C E O Engineers Turnaround For Back Yard Burgers

David McDougall's offer to help financially struggling Back Yard Burgers Inc. ended up becoming his latest turnaround project.

McDougall, who previously engineered turnarounds of Marble Slab Creamery, Great American Cookie and Pretzelmaker, was tapped as the Nashville-based burger chain's president and chief executive in January. He arrived three months after the company entered into a pre-arranged Chapter 11 bankruptcy.

The restaurant-industry veteran, who had been working as a consultant in Atlanta, found serious issues within the burger chain: falling sales, operating losses, little communication with franchisees and burdensome legacy costs, among others.

Now four months into the job, he says progress has been made. Franchisee relations are better. Sales are rising and losses are narrowing. Legacy costs have been eliminated or reduced. But, he cautions, the company "is not out of the woods yet." McDougall highlighted the challenges and progress during a recent interview with Tennessean business writer Duane Marsteller.

Before you came, what did you know about the company? I knew it had a great product, its hamburgers. It was known throughout this region for that. Also, (its) seasoned fries and chicken sandwiches. I knew that much about it. There had been some restaurants in the Atlanta area that I had frequented.

Obviously, the company had troubles or otherwise you would not have come on board. What were the circumstances of you becoming CEO? I had my own franchise consulting business which worked with emerging and mid-size franchise companies. In conversations with (new owner) Pharos (Capital) whether my company could be of assistance to them, the conversation evolved to how would I like to come in and help set a new course and take the company in a new direction.

What were the issues that got the company in that situation? It was a number of things going back to the mid-2000s. We were developing and building a restaurant that was a rather expensive investment. The revenue being generated by those restaurants was not sufficient, so there was no return.

How much did those restaurants cost to develop? Between $1.5 million and $1.7 million.

And how much revenue were they generating? Maybe $900,000 to $1 million (annually). It just wasn't an efficient return and clearly created issues for the developers.

Why did they cost so much to build? It was a rather elaborate, ornate facility with the finishes and the exterior. We were clearly trying to be the upscale, better burger place. The sales weren't bad, it was just they weren't enough for building that kind of restaurant.

The other thing as we got into 2008 and the financial crisis, consumers clearly began pulling back. People were not eating out as regularly. That was a contributing factor to the troubles that Back Yard Burgers found itself in. Management certainly worked very hard to try to find solutions to that, but they were facing a lot of headwinds.

They did try a number of different things but really couldn't catch their breath and continued to feel the stress of declining sales.

Sounds challenging. Why did you take this on? One thing I've learned in life is that nothing worthwhile comes easy, and your biggest accomplishments are those things that are challenging. I do firmly believe that this is one we can fix. We have the right products, (and) we've got a very passionate group of franchise owners and employees. To me, that's the right ingredients to help move this in the right direction.

You've been in the job now for almost four months. What's been accomplished? My three primary focus areas were improving unit-level economics, rebuilding the relationships with our franchisees and focusing on what made Back Yard Burgers great.

In terms of driving up our check averages, this year we're working on menu re-engineering. We just rolled out new menu boards to our company restaurants and we're in the process of doing it with our franchised restaurants. We're putting more emphasis on some of our featured menu items. At the same time we're going with lighter, brighter colors, making them hopefully easier for our customers to understand.

The other thing is highlighting some of the accompaniments you can have with your hamburger, like mushrooms, cheeses, things like that. That's helped improve guest checkout revenue.

The second thing is franchise relations. I can say that I've had the opportunity to visit the majority of our franchise owners, discuss the business, hear what they have to say and would like to see and make that commitment to work together.

What were they saying? The main thing is they have not felt as connected with the franchisor. Back Yard Burgers was kind of working on things specific to the company stores that weren't necessarily tied to the benefit of the franchised stores. We also did not have a real strong communication process in place.

Since then we have created a franchisee advisory council that's about to meet for the second time. We have monthly conference calls with our franchisees now. There's a bi-weekly written communication called ‘Hot off the Grill' that goes out to our franchisees.

The third area � Going back to our roots, our heritage. One of the first things I did was I contacted (Lattimore) Michael, the founder of Back Yard Burgers back in 1987 in Cleveland, Miss., and asked if he'd be willing to meet with me.

There was one thing that he shared that I thought was very insightful. When he developed the brand, he was relentless on wanting the product he served to be the best-tasting. From his standpoint, our competitive advantage was to be the best-tasting. And he was never satisfied, never felt it was exactly where he wanted it to be.

So he was on a quest for the perfect burger? He was. But again, most entrepreneurs and concept founders are like that. They're very driven to want to develop something that was better than anybody else. He also was willing to help. He wanted to see things move in a more positive direction.

What else has been done? One of the charges I tasked our vice president of marketing to take on was to complete a brand architecture study. We're in the process of completing that now. We talked to heavy Back Yard Burgers users, light Back Yard Burgers users and former Back Yard Burgers users to really understand what they liked about us, what they didn't like about us and why they stopped coming.

One of the things we (also) had to clearly do was to ensure our expenses were in line with our revenues, and we've done that. We had to reassess positions within the company and current needs. We reduced our office space. We had a number of expenses we were still incurring, such as vehicle storage units that we've since sold off. These were carryovers from days gone by, but they still were a monthly expense. We looked at every expense item and put together a cost savings task force. Every area of the business, every check we were writing, we analyzed to make sure if it was necessary.

A lot of this had to be done as part of the bankruptcy. Did you go beyond that? Absolutely. We took steps I felt we needed to do just to get the company financially stable. When I came on, the first couple of months were really difficult. Sales were really soft in January and February.

According to status reports in the bankruptcy case, the company's incurred a nearly $1.6 million operating loss since entering bankruptcy.

Right, but that since has come around. March was a much better month, and our April period will be better than March. We're making continuous improvement, and that's encouraging.

From a sales and marketing standpoint, we have just introduced our ‘Bigger, Better Burger' promotion. We reintroduced seasoned fries in those markets where it had been discontinued.

This was some of the disparity between the company locations and franchise locations. Clearly we want to get more back to the center with all of us doing the same thing. There had been a real kind of divergence, and that's not healthy. It's not good for the brand. It's not good for our customers. That's certainly why we wanted to bring everybody back together and understand that we're one Back Yard Burgers.

You've had previous turnaround experience with Marble Slab Creamery, Great American Cookie and Pretzelmaker. How does this one compare to those? In all those cases, the franchise community and the franchisor seemed to be very much aligned. Here, it became apparent early on that we needed to come together to work together. The franchise owners had really lost confidence. They felt like they had to do it on their own because they didn't feel like they were getting support from corporate. I can't say if they were or weren't but they certainly felt they weren't, and perception is reality.

What's your timetable for restoring Back Yard Burgers to profitability? I would expect by the second half of this year we will be positive.

How are you going to measure the turnaround's success? One is going to be comparable sales, that we consistently achieve positive comp sales on a weekly and monthly basis. Second, stabilization of our store count and start seeing some marginal growth in stores. Another area is customer counts, seeing more people actually coming to our restaurants. Another area we're looking very closely at is customer comments. Check average is clearly another key benchmark.

When do you anticipate the company not only becoming stable but expanding as well? I'd like to think by next year, 2014, we will start to see some new development. This will come from our existing franchisees. I've had more than a few say they are interested in growing in their markets. They were waiting to see how our transition went before they made that commitment to become more aggressive about looking for potential new sites. That's a good sign.

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