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Fazoli's debuts first nontraditional outlet

New on-site format to show growth could be a viable expansion mode

Fazoli’s, the 243-unit Italian quick-service chain, opened its first nontraditional unit at a Walmart Supercenter in St. Louis Tuesday.

The smaller-footprint location is the first of what chief executive Carl Howard said would be more Fazoli’s restaurants in on-site formats at retail stores, campuses and travel centers.

The 50-seat space is a conversion of a former on-site restaurant at the Walmart, which the Lexington, Ky.-based Fazoli’s said saved money on development costs.

“This is about 40 percent of what it would cost us to go into a traditional space,” Howard said. “We had to make some minor adjustments, and then off we went.”

Howard said the deal with Walmart encouraged current and potential franchisees that nontraditional growth could be a viable expansion mode in retail stores, college campuses, airports, or convenience stores and gas stations. Howard said Fazoli’s and Walmart will begin exploring more on-site units soon.

“There are Walmarts in some of the franchisees’ markets that could be an opportunity down the road, but we’ve got to get it figured out and get Walmart more comfortable with it,” he said. “We still have some time in front of us, but our group’s excited about the potential there.”

Fazoli’s also is close to announcing franchise deals at a major university in Texas and a major airport in the Midwest, Howard added.

The St. Louis unit is able to execute all of Fazoli’s food and beverage items, but in order to simplify operations with fewer SKUs, the brand left the two slowest-selling pizzas, sandwiches and baked items off the menu, Howard said. However, all the elements of Fazoli’s “Enhanced Service Program,” or ESP, rebranding initiative are in place at the new location.

The upgraded service style, in place at 50 corporate locations and five franchised units, features fast-casual touches like food delivered to tables by runners as well as real plateware and flatware. Noting that “it doesn’t take long for these locations to take off,” Howard said remodeled units initially experience weekly gains in same-store sales and traffic as high as 20 percent before leveling off into the high-single-digit range.

The market surrounding St. Louis, with remodeled Fazoli’s units in Paducah, Ky., and Cape Girardeau, Mo., is up 9.3 percent to date for the third quarter, Howard said.

About 80 company-owned locations remain to be remodeled, and Fazoli’s is securing financing to bring that about by the beginning of 2012, he said. Many of the brand’s franchisees, who operate slightly more than 100 units, have expressed interest in remodeling to the ESP format right away, though some are waiting to see the upgraded brand work in more franchised locations.

“Some of them are still in the wait-and-see camp, because the brand has gone through changes that weren’t always successful,” Howard said. “They want to get more comfortable that the ROI is there. Some franchise leaders are launching the program, though, and that lends a lot of credibility.”

Howard said Fazoli’s is on pace to end its fiscal 2010 in March with 2-percent gains in sales and traffic, with no growth to the average check, and sales and profit growth are expected to be positive for the first time since 2002.

The severe blizzards of early 2011 nearly stopped the brand’s streak of six straight months of same-store sales growth and seven straight months of positive traffic counts, he added.

“Some restaurants were down 20 percent to 30 percent in sales for a couple days, but we survived January on a slightly positive same-store sales basis,” he said. “The weather was awful, but we’ve had some clear days lately, and the brand’s on fire again.”

A portion of proceeds from Tuesday’s grand opening will benefit St. Louis charitable organization TFA Sunset, which helps local displaced people recover from tornadoes that struck the area last year.

Boca Raton, Fla.-based private-equity firm Sun Capital Partners purchased Fazoli’s in 2006.

Contact Mark Brandau at [email protected].

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