Bruised by seven years of negatives, culminating in a Chapter 11 filing, Back Yard Burgers has stabilized and its CEO believes next year it can begin growing again. ‘One step at a time’ is how they’re getting through.
New employee Monte Jump got the bad news just three days in advance: Back Yard Burgers was about to file for bankruptcy protection. "Oh my gosh. I did not even want to call my wife and tell her—and we closed 16 locations the day after that," recalls Jump, the chief marketing officer for the Nashville-based franchisor, about that December 2012 day.
Back Yard Burger Timeline 1986: Lattimore Michael starts Back Yard Burgers in the back of his grocery store in Cleveland, Mississippi. 1993: Michael takes the firm public, staying involved until 2007 when a series of private equity firms buy and sell the brand. DEC. 2012: BYB files for Chapter 11 bankruptcy protection, begins closing stores to eventually cut corporate total in half. JAN. 2013: After Pharos Capital Group puts in $14 million cash, new CEO David McDougall joins the company. 2013: Consumer research begins under Monte Jump, who zeros in on ‘grilling with care’ as a guiding mission. JUNE 2014: BYB posts 14 straight months of same-store sales growth as McDougall strives to repair franchisee relations.
Eighteen months later the brand has stabilized with a $14-million initial cash infusion from Pharos Capital Group in Nashville, new CEO David McDougall joining in January 2013, and the emergence from court protection just a few weeks after McDougall signed on.
The bruises linger, however—not surprising after three ownership changes, $50 million in debts owed to creditors, and even an assault allegation filed against a former CEO. "It takes a lot out of the business," McDougall says about the last seven years. "To rebuild confidence, to get potential investors’ confidence, it takes time.
"I’m optimistic we can do that, but it’s kind of like one step at a time," he adds, then details the steps they’re taking and the progress they’ve made, offering one look at what it’s like for a franchisor and its franchisees to go through bankruptcy.
McDougall started his tenure by calling a meeting with his general managers, and the atmosphere was tense. "I got one question, and the question was: Are we going to be in business in 90 days? I was taken aback," he recalls. "I said, well, of course. Although I thought, a lot of things have to fall into place."
He immediately instituted a monthly bonus plan for general managers of corporate stores, which awards them 1 percent of the monthly net revenue of the restaurants. "And it’s been paying off nicely. I have no problem sharing," he says.
He began digging into the unit level economics, "which is the name of the game," he says, improving the financial model for franchisees and company stores. "The good news is we’re in a much better place and our owners feel positive with what we’ve accomplished over the past 18 months."
McDougall is a foodservice veteran, the former senior VP of quick-service restaurant operations for NexCen Brands, which operated Marble Slab Creamery, Great American Cookie and Pretzel Maker, among others. When Pharos Capital asked him to take on the CEO job, he didn’t hesitate despite the bankruptcy filing. That’s because he believed in the basics of the brand. Lattimore Michael, the founder, started grinding up beef and cooking hamburgers in the back of his grocery store in Cleveland, Mississippi, in 1986.
"It was a hit right from the beginning," says McDougall, who sought out "Latty," as the founder is known, to investigate and return to the company’s roots. After Michael’s departure, a private equity group had embarked upon an expansion plan in the fall of 2007, ill-fated because of the financial collapse the following fall.
As stores closed and CEOs changed two more times, a new value menu was rolled out and franchisees howled—they had been known as a "better burger" restaurant long before Five Guys and Smashburger reinvented the category, and now they were pitted against McDonald’s and the like.
In July 2012, James Boyd Jr., the CEO before McDougall, was accused of physical assault by Back Yard executive Carl Diaz, who was promptly fired. Diaz alleged in a lawsuit Boyd’s "erratic behavior, abusive nature and continual acts of bullying" sparked everything from "employee alienation" to "mass walkouts." McDougall says those episodes are behind them. "Most of it was resolved through the bankruptcy. We say that’s in the past and not how we operate, not how we treat people."
In total since the bankruptcy filing, Back Yard Burgers slashed its corporate store count in half, to 22, closing stores with "exorbitant leases," McDougall says, where business couldn’t be sustained. That shook the confidence of franchisees. Back Yard has 46 franchised stores today.
"I will tell people bankruptcy is not easy. It’s expensive, and sometimes there are consequences that come with it that you don’t anticipate," McDougall says.
Bridgforth Rutledge is a successful Back Yard Burgers franchisee who opened his first store in 1998 and now has seven, in Jackson, Meridian and Oxford, Mississippi. The franchisor’s bankruptcy didn’t affect him directly, he claims. "Our sales have been really strong," he says, crediting three factors. "First, our locations are great," says Rutledge, a real estate lawyer as well as a restaurant operator.
Second, he hired an architect and designed a restaurant prototype that proved successful, going against the franchisor’s wishes at the time. "It’s extremely upscale, nice, a good-looking building," which he believes is essential to give the impression the restaurants are first class.
Not just cheap food
Third is operations. "We do our best to go above and beyond to operate better than our competitors," he says, adding he doesn’t view other hamburger joints as the major threat. "Our main competitor is Chick-fil-A," he says. "They don’t serve hamburgers, but demographically" that customer profile is the same, and those "customers will pay more. Their primary objective is not just to get cheap food."
Rutledge is relieved about the new management. "I don’t think all the problems have been fixed, but they’ve turned the corner. They’re seeing momentum," he says. Although a small group of franchisees are doing well, in his view, more franchisee stores will have to close because their locations are not good and can’t be overcome. "I think others have personally made the mistake of saving money on real estate, and it’s a downward spiral," he says.
Today, McDougall believes Back Yard Burgers has gone back to its roots, and that’s a positive. Jump, the chief marketing officer who this June was promoted to chief operating officer, was immediately enlisted by McDougall to begin a consumer research effort that is paying off. With a background at Pepsico, Jump considers himself "a disciplined marketer who wants to understand core consumers," he says. "It’s not what you at the executive suite think your brand is about, it’s what your customers think it’s about."
The research showed Back Yard Burgers is about "grilling with care," Jump says. "The grill becomes a strategic advantage for us, so all of our ideas come from there. Prior to that, there was a lot of work on products that had no business being here: things that were fried, for example."
A fried chicken sandwich was tested; three different styles of boneless wings, too, and for Lent, a fried fish product. With the new focus, this past Lent they rolled out a grilled mahi burger, and it was a hit. "Who are you going to beat, and how are you going to beat them," is the question Jump is striving to answer at Back Yard Burgers.
McDougall is confident. Same-store sales have increased for 14 months in a row now. Creditors are being paid in accordance with the bankruptcy agreement. Pharos Capital is backing him and the moves his team is making. And relations with franchisees are slowly being repaired. Says Jump about the bad times: "It was not a fun place to work before Dave arrived. Life is good today."
McDougall adds a caveat: "We’re definitely in a much, much better place," but "success can be fleeting. We’ve got a long way to go."
