Sunday, January 30, 2000
Gold Star hitches up with two new partners
Growing into future with Burrito Joe's, Great Steak
BY LISA BIANK FASIG
The Cincinnati Enquirer
When it comes to growing a business, there are fewer ways to expand a Cincinnati chili chain than there are ways to make Cincinnati chili.
So after Gold Star Chili Inc. got a cool reception in such provocative markets as New York, Philadelphia and Qatar in the Persian Gulf, the Cincinnati chain had reached a corporate reckoning. The only feasible way to grow its market share, its executives realized, is through national recognition and a broader range of products.
To do that, they agreed, Gold Star would have to align itself with some of its competitors.
“Our basic product line is a niche item,” said John Sullivan, chief executive of Mount Washington-based Gold Star. “It just will not generate enough sales to cover the necessary investment outside Cincinnati.”
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GOLD STAR FILE
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• Headquarters: Mount Washington.
• Founded: 1965.
• President and CEO: John Sullivan.
• Stores: 110 locations, four of which are company-owned.
• Number of franchisees: About 50.
• Employees: 36 at corporate offices; 62 at corporate stores.
• 1999 sales: $57 million, including grocery store retail.
• Fun fact: Gold Star recently won a blind taste test as the best-tasting Cincinnati-style chili by Cincinnati Magazine.
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Gold Star knew that massaging operations could improve market share to a point — with better food and service the chain could steal market from other competitors. But for more dramatic growth, Gold Star needed more dramatic measures.
As Roger David, marketing director at Gold Star, put it: “The big question is: How is Gold Star going to grow in the next millennium?”
The chain plans to do so in a two-way:
• A new Gold Star venture has entered into a business agreement with the Cincinnati founders of Burrito Joe's that gives Gold Star the option to buy 75 percent of the business in two years.
• Gold Star has entered into a co-branding agreement with Hamilton-based Great Steak & Potato Co. as a vehicle to drive it into new, far-off markets.
These measures follow failed attempts by Gold Star to expand into new territories as a method of growth. The strat egies also demonstrate how hard it is for small chains, especially those with region-specific products, to expand outside of their comfort zone of product and location.
For Gold Star, it's not simply a matter of covering the costs of building out-of-state stores. It is the matter of introducing Cincinnati-style chili to an unfamiliar public. Think of it: In Oklahoma City, a three-way will conjure naughty thoughts, not a hill of beans.
As for expanding inside Cincinnati, Gold Star can open only so many stores before it begins to cannibalize its own business. Right now the chain operates about 95 of its 110 stores in Greater Cincinnati.
Restaurant owners and specialists agree that regional chains, especially those in the family-style segment of the food business, have a heck of a time expanding beyond geographic and product boundaries. Competition by major chains and the cost of marketing and building in new territories often make such efforts prohibitive or disastrous.
“Obviously product knowledge is the first hurdle” to market growth, said Patricia Dailey, editor-in-chief at Restaurants & Institutions magazine. “I don't think (if I'm) someone sitting out there in Nevada — Cincinnati chili isn't going to mean a thing to me.”
Great Steak: National "escort'
For most chains, including Gold Star, the most logical expansion route is on the road. The chain does operate roughly 15 stores in Louisville, Lexington, Columbus and Dayton, but it failed in cities further away in the mid-1980s.
“People were very unfamiliar with the regional Cincinnati chili menu,” Mr. David said. “We found that consumers out of town that enjoyed coming to Gold Star were not as frequent users as those in Cincinnati. You need a much broader base of customers or you need an expanded menu.”
Gold Star is not alone. Several local chains have failed at out-of-state expansions, including Montgomery Inn, with an Indianapolis franchise, and Frisch's Restaurant's Inc., which used to have stores in Florida and Texas.
“When you have something that's relatively unique, it's very hard,” said Craig Maier, chief executive of Frisch's. “Not everything can go national. (It's) tough to maintain the culture.”
Gold Star decided that if it wanted to expand beyond its markets, it should have an escort — a company known in other markets that Gold Star can operate with under the same roof. The chili chain researched several casual-style and fast-food restaurant businesses for co-branding opportunities, and two years ago opted for Hamilton-based Great Steak & Potato. They now co-brand three stores, two in Dayton and one that opened in Evendale in December.
Great Steak & Potato had two great features: Nearby headquarters, so it understands Gold Star's product, and broad market penetration.
“There have been very few cities where we have opened in where the concept has failed,” said Nick Lanni, chief executive of Great Steak. “We have far more brand equity — in all big cities across the country, people know us.”
Great Steak operates more than 225 locations in North America and abroad — many in shopping malls. According to Technomic Inc., a Chicago-based restaurant researcher, the chain generated 1998 sales of an estimated $85 million from 200 stores. In 1996, it generated sales of $70 million from 160 stores.
Mr. David said Gold Star's total sales, including products sold at grocery stores, was $57 million in 1999.
The goal of co-branding is to increase visits among existing customers while broadening the customer base. Ideally, the return on investment will be better than in a single-concept restaurant. In the Great Steak deal, the Gold Star franchisee pays Gold Star 5 percent of sales, and Gold Star pays Great Steak a 5 percent royalty.
“What you're sitting in right now is the best way to expand outside of Cincinnati,” Mr. David said. “We tried to expand the Gold Star concept outside of Cincinnati, and we struggled.”
Mr. David said that in the three co-branded stores, an equal amount of Gold Star products is being sold as Great Steak. What he considers a plus is that Great Steak deals in a food concept understood from coast to coast — meat sandwiches and potatoes.
Uncharted territory
While Gold Star pushed ahead with its co-branding concept, the matter of increasing market share within Cincinnati persisted, for good reason. The company already has valuable knowledge of the Cincinnati market, and it only made sense that it capitalize on that resource.
Enter Burrito Joe's, the 5-year-old burrito chain whose fresh ingredients and funky decor attracted a loyal crowd. While Burrito Joe's has succeeded, it did so on a shoestring budget. Its owners began looking for a partner that could expand their concept, maybe into a franchise operation.
“I think Gold Star brings not only access to capital, but access to expertise in running a large, multiunit organization and a franchise organization,” said Scott SirLouis, who co-owns Burrito Joe's with Shaheen Kazemi. “That's a different game, and we didn't have the expertise in that.”
In the deal, Gold Star created a sister organization called TQ Investments, which backed Burrito Joe's fourth restaurant. That opened Friday in Harper's Station. In return for its roughly $220,000 investment, Gold Star has a two-year option to buy out 75 percent of Burrito Joe's Licensing — the intellectual properties arm of the business — and 75 percent of the existing restaurants.
Mr. Sullivan, Gold Star's CEO, said he expects Gold Star will consider opening another Burrito Joe's if the store in Harper's Station performs well. Perhaps after operating two restaurants, Gold Star will consider exercising the option to buy.
The purchase price has been determined, but not disclosed.
Gold Star liked Burrito Joe's not only because of the success of the small chain, but also because of the growing popularity of its food segment — casual-style, fresh Mexican food teamed with American ingredients.
“That whole fresh-Mex type of concept is very interesting to us,” Mr. Sullivan said. “(Burrito Joe's) is a very simple format. It's not extremely complex. Our operation in Gold Star is not that complex.
“The other thing that intrigued us is when you visited their stores at lunch time, they were full.”
To enter this agreement, 14 of Gold Star's 18 shareholders created TQ Investments. Mr. David is one of the managers of the new venture, along with Basheer Daoud.
Law of first, best
Like many regional chains, Gold Star will have to evolve and look for ways to maintain and grow its market. Not all of its efforts will work, and indeed the jury is still out on some of its latest strategies.
The emerging category of fresh Mexican food has attracted a lot of competitors with deep pockets — such as Chipotle Mexican Grill, which is expanding nationwide. Tracie Etheredge, an information specialist with Technomic, said the food category “is kind of new and up-and-coming” — so new Technomic has yet to gather data on the concept.
As for co-branding, industry experts and restaurateurs say the trend is still proving itself long-term.
Ms. Dailey from Restaurants & Institutions said it's a challenge to surmount resentment among out-of-town consumers who think a “brash outsider” is trying to one-up them in a beloved food category — in this case chili.
While she thinks co-branding is “a smart strategy, absolutely,” she suggests Gold Star market its Cincinnati-style chili “maybe with a different name.”
Locally, Gold Star has a lot of benefits. It knows its market and its supply partners. And residents of a community tend to want to support and propel home-based businesses. The company continues to investigate other ways to increase business, such as further diversifying its menu.
And as for its efforts with Burrito Joe's, Mr. Sullivan says the companies have the “law of firsts” on their side.
“Whoever's first has the advantage,” he said. “And beyond that, whoever's the best.”
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