Sbarro plans overhaul of menu, restaurants

The exterior of a Sbarro restaurant in Manhattan. The exterior of a Sbarro restaurant in Manhattan. The Melville-based Italian-food chain reached an agreement with lenders and most note holders to reduce its debt and sell shares. (Feb. 1, 2011) Photo Credit: Charles Eckert

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Sbarro LLC wants to make up for lost time.

The Melville-based Italian restaurant chain, one of Long Island's best known national brands, emerged from bankruptcy last year, and has started overhauling its 1,000 restaurants in the United States and around the world.

The goal: Move the 56-year-old brand higher in the restaurant food chain, offering better food, served fast but with higher quality ingredients.

Sbarro, which generated $650 million in restaurant sales in 2011, wants to be what the industry describes as a "fast-casual" eatery like its thriving competitors Panera and Chipotle.

Moving into the fast-casual format is overdue for Sbarro. For several years the company was unable to invest in the changes it needed to compete with quickly evolving competitors, new chief executive James Greco says. A 2007 takeover by private equity firm MidOcean Partners III, L.P. had burdened it with about $350 million in debt right before the recession hit.

Now, with the company's debt reduced by more than 70 percent after a trip through bankruptcy, Greco and his management team have launched a major comeback effort.

Greco, 54, a lawyer, came to Sbarro as a turnaround veteran. He was chief executive for eight years at Bruegger's Enterprises Inc., of Burlington, Vt., where he changed the bagel vendor to a more upscale cafe. The company was sold in 2011 to a French restaurant company; private investors reaped a reported 13-fold gain.

He was also chief executive for six years of Fieldbrook Farms Inc., a Dunkirk, N.Y., maker of ice cream and frozen desserts. After boosting sales and productivity, Greco took Fieldbrook into a rapid "prepackaged" bankruptcy, reducing its debts and selling it -- a process used in some turnarounds.

Greco said there are no plans to sell Sbarro. "We intend to be the pre-eminent fast-casual Italian brand worldwide. There's no one doing it in Italian of any scale."

Sbarro this month launched its new Neapolitan-style pizza -- featuring new dough and sauce recipes, thin crust and freshly grated whole-milk mozzarella cheese. Workers in Manhattan and Los Angeles handed out free samples from restored vintage trucks equipped with wood-fired ovens. Coupons were distributed. Signs promoted a new company Facebook campaign. And a public relations team was on hand to guide camera crews and reporters.

Management talked about new foods being tested: "handheld" food, possibly including sandwiches, and salads.

The moment stood in stark contrast to recent years when the company was strapped for cash.

"It feels fabulous to bring in changes and do the stuff we couldn't do in the past," said Carolyn Spatafora, Sbarro's chief financial officer, who has worked for the company since 2005 and was appointed chief financial officer in 2009. "Now we have the funding to do these things."

The fast-casual sector is a desirable place to be for many quick-service restaurants, industry experts say. Sales for fast-casual restaurants went from about $5 billion in 2001 to $27 billion in 2011, according to Technomic, a Chicago-based food research and consulting company, even as overall restaurant trips declined during the recession and its immediate aftermath. For the year ending August 2012, according to the NPD Group, the Port Washington-based market research firm, trips to fast-casual restaurants rose by 7 percent.

Even in a struggling economy, fast-casual eateries have "benefitted from trade-downs from full-service restaurants and trade-ups from fast-food places," said Bonnie Riggs, restaurant analyst at NPD.

 

Challenges abound

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Sbarro's reinvention faces many challenges, experts said. Sbarro's sheer size and large number of franchisees will make translating the new changes throughout the company difficult.

"When you have a thousand locations and half are franchisees, you have to get a lot of them to agree and get a lot of arrows aligned to make those changes," said Howard Cannon, chief executive of Restaurant Consultants of America.

Sbarro began in 1956 as a family-run salumeria in Brooklyn. Its first mall restaurant opened in Brooklyn's King's Plaza shopping center in 1970 and served as the format for most of today's Sbarro locations. The Sbarro family took the chain public in 1985 only to take it private in 1999. MidOcean acquired the company from the family in 2007 for $450 million.

The debt from that transaction, coupled with the ensuing recession, hurt Sbarro. Debt payments left little money to reinvest in new products and keep pace with other chains, especially those incorporating fast-casual features such as fresh, higher-quality ingredients.

Sbarro's corporate revenues, including franchise royalties and fees, climbed from $344 million in 2005 to $359 million in 2008, according to Securities and Exchange Commission filings (these figures exclude sales at franchise restaurants). But in 2009, as the recession cut deep, revenues dropped to $339 million. Sbarro's heavy debts weighed down profits, and the company began to post losses in 2007. By the time Sbarro filed for bankruptcy protection in April 2011, the company had about $368 million in debt -- an unsustainable amount, the company said in court filings.

Sbarro emerged from bankruptcy in November with a lot of catching up to do. "Competitors evolved over that period of time while Sbarro was dealing with its issues," said Greco, who became chief executive in February. A makeover, he said, will take time.

Since June, the company's 10 test locations -- none of them on Long Island -- have been using a revamped sauce recipe from scratch, open-flame ovens that cook and reheat pizza faster and grating cheeses daily for freshness instead of buying packaged grated cheese. Made-to-order pasta dishes are still being tested as well as other new menu items. Overwhelmingly, customers prefer the new food, Greco said.

 

Restaurants to be revamped

Pizza is the first revamped product to roll out nationwide. Greco tapped a friend who owns a New Haven pizza restaurant for help developing the new sauce and dough recipe. The sauce is simpler, made with fewer spices and whole-peeled tomatoes grown and packed in California for Sbarro. Whole-milk mozzarella cheese is used, as well as Pecorino Romano cheese and hand-rolled dough.

Sbarro's restaurants eventually will be outfitted with the open-flame ovens after the company unveils its new design. Sbarro's team has concept drawings ready to present to focus groups, Greco said.

As this major makeover takes place, Sbarro is expanding in Europe, Russia, Asia, the Middle East, the Caribbean and South and Central America. This year, the company signed a franchise agreement to build 15 restaurants in the Indian state of Maharashtra, the first of which opened in Mumbai. About 40 percent of its locations are international franchises.

And the company intends to diversify the types of restaurants it adds as it grows, moving toward more street-front locations rather than mall food courts, where its ability to influence restaurant traffic is hampered, Greco said.

For all of these changes to work, the company also needs to bolster its culture of hospitality, Greco said. Sbarro, which employs about 240 full-time workers on Long Island out of a total of about 4,600 employees, has focused on customer service through recruiting, hiring and training the right people, he said. The deterioration of Sbarro's service system was another factor that had hurt the company in the period leading up to its bankruptcy filing, he said.

The customer "experience builds emotional bonds, and emotional bonds create loyalty and," Greco envisions, "brand ambassadors."

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