How Sbarro survived, and thrived, after 2 bankruptcy filings

Thanks, Jonathan. It's great to be with you.

You know, just more of the same. We've crafted kind of a strategy that enabled us to get the brand growing again probably over the past seven years. We were disrupted quite a bit by COVID but have kind of kept our heads down and just driven execution since we've cracked the code, if you will.

I started with Sbarro as a board member in 2012 and then took over as CEO about a year later. The brand had a number of struggles. It had been owned by private equity for a while, so it had become heavily indebted and hadn't really crafted a growth strategy beyond the malls. We all know what was happening with e-commerce and the oversaturation of malls in America. When I came in it was a challenging situation. It was kind of a tired brand. We had to take it through a second restructuring because it was struggling under a massive burden of debt. We really struggled to figure out how to grow this brand again because at the time they considered themselves an Italian eatery. We did a lot of consumer research. The recognition of the brand was phenomenal. But what people really knew Sbarro for was pizza, New York-style pizza, and specifically pizza by the slice. I figured that's a pretty good place to call home. The pizza segment is the third biggest segment in the industry domestically, but what's interesting is it's also the third biggest segment in almost every market around the globe. We had a niche not only with authentic New York-style pizza but also with pizza by the slice. It took us a couple years. We struggled with some initiatives that just didn't work, but by 2016, 2017, that was kind of a cathartic moment and we recrafted our brand position. That brand position is that Sbarro is the leading quick-serve restaurant brand serving what we call the impulse pizza occasion. We specialize in New York-style pizza by the slice and stromboli that both creates and satiates customers' pizza cravings. What's baked into that is a recognition that pizza by the slice is kind of our thing. It's the segment in the market that we really historically have dominated and by far we're the biggest player in that space today. We create the craving, and that's an acknowledgment that we're kind of equal parts restaurant and retailer. So the merchandising element is exceptionally important to us. Once I reassembled the team with that revised brand position, we went through it in great detail, refined it a bit, and recognized that that is really who we are. The challenge was, okay, if that's who we are, where can we put restaurants like this? At the time we were primarily in malls and airports. There were 1,200 malls in America, there might be a hundred airports, and it just didn't give us much of a growth opportunity. We talked about convenience stores and the growth in QSR there, and travel centers or truck stops, and universities, and casinos, and military bases, and just a plethora of different venues. From 2017 to today, we still open in malls. We want to be in malls, but malls globally are only about 25% of our growth. The bulk of our growth is in convenience stores and travel centers and military bases, colleges, hospital food courts. It's a different business today. As a result, we're achieving record levels of new store development. The last three years, we've had over 100 stores a year, and this year we expect to open 140 to 150 restaurants globally. We've been very lucky and very fortunate. The team's worked very hard and we've got some great franchise partners. Most of my experience was in the QSR hamburger segment, and with pizza and with our concept, it plays well in almost every market around the world. We're in 32 markets around the world. We've opened up two to three new countries per year for each of the last three years and the numbers perform well. It's a concept that works globally. Once third-party delivery apps emerged in 2015, 2016, Jonathan, we jumped on that because we knew that was kind of our pathway into the mainstream QSR pizza segment. We saw it as an opportunity to offer the convenience of delivery or even carryout in a way that didn't require us to build that infrastructure internally. That's been by far the fastest growing segment of our business today. In some of the venues like convenience stores, it's a critically important piece. It's 25-plus percent of our mix.

It's funny. Last week we opened four restaurants globally, and we basically worked with all of those new store openings to say, listen, we can't determine exactly when and where each one opened. We did a press release with all of the above. We opened a store on a military base in Kentucky at Fort Campbell. We opened a mall location in California. We opened a convenience store in Oklahoma and a convenience store in the United Kingdom. So we'll let them fight over who got the 800th. But I will tell you yesterday we opened our 801st and that was a company-owned store at a mall in Maryland.

I think it's all the above. If I were to say what was the one critical piece, it was the brand positioning. Reestablishing the brand positioning was a monumental moment for us as a brand, both on the company and the franchise side. Brand turnarounds don't work very often, and not only for brands that have to turn around from one or even two Chapter 11 filings, but even those that don't have to go through restructuring. When it does work, in my opinion, it typically is where you tighten the brand position. Sbarro was considered an Italian eatery with a wide offering of Italian food as well as pizza and stromboli. We still embrace that broader menu, but we adapt the menu to the venue. If we're going into a convenience store, every store has New York-style pizza and stromboli. That's a given. That is the cornerstone of our brand. With stores in higher volume locations, we will broaden that menu to embrace spaghetti and meatballs, baked ziti, lasagna, salads, and even some chicken protein dishes. It's not like we shed that, but we tightened the positioning around the core of the menu that consumers knew, and we used that as a catalyst to regenerate growth. That change in the brand position was really critical. The other components are just a vicious approach to operational execution. Once we identified the positioning and understood how important merchandising was, we continued to drive heightened levels of execution. We identified what was critical to achieving that brand position and then we measured it and drove the execution in both company stores and franchise stores. Operational execution is really, really key. The food quality is absolutely central. What I try to do, whether in my time running Wendy's or my time running Sbarro, has been to identify a big segment of the industry — QSR pizza obviously a very big segment — and then we want to play in the premium quality end. Not to say that value isn't important and we don't have to be price sensitive for the consumers, but we can't lead on price. We're never going to win that game. We want to position ourselves as the premium quality player. I understand the legacy and the ridicule that Sbarro faced with its deteriorating performance over decades and the bankruptcies. We can't change those perceptions overnight. But we have worked judiciously and consistently to constantly upgrade the quality. Everything we make is fresh. We make the dough fresh. We shred the cheese — it's 100% whole milk mozzarella cheese. We've increased the portioning. We shred the cheese fresh every day in every store. Shred the vegetables. We're a big believer that over time that quality positioning is where we want to hang our hat. That's our north star. It's positioning for the brand, it's operational execution, ensuring we have the quality to deliver, and then finally we have to make good returns on invested capital. Our concept can deliver some really impressive returns. We seek to get our investments back in three years, and we want that for not only company stores but for franchise stores too. That's the kind of solid foundation we built the business on. I'm proud to tell you that we have basically deleveraged the company entirely. We have a debt-to-EBITDA ratio of less than one year, one to one. When I started it was probably 150 to 1. Shedding a lot of that debt through bankruptcy was very, very helpful. But we did a lot of other things — repositioning where we operated stores, renegotiating leases, and driving the franchise side of this business. God willing, we've got a very bright future. We're very proud of where we've gotten to, and our hope is just to keep our heads down and hopefully I have a chance to pass it on to the next generation of family members and just continue to manage the brand for the long run.

I took over as CEO in March. I had been on the board, but just like the other board members who were all the private equity guys and the debt holders, none of us really had a sense because we had just emerged from bankruptcy less than 12 months earlier. So none of us really knew the numbers. I took over in March of 2013. Our first board meeting, this is when we were headquartered in New York, was in April of 2013, one month later. And I immediately said, 'Listen, guys, we're going to have to take this through a second restructuring.' I had great partners — Apollo, Guggenheim, Babson, Fort Hill Capital — just great, great partners. And I teased them jokingly after the fact that I said that was the meeting where you guys threw your pencils at me, because they were adamant that is not going to happen, Dave. But by October they agreed, were 100% supportive, and then they played on the other side, the equity side, as we cut the business, turned around, and grew it again.

You are 100% right. And I would say there's another piece of where they make mistakes. I've run three companies in my life — that was our family-owned franchise, which became a very large franchise restaurant company within the Wendy's system, Wendy's International, and then Sbarro. I've always applied four fundamental principles to management. Number one is brand position. You have to know where home is. There's just three qualities I look for in the right brand position. Number one, it has to be authentic to your heritage. You can't have been a zebra all your life and say, 'Tomorrow I'm going to be a horse.' You have to have a brand position that's authentic and believable to your heritage. Secondly, it has to be a defendable position in the marketplace. And third, it has to be a spot that allows you to grow at an above-industry-average rate, which means you'll gain share. Those are the three fundamental simple qualities to an effective brand position. When we repositioned our brand, we knocked off each one of those three. The second principle is, if that's where home is, then what are the critical factors I have to perform well in to move the business there? I bifurcate them to consumer-facing and enablers. Enablers would be developing the brand, applying technology, having food safety in place, making money, having good returns on invested capital. On the consumer-facing side, it's the operational execution, the menu has to fit the brand position, the expression of the brand — whether it's advertising, store design, uniforms, and all the merchandising — has to fit. The third principle, and I'm a CPA, that's where I started my career, is performance measurement. If you know where home is, you know what's critical to getting you there, you've got to measure everything you deem critical. Those measurements have to be timely, valid, and efficient. You can't spend more on the measurement system itself than its value is. And the fourth thing is you have to drive heightened execution against all these performance metrics. It has to be a way of life. We've crafted monthly business reviews at Cedar Enterprises and carried it over to Wendy's and now Sbarro, and that becomes the cornerstone for driving performance improvement, developing talent, and sharing the culture and vision. The other dimension aside from brands trying to be something they're not is so many brands in this industry are owned by financial owners and their time horizon is different. If you look at the best brands in this industry, in many cases, maybe not all, but many, they're privately owned and quite frankly family-owned. You look at the Chick-fil-A's or the Raising Cane's or the In-N-Out's of the industry and they're managing the business for the long run. This is now a family-owned business. I've been able to buy out almost all the private equity guys. We're just kind of settling in for the long haul, God willing. My three sons all work here in the company in different areas. My message to them is just manage the business in a way that keeps an eye on your grandchildren. That's the key, because that's what customers and employees and franchises and vendors want. If you do that, it's a great industry. I love the industry.

Look, I'm not going to tell you it wasn't incredibly challenging, and it was not a solo act by any stretch of the imagination. I've had less to do with it than most others. It's been a team effort. I communicate once or twice a week with all of our system — company, franchise, globally. I send an email that goes out to 2,000 people. It is so important to communicate broadly and to help people understand that longer vision. I'm always compelling them to drive performance stronger in franchise stores. I spent quite a bit of time on this email talking about certain key initiatives, particularly the people one. I'm proud of the fact that last year we had our lowest turnover in my 40 years in this industry. We had 90% crew turnover in our 150 company-owned restaurants last year, and we have average general manager tenure — that's the highest I've ever seen in my businesses — just under eight years per manager for 150 managers. We just had our company operations conference two weeks ago here in Columbus. Of the 60 people that are multi-unit field people in company and franchise domestic operations, average tenure was 17 years. It's a people business. We all hear that all the time, but that's the reality. It's about team building, creating a culture and a vision, and then getting everybody rowing in the same direction.

Thanks for the invitation, Jonathan. It's great to see you again.