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Life After Scandal

First came corporate scandal, then bankruptcy. But Ranch *1 is determined to persevere.

It sounds like a soap opera. Two immigrants come to New York and set up a sandwich shop that quickly becomes a local favorite. They open more restaurants but soon realize they don't have the know-how to take their business to the next level, so they sell it to a group of restaurant industry veterans. This new group, though, tries to grow the company too fast, stores are opened too near to other stores, sales slip and the company faces bankruptcy.

A new management team is brought in and begins rebuilding the company, shutting down underperforming stores, selling company-owned units to franchisees. They have 51 franchisees. But in the midst of this reemergence, the president of the company is indicted on federal securities fraud charges. Although these charges have nothing to do with the company, potential investors are scared and franchise deals fail to materialize. The company has no choice but to file for bankruptcy.

This is the story of Ranch *1, a chicken sandwich franchise. Despite this string of bad luck, the company is resolved to fulfill the original founder's dreams to take this chain national. With the help of quick-service restaurant franchisor Kahala Corp., Ranch *1 is ready for the next step.

Franchise Zone spoke with Raymond DioGuardi, current president of Kahala Corp., who has been with Ranch *1 since joining the company as chief financial officer in 2000, about life after the scandal. Can this system be turned around?

Franchise Zone: When the company was filing for bankruptcy, what happened to the franchisees who were with the company at the time?

Raymond DioGuardi: There was a lot of skepticism. The president who was indicted resigned immediately. In July 2001, when I was named president, we met with the franchisees to explain the situation. Fortunately for us, we have a very, very strong and supportive franchise group. There was some uncertainty, but once they realized they would receive the same ongoing as they received prior to the bankruptcy, we were able to band together as a group, as a franchise system. The franchisees supported us through the bankruptcy, and that ultimately assisted us in emerging from bankruptcy.

Were franchisees experiencing any backlash in terms of sales?

They experienced some backlash when it first hit the newspapers--there was a lot of negative press. But it didn't appear to adversely impact the sales of the franchise restaurants. I didn't see much negative impact as a result of the bankruptcy, and it's a tribute to the loyalty of the franchise's customer base. People have been coming to these restaurants since 1990, and we've got a great product. I think customers realized this was more outside of the day-to-day restaurant operations. The quality of the food never changed, so we were able to keep our loyal customer base and, therefore, we kept up the sales.

Did Ranch *1 do any marketing to say, "We know this was someone within our company, but it didn't have anything to do with our company"?

We had issued a press release at the time. We even spoke to some publications and explained the company's position that it was, in fact, unrelated. When the indictment hit, it was on CNN and all over the newspapers. No matter how many times you say, "It's not Ranch *1 that was indicted," sometimes that doesn't get out in the media. We didn't go out and overly advertise this [clarification], primarily because we felt we should let it go. We stated our position professionally, honorably. We didn't need to keep harping on what essentially is a bad thing--we just wanted to continue to run our business. We believe that was the right approach.

What were you doing to calm the fears of potential franchisees at that time?

The best way to deal with potential franchisees was to call them in and explain the situation, tell them the facts, just lay it on the line. We had retained independent counsel to investigate the matter on behalf of the company, and essentially that disclosed nothing negative with respect to the company. We had a few franchisees--I'll be honest with you--who just shied away, did not want to move forward. We had a number of franchisees who basically said, "I'm going to sit back and wait," and a lot who stayed in the system because they knew the people they were dealing with, so they felt comfortable proceeding.

When you went into bankruptcy and were taken over by Kahala Corp., did you lose any franchisees at that time?

We had 51 franchisees then, and we have 48 now. Once we started going through the bankruptcy period, a number of franchisees who were sitting back actually came back to the forefront. They knew that, with the resources of Kahala, we would be stronger post-bankruptcy. One of the benefits Kahala brought to Ranch *1, and one of the reasons the board of directors approved Kahala as the debtor in possession, is their restaurant experience. They also brought with them a pool of franchisees, and I'm happy to say that a number of the existing Kahala franchisees have become franchisees of Ranch *1.

What have been the initial steps for Kahala to turn Ranch *1 around?

Actually, even prior to bankruptcy, we had already undertaken some of our own internal restructuring just for the sake of survival. We were restructuring our operations, selling some restaurants to franchisees, closing down some company restaurants that were not profitable--really scaling down our business and trying to focus on survival, and at the same time grow the business through franchising. The ultimate goal pre-bankruptcy was to transform ourselves from a company that had a large number of company-owned units to a company that had more franchised units.

When Kahala stepped in, we were probably about 40 to 50 percent of the way through the restructuring. Kahala gave us essentially the breathing room to be able to accomplish that--they brought in expertise in franchise sales that our company did not have, a franchise system base we could tap into to grow the concept, and distribution and marketing wherewithal to help us emerge from bankruptcy as a newer, fresher concept. We did a lot of that--we've changed our logo a bit to make it a little fresher, a little more energetic; we scaled back our menu; we've improved our distribution system. We're at the point right now where we're even improving some of our existing products to make the franchise easier to operate. A lot of that was brought on by Kahala's resources as well as the experience of the people who remained with Ranch *1.

What are the company's growth goals right now?

Our expansion growth is pretty much in the greater New York metropolitan area, down the northeast corridor, all the way down to Florida and in the Chicago area, then we have a couple of units in Arizona. So our focus in the immediate future will be Arizona, Southern California and, we hope, Northern California.

What do you want potential franchisees to know about where Ranch *1 is today and where it's going?

It's fair to say we're a company that is stronger than we were a year ago and we're only getting stronger. There's a large amount of growth on the table right now. We've got a pipeline that probably includes up to 200 restaurants that will open over the next five years, based on development agreements we've signed. We're going to go through a very, very serious growth phase--a controlled growth phase. We will be disciplined in what we grow and how we grow; before we enter a market, we'll make sure we have the product, the distribution and the marketing in place, so every one of our franchisees can be successful. Ranch *1 is here to stay and we hope in the near future we will be the leader in the chicken sandwich segment.

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