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DavCo chief knows what's cooking Kirstien takes hands-on approach as Wendy's franchisee; Adding Friendly's to mix; Firm has had solid gains, but faces lots of competition

Ronald D. Kirstien dresses the part of the perfectly groomed retailing executive: black shirt, trendy black and white striped tie and gold ring with the initial D.

Not the type usually found behind a Wendy's counter asking a truck driver what he wants on his cheeseburger.

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But don't be surprised if you see him doing just that.

Kirstien, chairman of DavCo Restaurants Inc., the world's largest Wendy's franchisee, has a motto: stay in touch with the stores. Don't just visit them, work them.

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"If I go into a store, I will jump right behind the line," he said. "There is no one in this company who won't do it, if you need a floor swept or a toilet cleaned."

It is a philosophy, analysts say, that is likely to serve Kirstien well as he guides the Crofton-based DavCo through the ups and downs of the fast-food industry and its expansion into the family restaurant business.

Last month, DavCo became the first franchisee of Friendly's restaurants, signing a long-term agreement with FriendCo Restaurants Inc. that gave it 34 existing restaurants in the mid-Atlantic region and the exclusive rights to develop up to 100 more in the next six years. It has committed to building at least 74.

The company has had a year of solid gains, but it faces a tougher market. Although harried Americans are spending more than ever on food prepared outside the home, more companies -- from grocery stores to pizza parlors to chicken joints -- are fighting for the carry-out/eat-out dollar. With fast-food sales fairly flat industry-wide, DavCo sees an opportunity to capture a piece of that expanding market with Friendly's.

"Overall, the fast food market isn't growing that fast. Mostly, it is a market share battle. If someone is doing well, then someone else is not doing well," said Mark Hamstra, associate editor of Nation's Restaurant News, a trade publication in New York.

Consolidation has weeded out some of the weak already. Snow storms and price competition have dampened the earnings of others. Even the grandfather of the fast feed, McDonald's, has been flailing around for a way to increase lagging U.S. sales.

"It is not a very good business," said Damon Brundage at NatWest Securities Ltd. of the fast-food business. "Companies have very little ability to raise prices to offset increases in operating costs."

Containing costs

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Despite the industry's problems, observers say DavCo is known for being able to control costs. "They do have a reputation in the industry as being a strong operator," said Hamstra.

Dean T. Haskell, an analyst with EVEREN Securities Inc., said he expects DavCo's same-store sales -- those at stores open at least a year -- to gain moderately at about 4 percent a year as long as Wendy's continues its marketing efforts.

Haskell also likes DavCo's long-term prospects, particularly as it develops a new model of store that combines fast food, convenience shopping and gas stations. Exxon and DavCo have signed an agreement to develop the model and are currently looking at three locations and plan to open the first early next year.

Started in 1969 by two brothers from Chattanooga, Tenn., DavCo was part of the same chain that owned Po' Folks restaurants. It opened its first Wendy's restaurants in 1976 and gradually grew into a franchise that now owns 229 Wendy's restaurants and has 8,500 employees in Maryland, Virginia, the District of Columbia, St. Louis, central Illinois and Nashville, Tenn. In the Baltimore-Washington area, the company operates 138 restaurants.

Kirstien joined DavCo in 1980, after rising through the ranks at Baltimore Colt Hall of Famer Gino Marchetti's Gino's Restaurants Inc. In 1987, management bought the company in a leveraged buyout financed primarily by Citicorp -- a move that saddled it with a heavy debt burden. In September 1993, after a recapitalization, the company raised $32 million in an initial public offering and was able to reduce debt and grow more quickly. Citicorp Venture Capital Ltd. retains a 47.6 percent stake.

The gambit succeeded, with sales more more than doubling to $208 million by 1995. In 1996, business was depressed, the company said, by snowstorms and price cutting by competitors, with same-store sales falling nearly 4 percent.

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This year, sales have rebounded, in part because of the introduction of a pita sandwich, with same-store sales up 4.4 percent and revenue of $163.2 million for the 39 weeks ended June 28. Earnings too are up -- by 50 percent -- to $4.7 million for the same period.

The upturn has helped lift DavCo's long suffering stock price from less than $9 in May to $13 Friday -- still below its March 1994 high of $18.50 and just $1 more than its $12 IPO price.

Improved operations

Kirstien said the company has tried to improve the bottom line by improving service and operations. He doesn't have fancy computer systems to tell him how many hamburgers have been consumed at each store in the past hour. Instead, he prefers to analyze why a store isn't doing well by rolling up his sleeves and working there.

He also puts stock in what he calls intelligent growth. Because DavCo has the exclusive right to build Wendy's restaurants in the mid-Atlantic region and an understanding in its other markets, Kirstien can grow at a pace that ensures new stores don't cannibalize the market.

Kirstien believes DavCo can add another 75 to 100 Wendy's before they saturate the market.

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In addition, DavCo's policy of promoting from within means the company can grow only as fast as it has good managers to take over restaurants. "You can strip your ability to manage those restaurants," Kirstien said.

And he takes the same hands-on approach in growing the company as he does in operating it. "The Kirstien rule is all new units will make profitability by the end of the first year," said Harvey Rothstein, secretary and executive vice president of DavCo. When DavCo is considering opening a new restaurant, Kirstien and other executives go out and look at the neighborhood, the location and the traffic. But the one piece of information they are not given is the property's asking price.

If the team comes back and recommends the company purchase the site, then price is discussed. "The trick is never to lie to yourself," said Rothstein, who doesn't want to be persuaded to set up a restaurant in a mediocre location just because the property is cheap.

Rothstein and Kirstien faced that issue of growth vs. price when they explored buying 180 Roy Rogers restaurants in the Baltimore-Washington area from Hardee's Food Systems Inc. Rothstein said the company decided it was not willing to pay the $66 million McDonald's paid for 180 stores, some of which it will convert to the golden arches.

DavCo searched for a more affordable way to grow its business and found Friendly's, a family-style restaurant and ice cream chain. That filled the bill for Kirstien.

"We are seeing a resurgence of family meals," he said. Because of an increase in working mothers, families have less time to prepare dinner and are less likely to eat together. He believes Friendly's can be good competition for Boston Market, carry-out pizza restaurants and even fast food stores.

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While DavCo may be taking a risk in getting into a market far different from the Wendy's it knows so well, analysts don't consider the move unwise. "It is a risk, but it can also be a safety net if Wendy's goes through some tough times," Hamstra said.

Despite the differences in the two chains, Haskell, the EVEREN analyst said, DavCo should be able to apply the same discipline to Friendly's that it has used to manage and grow its Wendy's stores. Prompted by Kirstien, DavCo has "an extreme focus on pleasing the customer," Haskell said. "He is extremely hands on. He is very much an operator."

Pub Date: 8/10/97


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