guests accompanied by children and a smaller dining room and bar for adults.
Open seven days a week for lunch and dinner, Ground Round/Gold Fork restaurant locations are divided into 24 regional units grouped within four divisions, each managed by its own senior vice president, and division vice presidents. A regional director oversees between four and eight company-operated restaurants, as well as any franchise locations in his or her region. General managers of each store oversee such day-to-day operations as food procurement, inventory control, hiring and firing of personnel, and local marketing; general managers report to their respective regional director. The average restaurant employs 60 people, half of them on a part-time basis.
Each restaurant averages approximately 5,600 square feet in size and holds seating for 210 people. They are divided into adult dining areas containing a bar and lounge area, and a family dining section that encompasses of the entire seating area. While exterior architectural styles vary according to local building codes and practices, Ground Round and Gold Fork locations prominently feature the restaurant logo. Most locations, which are chosen due to population density and average annual household incomes in the $40,000-and-up range, are leased from landholders. Marketing of each Ground Round, Inc. restaurant location is done primarily on the local level. Each store's general manager is encouraged to participate in community-based programs, particularly those involving area schools and youth organizations.
In addition to its company-operated stores, Ground Round, Inc. operates approximately 45 franchises throughout the eastern United States, and considers such stores an effective means of increasing brand-name recognition through minimal investment. Choosing franchisees with significant experience in the restaurant business, the company assists with site selection, construction, cooperative national advertising, and training of staff. In return, franchises must serve only Ground Round/Gold Fork menu items, develop an aggressive local advertising plan, and purchase all food and equipment through the company. Franchise agreements run for a term of 20 years, and require payment of both a franchise fee of $40,000 and an ongoing royalty of 3.5 percent of monthly gross sales.

Ground Round took out a $40 million line of credit in 2000 and tapped it for at least $26 million. Boston Ventures had already started selling off many of its locations to franchisees. Although the company sold 39 restaurants in the next two years, that still wasn't enough. The goal was to get down to fewer than 15 company stores, and Ground Round was stuck with 59. It had sold the best stores first, and many that were left were in less popular locations. In 2003 the chain lost almost $7 million on revenue of $107.4 million. While the restaurant selloff had reduced the $26 million debt to about $3.5 million by 2003, the lender wanted the rest paid off in the first two months of 2004.

Ground Round was on track to make those payments as soon as it sold off 19 more stores—deals that were in the works. But the financing for them hit a snag. The delay seemed minor at the time, but it meant the company would default on its loan payment—an agreement that already had been amended six times since 2000. The lender called its loan and exercised its right to clean out Ground Round's bank account. Boston Ventures, which had poured $15.1 million into the company with no return, refused to spend any more. (A spokesman at Boston Ventures declined to comment.) The management team—reportedly worried about being held personally liable for payroll, taxes, and other operating costs—shut the company down immediately.

It wasn't long after the bankruptcy that prospective buyers started sniffing around, and the franchisees—many of whom were angry and felt abandoned by their former operator—wanted to have some say in who would take over. To that end, the franchisees' attorney organized what he called the "beauty contest," a meeting in Philadelphia at which leading Ground Round franchisees could interview the potential purchasers. "We wanted to partner not with the highest bidder but with someone we liked," says franchisee Mike Metz. Potential buyers included the operators of such chains as Carvel and Wall Street Deli. But after a day and a half of meetings, the franchisees were clear about whom they thought would make the most attractive owner: themselves. "We felt we knew as much as them, if not more," says Jack Crawford, 45, a franchisee in Maine who has been with Ground Round for 25 years. "Why not put our own group together to bid on the assets?"

Over the following weeks the franchisees wrote a business plan based on the model of the Best Western hotel chain, which operates as a cooperative. (Crawford's company also runs three Best Westerns, and he stepped into a leadership role to apply the co-op model to Ground Round.) Among other benefits, franchise royalties would be reduced from 4% to something between 2% and 3%.

Winning Ground Round wasn't going to be easy, but the franchisees were organized. They had to come up with a $250,000 deposit to bid on the assets, and all 39 kicked in. Each franchisee also estimated how much he lost due to the bankruptcy. Together the claims reached about $40 million, but each claim stood separately—so if the franchisees wanted to sue, the new owner would have to fight 39 separate lawsuits. "It was a brilliant move of throwing a monkey wrench into the machine," says Mark Bromberg, CEO of Apex Restaurant Group, a Plano, Texas, company that specializes in turning around distressed restaurant chains and that was interested in Ground Round. "It was also unmitigated bullshit. Everyone laughed at it because it was so ridiculous."

Although no one, including the franchisees, thought they would ever get anything near the $40 million, those claims had a huge influence on the sale. Apex, backed by a REIT called U.S. Restaurant Properties, was the only prospective buyer from the beauty contest that bid at the auction, offering $6.5 million. The franchisees bid $1 million. The disparity was so clear-cut that a news article was published saying Apex "Wins Bid for Ground Round." But the deal was still subject to a bankruptcy judge's approval, and the franchisees filed an objection to the Apex offer, claiming that the $6.5 million wouldn't cover the $40 million they believed they were owed. The objection bought the franchisees time. During the next few weeks they scrambled to raise more money ($40,000 from each restaurant and a $2.9 million bank loan), upping their offer to $4.85 million. It was still less than Apex's bid, but it came with an attractive plus—the $40 million claim and the threat of litigation would be wiped out. Suddenly they were a serious contender. On July 7, 2004, the bankruptcy judge approved their offer. The franchisees now owned the brand.

They were ecstatic, but after the news broke some skeptics started saying that franchisee ownership of the parent company could trigger a new set of problems. They wondered whether the inmates would be able to run the asylum. "Franchising is not a cooperative event. It needs professional management," says Michael Seid, a franchise consultant based in West Hartford, Conn. While owning the concept is not a problem, operating it—and performing the franchisor's duties of marketing, promotion, and product development—could be. Apex's Mark Bromberg believes the franchisees, without strong financial backing, will have trouble competing against colossal chains such as Applebee's and T.G.I. Friday's. Says Bromberg: "It's not about saving money in royalties or being the master of your domain. This is about winning the battle for the consumer."

"We have a new model, so it's hard for traditional restaurant companies to grasp," counters Jack Crawford. "But it's working. We have 100% royalty collection, more than 90% marketing participation, and we expect four times the attendance at our annual meeting compared with last year. The numbers are great when there's skin in the game." There are now 71 remaining Ground Round locations, 64 in the co-op and seven run by three franchisees who decided not to join. Systemwide sales are about $125 million, on a par with their performance before the bankruptcy.

Burt Benepal, who was building the first West Coast location when the company went bankrupt, opened his restaurant—with the assistance of a dozen staff members who were borrowed from other Ground Round restaurants—in Richmond, Calif., this past summer. It was five months later than expected, but that kind of delay is not uncommon in the restaurant business. Benepal anticipates first-year sales of $2 million, and he's scouting for a location for his next restaurant, which he plans to open this summer. Jack Crawford expects six to eight new Ground Round locations to open across the U.S. in 2005.

The story of the Ground Round franchisees has made its way through industry circles—no doubt spurred when members of the co-op and their attorney recently spoke about the experience to 1,200 attendees at a franchise conference in Las Vegas. Michael Einbinder, a franchisee attorney at New York City law firm Rosen Einbinder & Dunn, says a client recently asked him what to do if his franchisor went bankrupt, and thanks to the Ground Round story, he had a new answer. "It's an object lesson," says Einbinder. "It makes people realize they have options."

By the winter of 1994 GRR's offer of purchase had become held up due to financing problems; the company entered 1995 with lagging sales that were attributed by analysts to a lack of marketing focus over the past few years. During the second quarter of 1994 the company's earnings had been reported at $1.6 million; the same period in 1995 would witness a loss of $738,000, signaling even more serious difficulties. This loss was credited not only to the frequent changes in ownership and identity it had experienced during the decade but also to increased competition in the casual dinner-house market. Corporate marketing strategies were re-evaluated during the year and a radio campaign was established, but it was later proven to be ineffective in combating an economic downturn that extended beyond sales.
Meanwhile, the offer to purchase the company by GRR Acquisition Corp. expired in early 1995 due to a change in the high-yield financing market originally funding the acquisition. In April O'Donnell resigned from his positions as CEO and president. The withdrawal of the merger offer and the subsequent resignation of O'Donnell caused associated charges totaling $1.6 million to be written off against first and second quarter 1995 earnings. By the end of fiscal 1995, Ground Round, Inc. posted a net loss of $5.7 million against sales of $300 million.
Following O'Donnell's resignation in 1995, Daniel R. Scoggin, a company board member since 1991 and, as president and chief executive officer, a 15-year veteran of Ground Round-rival TGI Friday's, was appointed president and chief executive officer of the company. A new business plan supported by those banks extending the company its line of credit included provisions for Ground Round to accelerate the repayment of some notes and other financial obligations. The restructuring of company debt would result in a debt reduction of $2.8 million by the end of fiscal 1996. Management hoped to end its reliance upon further debt by funding all capital expenditures for fiscal 1997 through revenues and the proceeds due it from the sale of various restaurant locations.
Attributing the continuing drop in sales to the former management's decision to eliminate the Ground Round's familiar menu in favor of more exotic fare that some maintained held little appeal to women or health-conscious consumers, Scoggin and his team resolved to stabilize the company's identity. In December 1995 a new, 200-item, core casual dining menu was implemented to replace the limited 50-item menu previously used. The new menu included Mexican, Oriental, and Italian items, as well as a wide variety of salads, soups, appetizers, and a generous summer menu. A new children's menu was also introduced. Under Scoggin's leadership the company initiated efforts to enhance the quality of the food it served at its Ground Round restaurants and improve customer service through more thorough employee training programs and greater communication between employees and management.
While management would institute changes in the Ground Round menu, it would continue to close restaurants that were no longer deemed profitable, and by the close of 1995 had only 197 restaurants in operation, 46 of those under franchise.
Reduction of Restaurants Continues Through 1996
The first quarter of fiscal 1996, which ended on December 31, 1995, saw the company post a $3.02 million loss. Although the company had begun retraining its staff and catering to younger customers through a game-based program, such efforts could not put the skids on its downward descent, which was burdened by over $50 million in debt and leases. By July the company had posted a 9-month loss of $9.7 million; the year-end loss for 1996 would be $22.95 million, including an $8.9 million accounting charge against assets as a result of closing certain of its restaurants. Despite the loss, through the efforts of its 7,900 employees at 143 restaurants, the company's fiscal 1996 revenue reached $218.8 million, still a 5 percent drop over the fiscal 1995 level of $230.4 million. Fortunately, in mid-1996 Lone Star Steakhouse, one of the company's major competitors who wished to expand its market into New England, purchased 11 Ground Round restaurant locations in the northeast. Planning to convert the units within 12 months, Lone Star paid the struggling chain $16 million. Ground Round restaurants still in operation by the end of fiscal 1996 would number 189.
In addition to reducing overhead through the sale of several units, the company also made efforts to further adapt their format to the changing needs of families... and to the tastes of children, whose likes and dislikes often dictated where families went on their night out. Surveys showed that families eating out spent more money at restaurants than any other consumer group, and Scoggin was determined to capitalize upon that fact. Hiring a consulting firm, the company began to plan adjustments to its overall image and its menu. Ground Round restaurants changed portion sizes for children under the age of 13. The menu was also changed to feature 30 vegetarian dishes, as well as a new summer menu. The company began experimenting with a new restaurant design attached to a Ramada Inn in its Manhattan, Kansas, location. And in April 1997, now operating what it considered a manageable number of restaurant locations, Ground Round, Inc. changed the name of its restaurants to Gold Fork: Casual Food and Dining.
While the company would continue to post losses into fiscal 1997, during the first quarter of that year Ground Round, Inc. was able to retire over $12 million of debt. The company planned to increase efforts to promote the franchise opportunities within its casual dining chain as a means of more financially conservative expansion and as a means of enhancing recognition of its restaurants' new name.

Public Company
Incorporated: 1968 as Ground Round Restaurants
Employees: 7,900
Sales: $ 218.8 million (1996)
Stock Exchanges: NASDAQ
SICs: 5812 Eating Places; 6719 Holding Companies, Not Elsewhere Classified; 6794 Patent Owners and Lessors.

35 Braintree Hill Office Park
Braintree, Massachusetts 02184

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