David Karam, CEO of Sbarro, former president of Wendy's

It is a great honor to be here and thank you Doug and Jay for your invitation. I'd like to share a bit about my own experience in the industry, hoping to provide some inspiration or a road map for your careers. Before I start, the points Jay put on the screen point to a character trait central to success: fortitude. Looking at my own life and examples like David Thomas, it's fortitude at the end of the day. There are other requirements for success, especially in business, but it's fortitude for a vision and idea you truly believe in. If you make it a financial objective, you're less likely to succeed. Everyone's talked about Apple and Steve Jobs, and what shocked and impressed me about Jobs was his willingness to cut against the grain and make huge bets because he wasn't a slave to economics or making money. Even after great success, he pivoted hard with the iPad and handhelds, putting his computer business at risk. He showed fortitude and perseverance, and I encourage you to cultivate that in your life. It's not a trait you turn on like a light switch; it's something you nurture like every other virtue, slowly and methodically throughout your lifetime.

And we were working for a company that might have had four restaurants at the time, but it was store #2 where all training took place. All franchisees and new hires for Wendy's brand went through that store. It was exhilarating; even as young kids, we knew we were part of something significant. We saw firsthand that Dave's vision was unique and differentiated in a saturated fast-food industry. The confusion consumers had when we asked about sandwich customization or the pickup window, which was new to the industry. The company grew, and after four years, I graduated and went to college. Actually, it was in this room, Jay, but a professor in my third year asked to see me after class. I was taking accounting with the mindset of going into law. He asked if I'd ever thought about accounting, and I admitted I hadn't. He encouraged me, and ultimately I chose accounting as a career. I wish I remembered his name; he had compassion to reach out and encourage me. That was a gift from God because I found my passion. I loved business but never saw myself as a career accountant. I went into public accounting at a big firm, but I knew I had a gift for analytics and loved working with people, so marrying financial and strategic aspects was great. I pursued an accounting degree, still planning law, but interviewed. I came out of school during tough economic times with double-digit inflation, unemployment, and interest rates, but we pursued opportunities. I got a position with Touche Ross, now Deloitte, and worked public accounting for four years. Before leaving for college, my father had portioned some Wendy's stock into a franchise. In 1975, he incorporated and took development rights for Wendy's in Las Vegas, opening his first restaurant around when I graduated high school in 1976. Between then and my four years in public accounting, he grew the business to 13 stores. But it was taxing his limits, as his training was in law, and Wendy's had hit a wall after meteoric growth. So I came to work with him, left public accounting, and took over his 13-store franchise. We grew it with Wendy's rehabilitation and our own innovation and fortitude, building one of the larger restaurant companies in America today, doing nearly a quarter-billion in revenue in six states with offices in Columbus. That company is Cedar Enterprises, focused on Wendy's. But Wendy's went through difficulties with untimely deaths of two CEOs and Dave Thomas. Leadership struggled, and Wendy's was outperforming McDonald's. From 2002, it hit a low in 2005 when hedge fund investors like Nelson Peltz and Bill Ackman advocated for change. Wendy's had brands like Tim Hortons, and they agitated for change. From Q4 2005 to mid-2006, there were management changes and a decision to invest in Tim Hortons. In early 2007, Wendy's put itself up for sale after spinning off Tim Hortons. There was worry over who decided to sell, but I decided to control my destiny. I pulled together other large franchisees, and we considered buying it, but they left me on my own. I started building relationships with investment banks during the financial crisis. Thirty-eight companies bid for Wendy's, and it was a fascinating and frightening period. Over 12 months, bidders peeled away due to lack of financing. GE Capital approved financing for my bid, but markets froze. I raised under two billion for a cash bid. After presenting to the board in April 2008, they decided to sell to me, but overnight they changed their mind and sold to Arby's and Nelson Peltz. Peltz called me the next day to run the company, citing alignment of interests and my skin in the game with 150 restaurants. From 2008 until last year, I took the reins and made a turnaround. Wendy's earnings grew by 100 million in three years despite recession, from 240 to 340 million EBITDA. The brand's vitality was restored with second-best sales performance and best profit improvement. Operational and financial metrics improved. When I stepped in, global audits were failing 34%; when I left, it was down to 0.5%. Execution is key; the customer experience is the brand. Dave Thomas said, 'the final three feet' between payment and tray pickup. Operational disciplines and re-establishing Wendy's as premium quality were central. We raised salad prices by 25% and became the largest seller of salad by introducing fresh ingredients. We did the same with fries, burgers, breakfast, and chicken sandwiches. For the first time in 43 years, we overtook Burger King despite having 20% fewer restaurants. At the end, I moved back to my franchise, focusing on emerging higher-growth categories. My vision is four quadrants of growth: international, breakfast, beverage, and fast-casual. My shift is to look at opportunities in those growth quadrants. Private equity firms reached out, and I continued overseeing Cedar and accepted the role of Chairman of Sbarro, providing guidance for a turnaround and strategic growth plan. I'm also a board member of Logan's. That's my story—varied as an entrepreneur and operator of a nine-billion dollar brand. I think career paths in this industry are fascinating. There's nothing like being in business for yourself in the US. The restaurant industry has low barrier entry and has spawned entrepreneurs like Dave Thomas, Tom Monaghan of Domino's, and Steve Ells of Chipotle. Health-consciousness and food awareness are driving brands like Panera, Five Guys, and Chipotle. You're in an industry open to multi-partnership. I welcome questions and dialogue.

I think it depends on the brand; there's no one-size-fits-all. My approach to managing companies like Cedar Enterprises, Wendy's, or Sbarro is to keep it simplified. I apply four fundamental management principles. First, what is the brand position you're seeking to establish? What makes your concept different? That's true for new or existing brands. For brands like Wendy's or Sbarro with consumer experience, you can't suddenly change; you need to refine and stretch your brand position. Delivery and advance orders are important if they define what makes the brand unique, but it depends. Brand positioning must be defendable, authentic to heritage, and allow for growth above industry average. Start with the brand: what makes you different and defensible. Second, engage your team to establish critical factors to success. For Wendy's, it wasn't being more of the same; it was re-establishing premium quality and ingredients, like our logo: quality is our recipe. For Sbarro, we established 'hands-on Italian' position. They started making pizza by slice in-store with handmade dough, sauce, and cheese, but over 20 years got away from that, leading to stagnation. Costs rise, causing margin squeeze and cutting. Great companies like Apple step back to reclaim their spot. Krispy Kreme was dead but reinvigorated. The second principle is identifying what's critical to the brand position. For Wendy's, it was food, operational disciplines, financials, image, communication, and franchising. We had to measure these factors with quantitative skills, as the industry is competitive and inefficient. We used 13,000 audits to measure cleanliness, order accuracy, and friendliness. Finally, heighten execution over time to build strong brands. Principles resonate across industries.

I don't think there's one best way. If you're starting out, franchising might mean developing a brand or being a franchisee. I think you're suggesting being a franchisee. One way is to find concepts with low investments. A new Wendy's costs about two million, but a Jimmy John's franchise might cost three or four hundred thousand. If you can save 20% or access capital, you have a shot. The better path is to find a concept you like and has relevance. Invest in stocks you do business with, as Warren Buffett said. You're a young consumer, and growth is there. Look for concepts with reasonable entry points. It doesn't mean staying in one concept forever or having only one store. But when you go multi-unit, analytic skills become critical. You can't feel all problems; you need performance measures. For example, high employee turnover might mean customer turnover, and food cost variance might indicate theft. I was in California this week with owners of a hot fast-casual Neapolitan pizza concept. Fast-casual concepts go into in-line locations with lower investment, like five or six hundred thousand, and high returns of 60-70%. This fuels fast-casual growth. Demographics show health-consciousness is a mega-trend, driven by aging consumers eating healthier due to health concerns. The Food Network has made consumers more knowledgeable about food, ingredients, and preparation. Ethnic foods and spicier tastes are growing, not fitting fast-food well. Projections show fast-food growing 0.9% per year, but fast-casual at 8-10%. Chipotle does four billion, Panera nearly eight. Entrepreneurs are spawning concepts. I met with two Cornell girls who started CoolHaus ice cream sandwiches with ten thousand dollars and social media, starting with a food truck. They now cater to Google, Facebook, and Hollywood. I've seen many innovative concepts, like Snooze for breakfast. The restaurant industry is a golden era for entrepreneurship with low economics. But chef-inspired creations often lack analytic, financial, and organizational skills to scale.

It's fascinating because they got crushed in the recession from reduced business and leisure travel. Look at brands like Hyatt, which was hot but lacks reinvestment. Hilton was given up for dead but is rebounding with corporate-owned hotels like the new one downtown due to success at Polaris and Easton. It's capital-intensive and franchising-based. Existing fleets are tiresome, so those with capital are re-investing in remodels and modest growth, doing well in major cities. Columbus is steady due to government, Ohio State, and service sector. There's brand rehabilitation with access to capital, like Holiday Inn's remodels and repositioning. The hotel and restaurant industries are similar with workforce, fixed assets, execution, and development. It's stable and hard to displace via internet, unlike retailing with Best Buy at risk. Having a digital strategy is critical for marketing and consumer relations. Up-and-coming concepts succeed with food and social media, as consumers filter out advertising and rely on Yelp, Facebook, etc., leveling the playing field for new entrants against brands like McDonald's or Wendy's.

It's a great question and difficult. Turning around large brands, especially franchisee-owned, is challenging. It hinges on right strategy and discipline. You don't lead with reinvestment; predecessors pitched needing billions. Image and facilities were critical success factors. We developed designs and are testing. You need to move on multiple fronts for consumer relevance: menu, operations, hospitality, financial performance, and reinvestment. Reinvention strategy should follow. With Sbarro, we're using similar organizations. Franchisees are longer-term investors and should be listened to. A big reinvestment strategy requires looking at what franchisees want: confidence in long-term vision and plan. With $600,000 per store and 7,000 stores, it's a big number, but not overnight. Mature brands like Wendy's, Burger King, Taco Bell, KFC, and others will struggle with reinvestment to stay fresh. Wendy's brand position was built on quality freshness and choice. Research showed the number one operational attribute was cleanliness, starting with the parking lot, since 60% experience via drive-thru. Speed of service was second, giving confidence in freshness and order. Consumers aren't dumb, so understanding their view is key, then measuring and driving execution. You also need big ideas like menu reinvention and store design.

Yes, the first step was to reinvent the brand position with hands-on Italian experience, rekindling heritage. It's indulgent food, like eating New York style pizza with hands. They digressed too far with steam tables; our plan is to strip that out. We've developed high-end salads, reinvented pizza with fewer types but more abundance, and hand-held sandwiches with pizza dough. Once store redesign is done, we'll test in malls and solicit in-line locations. I've asked to do it with a different flag to gauge brand damage, which is lower without a TV ad budget. We'll try the new version with Sbarro banner and another name elsewhere. We have 400 international stores with eye-popping sales growth, so we'll build that. The final leg is getting on-trend with artisan, Neapolitan-style pizza, similar to Chipotle's line-flow model. Start with high-quality dough, build pizza with standard or custom builds, baked in a wood-fire oven for 3-4 minutes. Good margins and pricing power, complemented with salads and beverages. With 1,000 stores, we can convert a couple dozen. We have airport, casino, and high-grossing stores. We're developing on-trend artisan pizza concepts under corporate infrastructure. Ultimately, decouple from malls as that business shrinks. A-level malls like Polaris and Easton retain business, but others like Eastland, Westland, Northland are gone. Retail via Amazon and direct sales is growing. Concepts like Northstar show innovation with healthy, locally grown focus but limited scalability.

Yes, and you see the points I made about fast-casual: source of ingredients, preparation story, higher quality manifesting there. I don't disagree.

What do you like to get there?

Have you been there for breakfast?

Has anybody been there for breakfast? What do you think of breakfast?

Limited menu, but very differentiated. How about Piada? Anyone been to Piada? What do you guys think of that—like it or don't like it?

Talk to me about it.

So, won't go out of your way for it.

You know, when you said 'crave,' that is key. That's the key to success. Everything doesn't have to be crave-able, but you've got to have some products that are really crave-able by the consumer. That's what keeps drawing them back, even if not ordered all the time.

So you typically get the bowl?

And what about you, the Piada?

That's my experience as well—it's too brittle.

Yeah. What about other fast-casual Mexican places? I'm sure you guys have all gone to Piada, but are there other places in that space different from Piada?

Pei Wei, yeah—very similar. You like that?

It's a very successful concept. Part of P.F. Chang's, which has just sold. P.F. Chang's is casual-dining Chinese, and they developed Pei Wei from that.

I'm just curious—does anybody like Mexican? What other concepts have you seen in Mexican?

So you've got a crave-able product there, right?

Sure, yeah.

They're actually based in Atlanta.

They've got some here, I think. There's a burrito concept in Dayton—I don't know if I can remember. Has anyone tried it? What's it called?

Yeah, Hotheads. Is it good?

Well, the reason I ask is that as successful as Chipotle is—they are crushing it right now. I know I said don't measure success by numbers, and I'm going to violate that here, but Wendy's with 6,700 restaurants, 1,400 company-owned, and owning real estate of about 600, a nine-billion dollar brand has a market cap of about two and a half billion dollars. Chipotle, which I assume has no debt and no real estate, all company-owned stores, 1,500 comparable to Wendy's, has a thirteen billion dollar value. But as successful as they are, I've seen many interesting fast-casual Mexican places that make Chipotle look like what Taco Bell is to Chipotle. One is Xoco in Chicago. Unbelievable—seven and a half million dollars per unit in 3,000 square feet, taking fast-casual Mexican to a whole different level. As successful as they are, there's still room for growth. American consumers love Mexican food, so there's growth in that space.

Thank you for your time.