FOLLOW THE MONEY – OCTOBER 15, 2024

Stanley Druckenmiller, a muti-billionaire, likely the best macro trader on the planet, with 45 consecutive years of positive performance, put it this way in a presentation last week. ”…in the US you have a reckless monetary gamble (by the Fed) and an unhinged reckless fiscal policy (by our government), which makes the odds of the fabled soft landing somewhat different that what the market is pricing in”. I’ll rely on Druckenmiller’s view for this month’s fiscal/monetary macro update, since his credentials are a lot better than my own. I will only add that whoever gets elected, the deficits and debt are not going away.

lessons to be learned from: THE RISE AND FALL OF FLAKEY JAKE’S

The restaurant industry, which leads Drukenmiller’s general economy, seems to be in a holding pattern, perhaps awaiting results of the upcoming important election. Therefore a “teaching moment” could perhaps be useful, reflecting back to just one war story within my 40+ years covering the restaurant industry: The Rise and Fall of Flakey Jake’s.

It was 1981 and, after losing all my money building and operating fifteen Arthur Trencher’s Fish & Chips locations in Ontario, I had resumed my Wall Street career as an institutional analyst. In 1981 the hottest concept among publicly held companies was Chi-Chi’s, the full-service Mexican dinner house. Their sales to investment ratio, by the way, was a fully loaded 2.0, doing $2.5M out of a land, building and equipment package costing $1.25M. One of their largest franchisees was publicly held Kelly-Johnston Enterprises and co-founder Joe Johnston became a valued source of industry information. I made my way to Houston, after he suggested I look at Fuddrucker’s, a (bigger and better) hamburger concept opened in 1979 by renowned restauranteur, Phil Romano (later to found Romano’s Macaroni Grill). My personal visit to Fuddrucker’s, doing upwards of $50,000/week in about 4,000 square feet was indeed impressive, prompting me to write Romano a letter, suggesting that my firm could provide capital for expansion. Romano did not respond so I moved on, until getting a call from a friend in Seattle. Sea Galley Stores, a publicly held seafood dinner-house chain, had just converted a Seattle location into a new concept called Flakey Jake’s. It did not take more than a minute on the call to realize Flakey Jakes was a modified version of Fuddrucker’s. It took me no longer than a week to get to Seattle, still only a few weeks after the opening. Parenthetically, Norman Brinker, the Babe Ruth of full-service casual dining, had already visited, still out there paying attention.

Sea Galley had done a good job, modifying Fuddrucker’s, while maintaining essential elements, and the store was clearly doing well. After buying myself some stock in Sea Galley Stores, I suggested to CEO, Steve Dowen, that my firm would be happy to help finance their expansion. Consequently, in 1983 my firm underwrote Sea Galley’s partial sale of Flakey Jake’s, still with only a handful of stores, to the public at $5/share, which promptly appreciated to $9/share. Extra credibility was provided by the recruitment of an “A team” of franchisees, including Frank Carney (co-founder of Pizza Hut), Jim Patterson (founder of Long John Silver’s) and Willy Theissen (founder of Godfather’s Pizza). I had also helped recruit Bob Luckey, who had become well known to Wall Street by way of his leadership of the publicly held Chart House chain, to be CEO of Flakey Jake’s.

From its IPO in 1983, Flakey Jake’s, by 1985 had grown to about 50 locations.  At the same time, Fuddrucker’s, which also came public in 1983 was growing to about 75 locations. It is noteworthy that Fuddrucker’s turned profitable by Q1’85, while Flakey Jake’s reported a quarterly loss of over half a million dollars, no doubt a function of Fuddrucker’s head start. In the period from 1985 to 1988, the wheels basically came off both concepts.  Fuddrucker’s grew to 150 units by 1988, though the unit level profitability declined, when Romano left, and it was purchased by publicly held DAKA. There have been about five other owners of Fuddrucker’s since, including publicly held (at the time) Luby’s, and private equity groups, as the chain has dwindled to under 50 locations today. Flakey Jake’s, after stumbling for several years in the mid-80s, was sold to a group led by Frank Carney, but had dwindled by 1991 to only three company stores and several franchised.

It was not the competition or general economic weakness that took Flakey Jake’s (or Fuddrucker’s) out. Those factors can hurt in the short run, but every failure in the restaurant industry that we know of over the last four decades was self-inflicted. There was plenty of room for a “better burger” chain, with Shake Shack coming to mind.  Of particular note: the franchise “A team”: Carney, Patterson, Thiessen et.al., were likely already too rich and famous, without the necessary drive for a “younger person’s game”. Experience teaches that leading a franchise system is separate and apart from running company operations. Executives can be hired for each but that doesn’t guarantee the increasingly rare commitment that comes with emotional, as well as financial “skin in the game”.

Roger Lipton