6053 W. Century Boulevard, 11th Floor
Los Angeles, California 90045
Telephone: (310) 342-5000
Fax: (310) 342-4640
Web site: http://www.cpk.com
Sales: $422.5 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: CPKI
NAIC: 72211 Full-Service Restaurants
California Pizza Kitchen Inc. was created in 1985 by attorneys Rick Rosenfield and Larry Flax. The company operates more than 150 full-service restaurants and 24 ASAP quick-service locations in 27 states and five countries. California Pizza Kitchen's menu was innovative from inception, offering unique pizzas topped with everything from barbecued chicken and duck, to grilled shrimp and Jamaican jerk chicken. It also serves a variety of salads, soups, pastas, sandwiches, appetizers, and desserts. California Pizza Kitchen's pizzas can be found in grocery store freezers as well, thanks to a partnership with Kraft Foods Inc.
The founders of California Pizza Kitchen are Larry Flax and Rick Rosenfield. Flax, a native of Los Angeles, California, was educated at the University of Southern California Law School and served as an Assistant United States Attorney during the early 1970s. In that capacity, Flax worked as Chief of Civil Rights and as Assistant Chief of the Criminal Division for the United States Department of Justice. Rosenfield, a native of Chicago, worked as an attorney for the U.S. Department of Justice in Washington, D.C., and as Assistant U.S. Attorney for the Central District of California. Having met while pursuing their respective careers as assistant federal prosecutors, the two men struck up a friendship during the early 1970s and decided to form their own law firm. Concentrating on criminal defense cases, in 1984 the two partners found themselves arguing a case before a Superior Court Judge in San Francisco. Flax and Rosenfield strongly believed that the facts of the case were in their favor, but the jury was unable to reach a verdict. Disillusioned by the hung jury, the two young men decided to leave the legal profession to seek a more rewarding career.
During their partnership, Flax and Rosenfield had offered legal services on a national basis, and in the course of their business travels they had sampled restaurants across the country and developed an enthusiasm for good food. Resolving to turn their enthusiasm into a business opportunity, they decided to open a restaurant. The two entrepreneurs took their lead from Wolfgang Puck, the master chef and owner of Spago restaurant in West Hollywood, who was known for creating pizzas with unusual toppings; the pair saw an opportunity to bring innovative pizza like Puck's to the mass market. The first California Pizza Kitchen was opened in Beverly Hills in 1985 and was an immediate success.
The strategy behind California Pizza Kitchen was simple. The owners wanted to provide a casual, upscale, family restaurant, with good food as the cornerstone of the enterprise. Most of the chain's kitchens are out in the open, so customers can watch the cooks preparing their pizzas. The restaurants are decorated with white tile to provide a clean, crisp atmosphere. The pizzas are baked in wood-burning ovens imported from Italy, whose designs had been perfected over a period of a few hundred years. The oven is fired to approximately 800 degrees Fahrenheit, and the pizza is cooked in three minutes in order to sear the ingredients. This results in a tastier—and, according to some cooks, a healthier—pizza. The partners were committed to creating designer pizzas with unusual toppings, such as duck sausage, Tandoori chicken, and goat cheese, an approach that not only attracted customers not normally inclined to eat pizza, but also enabled the company to take advantage of food trends within the industry. When the owners added pasta, salads, soft drinks, liquor, and desserts to the menu, California Pizza Kitchen was on the road to success.
Although the company struggled during its first few years of operation and incurred some debt, sales of its pizza were always increasing. The company's big break came in 1989 when the flamboyant chairman of Golden Nugget casinos, Steve Wynn, struck a deal with Flax and Rosenfield to put a California Pizza Kitchen in the Mirage Hotel and Casino. Located in Las Vegas, the heart of the U.S. gambling industry, the new restaurant garnered $5.5 million in sales during its first year of operation. On weekends, according to the restaurant's manager, tables were turning over between 16 to 25 times within a 13-hour period. Unfortunately for Flax and Rosenfield, they did not own the restaurant in the Mirage Hotel and Casino. Wynn had arranged an unusual California Pizza Kitchen franchise. Yet the publicity that came from the success of the restaurant in Las Vegas opened doors to new opportunities in other parts of the country. Real estate developers were soon lobbying to place a California Pizza Kitchen in strategic locations for new malls and commercial developments.
In 1992 PepsiCo, Inc., located in Purchase, New York, bought a 50 percent interest in California Pizza Kitchen, which it later increased to 67 percent. In addition to its line of soft drink products, PepsiCo owned Pizza Hut, KFC (formerly known as Kentucky Fried Chicken), and Taco Bell. Management at PepsiCo wanted to gain more experience in operating full-service, moderately priced, casual-dining restaurants. The deal was finalized for $97 million, with Flax and Rosenfield receiving $20 million apiece, and PepsiCo assumed two seats out of the four on California Pizza Kitchen's board of directors. Not surprisingly, two of Taco Bell's officers were chosen for the two seats on the board. Flax and Rosenfield remained as co-chairs of the board of directors, with 50 percent voting control, and continued to direct the day-to-day operations of the company. The only change PepsiCo required in the agreement was for California Pizza to replace the sale of Coca-Cola products with PepsiCo's line of soft drinks.
The arrangement between PepsiCo and California Pizza Kitchen seemed to be a gift to Flax and Rosenfield. At the time of the deal, California Pizza Kitchen was generating approximately $60 million in annual sales from all its restaurants, with each one averaging a little more than $3 million. The number of employees had reached 1,700, the number of operating restaurants had risen to 25, and the ambitious entrepreneurs were pursuing a strategy to open a new unit each month. Although the owners were contemplating a public stock offering in order to continue their expansion program, they decided to accept PepsiCo's offer due to the generous terms of the agreement. Flax and Rosenfield realized that PepsiCo management wanted to learn how to run an operation like theirs, and they were more than willing to teach people at PepsiCo what they knew in exchange for limitless expansion capital. Each new restaurant was costing nearly $1 million to open over an eight-month period, and Flax and Rosenfield did not want to interrupt their aggressive expansion plans.
California Pizza Kitchen was opening restaurants in upscale office buildings and pricey malls and as freestanding units in affluent areas. The company's restaurants were primarily located throughout the greater Los Angeles metropolitan area, but new units were opened on a monthly basis in major cities across the country, including Chicago and Atlanta. Except for two franchises in Las Vegas, and a limited partnership in Chicago, all of the restaurant units were owned by Flax and Rosenfield. Delighted by the chain's success, PepsiCo management was especially intrigued by the part played by the waitstaff in California Pizza Kitchen's achievement. When PepsiCo officials visited a number of California Pizza Kitchen units located in various areas of the country, they discovered an inordinately friendly and helpful staff of waiters and waitresses at each restaurant. Impressed by the process of selection, training, and retainment of employees, PepsiCo was determined to learn how to apply these techniques to its own restaurant operations.
The partnership between PepsiCo and California Pizza Kitchen flourished from the beginning. By the end of 1993, Flax and Rosenfield were operating 35 restaurants across the country and were planning an ambitious expansion drive of 50 new units per year in both 1994 and 1995. In 1993 the restaurant industry honored Flax and Rosenfield with the Golden Chain award, one of the plaudits that the partners found most satisfying out of all the accolades they received.
As their successes multiplied, Flax and Rosenfield began to devote even more attention than before to the development of personnel, which included more than 3,000 workers, 160 of whom were kitchen managers and general managers. Not only were the two men driving forces behind better service, but through their constant concern with internal coaching and promotion, they enhanced their employees' career opportunities. A former waiter and cook who had joined the company when it was only one month old was promoted to vice-president of back-ofthe-house operations; a unit-level assistant manager became front-of-the-house operations vice-president; and the company's first waitress in the Beverly Hills restaurant became vice-president of training. The former lawyers also worked to improve the pay scale and benefits of their workers, securing, for example, a $2.3 million deal in special compensation and bonuses for company executives through negotiations with parent PepsiCo.
Throughout all of these developments, the focus of California Pizza Kitchen remained the food. The company offered 29 different pizza flavors, including duck sausage pizza, Thai chicken pizza, two-sausage pizza, tuna-melt pizza, mixed grill vegetarian pizza, goat cheese pizza, and eggplant Parmesan pizza, with prices ranging from $6.95 to $11.95.
We believe our most defining success is our adherence to the philosophy that forms the foundation of our corporate culture, "R.O.C.K.," which stands for Respect, Opportunity, Communication and Kindness. It defines our relationships with our employees, vendors, partners, guests and stockholders and we know it provides the basis for our belief that CPK is an employer of choice. The R.O.C.K. philosophy also delivers a measurable return on investment for stockholders because employees who are motivated in a team environment can accomplish almost anything.
The year 1994 was one of the best to date for the company. California Pizza Kitchen added 28 restaurants to reach a total of 70 units operating in 15 states and the District of Columbia. Sales also shot up to the $120 million milepost, a dramatic increase of 60 percent over the previous year. Surprisingly, only 40 percent of revenues were coming from the company's pizza menu: other items such as corn soup and barbecue chopped chicken salad were selling just as well. Per unit annual sales were still hovering around the $3 million mark.
By the beginning of 1995, California Pizza Kitchen was operating 78 restaurants in 18 states and in the District of Columbia. New food toppings and combinations were continually being added to the pizza menu, as were a host of new items such as Chicken Tequila Fettucine and Tuscan Bean Soup. Although Larry Flax and Richard Rosenfield remained firmly in control of the day-to-day operations of the restaurant chain, new management personnel from PepsiCo were becoming more and more an integral part of the company's decision-making process.
Changes were on the horizon for California Pizza Kitchen as it entered the late 1990s. After spending nearly $100 million to expand the restaurant chain, PepsiCo shifted its business strategy and decided to jettison its restaurant holdings. As such, the company agreed to sell its interest in California Pizza Kitchen to venture capital firm Bruckmann, Rosser, Sherrill & Co. in 1997. Flax and Rosenfield retained a 25 percent interest in the company and Frederick Hipp was brought in to oversee daily operations as CEO.
California Pizza Kitchen returned to profitability in 1998 and also partnered with Kraft Foods Inc. to sell a line of frozen pizzas in grocery stores. During 2000 the company went public, raising $72.5 million in its initial public offering (IPO). The money was used to pay off debt and buy back preferred stock.
After the IPO, California Pizza Kitchen embarked on an aggressive growth strategy with Hipp at the helm. During 2003, 22 restaurants were opened. Some of the company's new locations, however, failed to meet profit expectations. As a result, the firm took cost-cutting measures that included shuttering its quality assurance department, stopping new menu rollouts, and raising the criteria for performance bonuses for managers. The company's founders, Flax and Rosenfield, were disenchanted with California Pizza Kitchen's direction and immediately set plans in motion to regain control of the company. Sure enough, Hipp left his post in 2003, leaving Flax and Rosenfield positioned to restructure California Pizza Kitchen.
A cornerstone in the co-CEOs' strategy was to slow growth by making sure new restaurants were opened in desirable and profitable locations. During 2004, five new California Pizza Kitchens were opened. With granite counters, marble floors, flagstone walls, and wood tables, the company's new restaurant in the Irvine Spectrum Center in California showcased its look for the future. The new design was tailored to appeal to an older crowd—diners who would order cocktails with dinner. Flax and Rosenfield hoped that increased alcohol sales would bolster profits. They also returned the company's focus to its R.O.C.K. philosophy, which stood for respect, opportunity, communication, and kindness. This philosophy—a mantra the founders felt was ignored during previous management—guided its relationship with California Pizza Kitchen employees, customers, suppliers, and shareholders.
During 2004, comparable store sales increased by 8 percent, while revenues grew by 17.4 percent over the previous year. Earnings per share increased threefold over 2003 figures, a sure sign that California Pizza Kitchen was headed in the right direction. The company celebrated its 20th anniversary in 2005 and Flax and Rosenfield were confident that California Pizza Kitchen would continue to prosper in the years to come.
Brinker International Inc.; The Cheesecake Factory Incorporated; P.F. Chang's China Bistro Inc.
Albright, William, "Everybody's Hot to Get in This Kitchen," Houston Post, December 9, 1994, p. 17.
Barret, Amy, "Detergents, Aisle 2, Pizza Hut, Aisle 5," Business Week, June 7, 1993, pp. 88–89.
——, "Pepsi Is Going After the Upper Crust," Business Week, June 7, 1993, p. 90.
"The Best of 1991," Business Week, January 13, 1992, p. 123.
Britt, Russ, "California Pizza Kitchen Sells Slice," Daily News, May 21, 1992, p. 12.
"California Dreamin'," Restaurants & Institutions, April 1985, p. 27.
"CPK Gets Hipp Replacements," Restaurant Business, August 15, 2003.
Faust, Fred, "Chain's Winning Strategy: Top Pizza with Americans' Favorites," St. Louis Dispatch, August 26, 1991, pp. 1–4.
Howard, Theresa, "PepsiCo Acquires 50% of California Pizza Kitchen," Nation's Restaurant News, June 1, 1992, pp. 1–2.
Littlefield, Kinney, "Pretty Is Part of Pizza Picture at New Takeout Eatery in Irvine," Orange County Register, May 28, 1993, p. 6.
Manley, Victoria, "California Pizza Kitchen Opens in Monterey," Monterey Country Herald, January 25, 2005.
Martin, Richard, "Larry Flax and Rick Rosenfield: Courting a New Success," Nation's Restaurant News, September 20, 1993, p. 18.
McCarthy, Michael J., "PepsiCo Buys Its First Slice of Fancy Pizza," Wall Street Journal, May 21, 1992, p. B1(E).
Montgomery, Tiffany, "Pizza Gets Redesigned," Orange County Register, August 1, 2004.
Morris, Kathleen, "How to Have Your Pie and Eat It Too," Business Week, November 16, 1998.
—update: Christina M. Stansell