Alliance group to acquire Damon's International

From Nation's Restaurant News
COLUMBUS, OHIO - Damon's International, operator of 105 company and franchised Damon's Grill full-service dinner houses throughout the United States, Great Britain and Panama, has entered into an agreement to he acquired by Alliance Development Group, a real-estate development company based in Charlotte, NC.

Terms of the deal were not disclosed.

Damon's reported fiscal 2005 total sales of about $252 million, a decline from $277 million in 2004. Shannon Foust, president and chief executive, who blamed sales weaknesses on the Midwest's economy, said the acquisition would he in the best interests of the brand.

The company is expected to name Jon Self, a Damon's board member and franchisee, its president upon completion of the sale.

With new owners, a new menu and a reduced debt load, the struggling rib house chain is poised for a turnaround

SAVING Damon’s

Damon’s grill cracked a rib trying to grow too fast—and anyone who’s ever suffered one of those painful fractures knows how agonizing they can be. In Damon’s case, the injury came close to landing the whole company in the critical care ward. But now Damon’s has a new owner—the Charlotte, N.C. based Alliance Development Group, and the bosses at Alliance say the crisis has passed, and the restaurant chain is on the mend.

The recent trials and tribulations at Damon’s—too much debt, too much competition and ill-conceived expansion efforts, are hardly unique in the fiercely competitive casual dining segment of the restaurant biz. Where other chains with such problems have self-destructed, Damon's-with new ownership, reduced debt and a fresh game plan, seems ready for a comeback.

Founded in 1979 with a single restaurant on East Broad Street, Damon’s capitalized for years on a unique sports bar environment and some of the best barbecued ribs around. Under its previous moniker, “Damon’s—the Place for Ribs,” the chain experienced a growth spurt that saw almost a tripling of its stores. Mostly because of franchising efforts, Damon’s went from about 50 stores in 1990 to nearly 150 in 2003, and nudged close to $300 million in total sales.

But in recent years, Damon’s had wandered a bit from its successful formula, and a number of other casual dining chains had tied on their bibs, ripped open the wet wipes and pulled up chairs for their own taste of the ribs business. Like a comedian whose shtick has been copied too well by some up-and-coming talent, Damon’s struggled to maintain its identity, or find a new one.

Now known as Damon’s Grill, the chain is still figuring out what it wants to be. Is it a place to watch the game on the big screen, slug back a few cold ones and munch on ribs? A clean, friendly place to take the kids for Sunday dinner? A haven for trivia buffs who nibble appetizers while competing with other wonks at bars and restaurants all over the country?

In the long term, the identity Damon’s chooses will no doubt determine the company’s fate. In the short term, the company’s strategy has been to get healthy by getting smaller.

TIGHTENING THE BELT

By the time new owners took control of corporate parent Damon’s International last year the chain’s waistline had already shrunk considerably as underperforming stores were closed or sold off. Down to 110 stores at the end of fiscal 2005, Damon’s fell from 97th to 128th in Restaurant & Institutions magazine annual rankings for top-performing chains in 2006. Total sales dropped from $294 million in 2004 to $252 million in 2005. The cutbacks continued in 2006, with the company’s new owners reporting 90 stores operating in late December

Will the get-smaller strategy pay off? Scott Hume, executive managing editor of Restaurants & Institutions, says the jury’s still out. Sales per store were basically flat from 2004 to 2005, Hume says: “They had $2.1 million [per store] at the end of ‘04 and $2.15 million at the end of ‘05, so the stores that are operating are doing about the same; there are just fewer of them, and that’s why they fell back a bit” in the rankings.

For some companies, such dramatic shrinkage might signal the beginning of a death spiral, but the folks at Alliance Development Group seem to know what they’re doing. Privately-owned Alliance specializes in build-to-suit, sale/leaseback and other real estate development deals with retailers, restaurant chains, hotel operators and health-care providers.

Announced in fall 2005, Alliance’s acquisition of Damon’s didn’t close until April 2006, and the nerves of some franchisees and executives got rubbed raw during the wait. Jon Self, a longtime part-owner, franchisee and board member, walked away from a deal to retain part ownership and become CEO of Damon’s after the sale. Self, who owns the Buckeye Hall of Fame Café and other restaurants, didn’t return C.E.O.’s calls for comment.

The sale also was the subject of a lawsuit against Alliance and its president, William J. Burk, filed by Damon’s franchisee Brian Maloney of Pennsylvania. Maloney claimed he and Self were supposed to own the chain along with Alliance, but that the new owners went behind his back and cut him out of the deal, according to court documents. Maloney’s suit was dismissed by the North Carolina General Court of Justice.

Other franchisees briefly mobilized against Alliance last summer questioning Burk’s financial history. Burk filed for personal bankruptcy in 2002, faced regulatory trouble in Pennsylvania after a 1992 incident in which shareholders of a real estate company he was involved with lost millions, and settled a suit with the US. Securities and Exchange Commission that same year.

“I’ve never been involved in stock fraud,” Burk says. “‘There was some action taken, but nothing was done because I’d done nothing. Since that time I’ve built a number of projects. . . . One project in North Carolina created 6,000 new jobs. When someone’s trying to make you look bad, they don’t talk about things like that.”

Burk says some franchisees were “misled” by rumors that Alliance wasn’t going to put any money into Damon’s. Paul Rose, who owns stores in Baltimore, reportedly organized a franchisee meeting to oppose Alliance. He did not return C.E.O.’s calls for comment.

Franchisee Ed Bush Sr., who has a store in Clarke Summit, Pa., says he’s been happy with Alliance’s leadership. “I found them to be very professional, and the support that continued to come from Damon’s was excellent in my opinion,” Bush says. He’d like to open four more stores in the next five years.

Franchisees are the key to the company’s future, Burk says. Damon’s spokesman Brad Ritter says Alliance sold the last 20 company-owned restaurants in October to Damon’s Management Group, a company formed by Pittsburgh businessmen Mike Sabatini and Jack Nalipinski. Ritter says Damon’s Management Group, now the chain’s largest franchisee, plans to open at least three more restaurants—two in Pittsburgh and one in Akron.

A TURNAROUND PLAN

Already, Burk says, Alliance has poured a “very, very significant” amount of money, “in the millions,” into Damon’s. The company’s 25-point tumaround plan is in place, and Burk predicts a period of rapid growth through franchising.

Carl Howard, the company’s new president and CEO, says the turnaround plan doesn’t involve getting rid of Damon’s ribs, still made from founder Irving Rossman’s recipe, or scrapping the Clubhouse sections of the restaurants, where customers watch sports or play trivia games on large projection screens. A Damon’s veteran, Howard started at the chain in 1990 and has been a general manager, regional manager and franchisee. He left for a little more than a year in the mid 90s to work for bd’s mongolian barbeque, but returned when the board of directors called upon him.

Like many good restaurateurs, Howard enjoys his own product. “There was a streak there for about seven or eight years where I ate one rib bone everyday he says. “Our sauce is the best.”

Howard says Damon’s is rebounding because of Alliance’s support. “The old board was in the twilight of their careers,” he says. “I was on that board. They wanted to slow down, back off. They all live in New York. They were very hands-off. They just didn’t want to put any more money in.”

Alliance, Howard says, has “put absolutely no restrictions on me as far as ‘can’t spend, don’t do,’ and that’s a fantastic opportunity for anyone". He says Alliance "has already put several million into the organization,” including money to hire consultants WD Partners and Technomic.

Howard was promoted from chief operating officer to CEO after Shannon Foust, a 22-year Damon’s veteran who’d been CEO since 1999, resigned following the announcement of the sale to Alliance late in 2005. Foust has since gone on to lead franchise expansion efforts at Columbus-based Roosters, another casual-dining chain. Self initially was slated to take over in Foust’s absence, but he pulled out of the deal and Howard was named CEO.

For Howard, deciding to stick with Damon’s after the sale wasn’t exactly a no-brainer. “Like Shannon, I was also considering other options,” he says. “Because the transaction took so long to close, it raised a lot of questions, made people nervous". He says the sale was drawn out because there were “a lot of moving pieces in that transaction—eight different lending institutions."

DECLINE & REVIVAL

Damon’s didn’t slide into trouble overnight, and restoring the chain to good health won’t happen overnight either. Founder Rossman, who now owns two restaurants in the Fort Myers, Florida area, says the key to Damon’s success in its early years was that everything about the restaurant reflected his own tastes. It was Rossman who transformed the Red Ox Steakhouse at East Broad Street and James Road in the Eastmoor neighborhood into “The Place for Ribs” in 1979, naming the place after his pet ferret.

“I used to entertain at my house and cook for people, and everybody said I was in the wrong business", recalls Rossman, who was a partner in his brother’s collection business before launching Damon’s. Gene Simonetti, Rossman’s business partner in those early years, says the basics can’t be forgotten at any restaurant. “There was a focus we established on really good food, served warm in nice portions at fair prices,” says Simonetti, who also now lives in Florida. “And we focused on the guests and their wants and needs at the table rather than anything else.”

Somewhere along the expansion trail, Simonetti says, Damon’s lost that early focus. “When you lose one or more of those key foundations, you’re history,” he says. “It’s not rocket science. It's pure and it’s simple.”

“In 1992, we could rest on our laurels with ribs and the Clubhouse,” Howard says. But technology evolved to a point that made the Clubhouse less exciting for customers. Cable and satellite TV has allowed people to have all the sports programming they want right at home.

Meanwhile, newer sports-themed bars came out of the woodwork—at least six on Bethel Road alone, all in close proximity to the Damon’s learning center and test kitchen on Knightsbridge Boulevard. “And everybody has ribs now,” Howard says.

“Damon’s prior management really did not evolve the concept to keep it in pace with changing consumer preferences," says Dennis Lombardi, Executive Vice President for foodservice strategies at WD Partners. “Now they have to play catch-up in that category with a design that is more in keeping with what people look forward to and enjoy today—a contemporary look, ambient light. Fifteen years ago, those big-screen TV’s were quite the thing. Now, with people having 42-inch plasmas at home and sometimes much bigger, and with HDTV, it’s a little different story.”

Food and ambience accounted for only some of Damon’s problems. There were location and store design issues as well – old buildings in neighborhoods where demographics changed between 1990 and 2000. “In 1992, Hilliard-Rome Road was a farm,” Howard says. “Tuttle (Crossing) Mall wasn’t complete. There was no Polaris, no Easton.” The Continent, once home to one of the busiest Damon’s, entered a period of decline and is now struggling to reinvent itself.

There were financial challenges, too. As Damon’s expanded, the company took on a substantial debt load – some $40 million by one estimate. Servicing that debt and continuing to carry the operating costs of company-owned restaurants kept Damon’s cash-poor and unable to make significant capital expenditures.

So far, Alliance Development Group hasn’t hesitated to invest its own cash in Damon’s – or to shift strategies. The Damon’s turnaround plan started with a new menu, as is often the case with restaurants in trouble. In July, the chain introduced what Howard says franchisees have called the best menu the restaurant has ever had.

New dishes include Shanghai Paddles, a spicy, Asian wing-type appetizer actually made with turkey; the Desert Pear Margarita; Asian chicken and pasta; smoked portabella flatiron steak; and baby back ribs. Yes, Damon’s now offers baby back ribs, cut from a leaner place on the hog’s back. Previously, the chain had featured only St. Louis-style ribs, which are cut from the spare rib portion of the back.

In selecting dishes for the new menu, Howard says, Damon’s is attempting “to put something together that’s consumer-relevant 363 days a year, not just on football Saturdays or the day of the big basketball game.” New combo dinners, featuring two entrees, soup or salad and a side dish for $13.99, have been very popular with customers, Howard says, "It's the best deal in the city if you ask me.”

Howard credits the new menu for the fact that same-store sales rose in September for the first time in 14 months, by about 2 percent. More menu changes, scheduled to be rolled out in January, were to include a limited-time offer featuring alternative rib sauces.

The size of Damon’s restaurants also is going to change, Howard says. A typical Damon’s used to be 8,000 square feet; the newest prototype is about 6,000 square feet. To make startup costs lower and returns higher for franchisees, Alliance wants the maximum size of future stores to be about 5,000 square feet.

The stores will become brighter and airier as well. Anyone who has been in Damon’s knows the windowless Clubhouse is kept quite dim, so ambient light doesn’t interfere with the images on the project screens. Newer technologies such as plasma and LCD screens can handle a bit more light, Howard says, co Clubhouse areas won’t be as dark. Tabletop speakers and channel changers also may become portable in the next Damon’s evolution.

Alliance also has dramatically improved Damon’s liquidity by selling all of the company-owned restaurants. Ritter says that sale reduced the company’s debt from $40 million to about $5 million, freeing up cash for other uses. Howard also has discussed plans to sell the company’s headquarters building on Executive Drive and move the corporate offices into Damon’s nearby training center.

Early on, Howard talked about plans to build more company-owned restaurants, but the long-range strategy now seems focused on expanding existing franchises and developing new ones. Information on the Damon’s website says the total investment required to open a store can range from $1.12 million to $3.2 million, with an initial franchise and development fee of $50,000.00.

With the cash-guzzling company-owned restaurants gone, greatly reduced debt and a well-capitalized ownership group, Damon’s seems to be in position to execute its turnaround plan. What’s needed next are some deep-pocketed franchisees, willing to sink their own capital into 5,000-square foot stores with spiffed-up menus and the latest big screen technologies, all served up in lighter, cheerier Clubhouse areas.

And, of course, a few hundred thousand customers, eager to chomp those ribs, watch those games and punch those trivia consoles.

Katy Waters is an associated editor for Suburban News Pulications.