PIZZA SCRAP: Shakey’s Set to Face Franchisees in Court
By JENNIFER BELLANTONIO
Garden Grove-based Shakey’s Inc. has tabled an expansion as the pizza parlor chain faces franchisee lawsuits and possible defections.
The company is set to square off in court this month with two franchisees that filed separate suits last year charging Shakey’s with breach of contract and fraud, among other things.
“Most of the terms of our contract haven’t been upheld in the past 20 years,” said John “J.J.” McNulty, president of the Shakey’s Franchised Dealers Association and a plaintiff in one of the suits.
McNulty operates an El Monte Shakey’s that he said has been in his family since 1964. He’s using the Shakey’s name under an extended interim contract after failing to come to terms on a new 20-year deal.
Mick Clark, president of Sterling Foods Inc. of Irwindale, filed the other lawsuit. He runs five Southern California Shakey’s and is the company’s second-largest franchisee.
Shakey’s officials say the cost of fighting the suits is dipping into its cash and has put a planned expansion on the back burner. President Sean Flynn isn’t talking about making nice with the franchises.
“No single franchisee, no matter how large or small, defines the future of this brand,” he said. “My job is to grow the franchise base by opening new stores. The silver lining to that particular cloud would be that we would get some very prime territories back, which we can refranchise.”
The company diverted “so much of our resources” to the legal matters that “we weren’t able to go ahead and do some of the things we would’ve done,” Flynn said.
The brouhaha has shaken things up at 70-unit Shakey’s, which said last year it planned to double the number of franchised parlors in the U.S. in the next five years. The company also said it planned to update its menu and unveil new store prototypes, starting at its company-owned Covina store.
The franchisees claim Shakey’s parent, Inno-Pacific Holdings Ltd. of Singapore, mismanaged money that should have gone to the chain and threatened to file for bankruptcy as a result of the lawsuits.
“I don’t have direct access to their financials, though I understand that they owe a number of creditors a significant amount of money,” McNulty said.
Shakey’s refuted the claims.
In a May 1 Singapore Business Times story, an Inno-Pacific official said “the outcome of the trial is not likely to have a material impact on (the company’s) financial position.”
In a prior statement, Inno-Pacific said it was selling Hong Kong-based Shakey’s International Ltd., which oversees most global franchises, to “focus on its core business” in the U.S.
Last year, Shakey’s Inc. counted $4 million in royalties and sales and a $1.7 million loss, according to the company. Industry sources say U.S. franchisees do about $60 million a year in sales.
Shakey’s still plans to remodel its Covina parlor this year, and continues to “address the issue of product development,” according to Flynn.
“It can seem that this litigation is very weighty, it is,it’s a distraction,” Flynn said. “But it mustn’t influence the reality of the potential of this brand.”
This isn’t the first distraction Shakey’s has faced. The company, which operated close to 400 U.S. restaurants at its 1970s peak, has closed troubled locations and struggled to lure new franchisees. Management also has shuffled, with Shakey’s seeing 13 new presidents in about 14 years. Flynn, who was hired last year, is No. 13.
According to franchisee McNulty, a new president comes in and makes promises based on direction from Inno-Pacific. But he said the parent company “fails to provide the support that’s necessary to move the system forward.”
“The president is hung out to dry,” McNulty said. “(Inno-Pacific) kills that messenger, hires a new messenger and blames the old messenger for everything that’s been done since the prior one was slaughtered.”
Franchisee Clark: “Sean will probably be a scapegoat a year from now.”
Flynn doesn’t see things that way.
“I hope this particular iteration is one to stay in place for a long time and see this brand reach former levels of glory,” he said.
The scuffle has overshadowed some good news at Shakey’s.
Last week, Shakey’s opened its first new franchise restaurant in nearly a decade. First-time franchisee James Kim opened a parlor in La Habra.
But word is other franchisees may be weighing an exit from the chain.
Alhambra-based Jacmar Cos., Shakey’s largest franchisee with 19 parlors, reportedly plans to leave the chain, either before or after its contract expires in about four years, according to McNulty.
Jacmar, which also owns a majority stake in Huntington Beach-based Chicago Pizza & Brewery Inc., did not return calls for comment.
In an April 3 story by Louisville, Ky.-based NetWorld Alliance’s Pizzamarketplace.com, Jacmar division president Randy Hill was quoted as saying: “We will never,and this is an irrevocable statement,be associated beyond the length of our existing contract with Inno-Pacific.”
Jacmar accounts for about a third of the Shakey’s chain’s sales, according to McNulty.
A few months back, Supple Restaurant Group of Oshkosh, Wis., settled a lawsuit with Shakey’s that took its three restaurants out of the chain. Owner and operator Jay Supple converted his three parlors to Fox River Pizza & Buffet, according to McNulty.
Clark of Sterling Foods, which now has five Shakey’s stores down from 10 in the past, said his interim contract expires in June 2003. He said he’s already been working on “our own products, recipes, name and brand to launch our own system if we come to expiration and cannot resolve the matter.”
“There are other chains that have contacted us and invited us into their systems,” Clark said. “That certainly is a viable option.”
Shakey’s has its own options, according to Flynn. He said the chain has been in talks with “area developers and single-unit franchisees” that he expects “will come on board.”
