Special Report | July 2012 | By Sonya Chudgar
The Rise, Fall, and Rise of Sbarro
One hundred days. That’s how long Jim Greco gave himself to right the sinking ship that was Sbarro when he took over as president and CEO in February.
The company filed for Chapter 11 bankruptcy in April 2011 and emerged from it in November, having shed $200 million in debt and 25 underperforming sites. But jiggering liabilities on a balance sheet had not addressed the limitations—which ranged from a subpar pizza recipe to an overreliance on mall traffic—that had caused Sbarro to drown.
“I recognize that Sbarro had, over the last several years, lost its lead in the space it operates,” Greco says. “Sbarro is an iconic brand with name recognition. And that is something that’s really hard to create and is very valuable. So I thought that it was a great place to start to build something back.”
On February 1, Greco stepped into Sbarro headquarters to recast the brand as a fast-casual contender. He concocted a formula called the 100 Day Plan, detailing how the Italian quick serve would leverage people, place, product, and positioning to enact its resurrection.
The changes debuted in June, when Sbarro rolled out 10 test units showcasing an updated pizza recipe, open-flame ovens, and a made-to-order pasta station, all rolled into the brand’s new motto, “Hands On Italian.” Team members now undergo cultural hospitality training, and an outside firm holds the blueprints for a next-generation design to be unveiled in November.
Five months into his reign as CEO, Greco says everything is going according to plan.
“We wanted to settle on a vision, we wanted to design a strategy to realize that vision, and we wanted to create the 100 Day Plan that called for a number of initiatives to be accomplished,” Greco says. “And everything that we sought to accomplish in the 100 Day Plan has, in fact, been accomplished.”
In 1967, seven years before the first successful mall food court was built, Sbarro engineered a mall location in Kings Plaza Shopping Center in Brooklyn, New York. The idea was simple: cook fresh, Italian food in an open kitchen and serve it quickly. Consumers ate it up, and the modern Sbarro concept was born. The brand became a staple as food courts boomed throughout the ’80s and ’90s.
But the quick serve that once offered “tastes to fit every palate” fell into troubled waters in the ’00s as rivals rose to challenge Sbarro’s offerings. Pizza Hut began peddling calzones in 2003 and pasta in 2008, and Domino’s stepped up to bat with a flashy new pizza recipe in 2011.
Consumers, meanwhile, were slowly slinking away from Sbarro in favor of a rising restaurant sector: fast casual.
“Fast casual was getting a really good grip on the consumer,” says Anthony Missano, president of business development for Sbarro. “It had done a great job of educating the consumer about quality and what to expect for a reasonable price, so the value equation was very strong, and I think at Sbarro we just were not consistent with that trend.”
Part of the trouble was the brand relied heavily on locations in malls, and as the recession hit around 2008, consumer confidence dropped and once-vibrant malls became ghost towns.
“If you look at what real estate costs were and construction costs in that 2005–2008 time period, they were extremely inflated,” says Dave Bagley. Bagley is a principal at MorrisAnderson, an operational and financial turnaround firm that has led bankruptcy recoveries for Sonic and Popeyes, among others.
“These malls that Sbarro was placed in were in geographic areas where there was a lot of continued growth during that period of time,” he says. “They were based on continued growth, and as we know now, some of those things didn’t come to fruition.”
Coupled with real estate costs were rising commodity costs. While corn and protein prices skyrocketed, inflation drove up price tags on cheese and flour. Gas prices grew faster than sales of the Apple iPad, and suddenly every input entering the store was costing exponentially more.
Coming in, Greco says, he noticed Sbarro was purchasing costly ingredients but charging low prices.
“I saw a company that was using costly ingredients to produce food that’s much better for you than typical fast food,” he says. “And, as a result, to cover the cost of materials we need to charge prices that are above fast food. But we weren’t delivering the whole fast-casual experience that we could.”
The Turning Point
In 2007, private equity firm MidOcean Partners bought Sbarro for $417 million. In 2010, it installed a new management team and appointed one of its managing partners, Nicholas McGrane, as CEO.
The changes were not enough. By 2011, Sbarro had accumulated more than $350 million in debt.
“The biggest enemy of a company that’s in financial trouble is time,” Bagley says. “If they have cash, they have time. But they need to generate some liquidity to give themselves time to turn around their operations.”
Sbarro, submerged in debt, had no choice but to file for Chapter 11 on April 4, 2011, and attempt to reduce its debt by half.
Bagley says a turnaround involves three steps: assessing the situation, identifying the biggest risks to the business short-term, and making changes so the company arrives at a stability point.
“In a turnaround, there are things you can do that don’t affect the customer, right?” Bagley says. “If I renegotiate a lease, if I cut a deal like Sbarro did with its lenders, that doesn’t affect the customer experience at all. That enables the company to be on more solid financial footing, which over a period of time, will improve the customer experience.”
Sbarro’s stability point arrived seven months later, at the end of November, when the brand emerged with reduced debt and an infusion of $35 million in capital from its lenders.
Greco Steps In
Greco enjoys puzzles. But we’re not talking about 100-piece jigsaw puzzles. His puzzles of choice are closer to $500 million on a balance sheet, and his quest is to arrange the pieces so they stop bleeding red.
Greco has led four previous financial turnarounds, most recently at Bruegger’s. His plan at Sbarro focuses on four areas: product, place, people, and positioning.
In terms of product, Sbarro reformulated its pizza recipe using all-natural ingredients, from whole milk mozzarella cheese to whole peeled tomatoes. It is working with manufacturers on original sauce recipes and styles, and it installed open-flame ovens that “give us a lot more theater than we had before,” Greco says.
The new pasta station, meanwhile, allows guests to build personal noodle dishes within 45 seconds.
The new positioning, “Hands On Italian,” is reflected in the food, PR, and point-of-sale materials. Greco also implemented a cultural hospitality program that teaches management in how to hire for attitude, train for skill, and empower for teamwork.
Executives are closely monitoring the aforementioned changes at 10 nationwide test units unveiled in June. All 10 were converted overnight in a “Mission: Impossible”–style adventure, with teams moving in at 9:30 p.m., dropping in the 6-foot-long pasta station, muscling the 5,000-pound woodstone pizza oven over the counter, and fashioning murals and menuboards so the stores could open the next morning.
While they reflect an updated design, the test units are not representative of the ultimate blueprint. Those will come in November, when Sbarro unwraps five units renovated in the next-generation design.
The Next Chapter
Greco’s team will analyze sales and conduct customer intercepts to gauge opinions at the test units. Customers, meanwhile, can look forward to the nationwide rollout of the new pizza recipe at the beginning of September.
Missano says Sbarro’s changes are not a one-shot process, but will continue to evolve over time. Next, the brand will take a closer look at its salad, dessert, and handheld offerings, and Greco hopes improvements will be made to them by the time the five next-gen units arrive in November.
As Sbarro plans for its future, Bagley warns against changing too much or too swiftly.
“In a turnaround situation, you’ve got to really convince everyone that while you’re doing things better, it doesn’t mean you were doing them poorly before, because maybe they liked the formulation of the coffee or the formulation of the pizza,” he says.
Rebranding as a fast-casual concept also requires a different management style, experts say.
“When you start talking about fast-casual types of concepts, that’s almost a whole different process [than a quick serve],” Bagley says. “There are multiple more touch points, which makes managing those locations a little bit different, and that’s one area where we see some of our clients in the past who try to change their concepts really struggle with that.”
But Greco isn’t worried.
“[The changes] will, once again, establish Sbarro as a leader in this space,” he says. “The things that are coming will be so far and above what others here in our space do, and for that matter, it will be so compelling that it will make us a strong competition for folks in other types of fast-casual spaces.”
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