Sbarro, Inc. - Company Profile, Information, Business Description, History, Background Information on Sbarro, Inc.

401 Broadhollow
Melville, New Jersey 11747

Company Perspectives:

The Sbarro brand, currently operating and franchising in nearly 1,000 units worldwide, has become synonymous with fresh and inventive Italian food. The company's prevailing mission, to satisfy customers, has been the dynamic spirit behind three generations of fine cuisine, and continues to drive our entire organization.

History of Sbarro, Inc.

Sbarro, Inc., owns, operates, and franchises an international chain of family-oriented Italian restaurants under the "Sbarro" and "Sbarro The Italian Eatery" names. Most of these are buffet and cafeteria-style restaurants located in food courts in shopping malls. Others are found in airports, toll-road rest areas, sports arenas, hospitals, universities, casinos, and downtown locations. The Sbarro menu offers pizza, pasta, hot and cold Italian entrees, salads, sandwiches, cheesecake, and other desserts at a modest price with fast service. As of December 2003, there were 915 Sbarro restaurants, located in 46 states, the District of Columbia, Puerto Rico, and in 26 countries across the globe. A total of 528 of these were company-owned and operated; the others were franchised. Members of the founding family took the company private in 1999.

Early History

In 1956, Gennaro Sbarro (pronounced zah-BAHR-ro) and his wife Carmela emigrated from Naples, Italy, to Brooklyn with their three young sons, Joe, Mario, and Anthony. The Sbarros wanted to open a salumeria--a gourmet Italian delicatessen--like the one they had back in Italy. To earn the money to do so, Carmela worked as a seamstress and Gennaro, Joe, and Mario worked in various delis in the city.

In 1959, the Sbarros opened their salumeria in the Bensonhurst section of Brooklyn, offering sandwiches, pasta dishes, and homemade cheesecake. The deli was a hit, and by 1964 the family had opened three more. Working behind the counters, the Sbarros noticed fewer customers were "taking out" their purchases. Instead, they were eating the deli food before they left the store. "Customers were standing at the counter eating pasta," Mario Sbarro told Business Week in 1987. "We knew we were on the threshold of something different." Responding to customers' needs, the Sbarros put in some chairs and tables and started offering hot food, such as pizza and lasagna.

Expansion in the 1970s-80s

By the early 1970s, the Sbarros found themselves owning four popular restaurants. At that point the family had to decide how to expand but keep standards high. Gennaro Sbarro did not want to franchise his operation. Instead, he opened 12 new restaurants in the New York area, and had all the food made daily at the original deli. Eventually Sbarro and his sons established a formula that gave productive managers 15 percent of a restaurant's net profits but kept the ownership of the restaurants in the family. Under the growth plan, Carmela still produced all the cheesecakes, while other ingredients were all purchased through one wholesaler. In 1977, the family incorporated its various food and restaurant businesses as Sbarro, Inc.

As the Sbarros were developing their growth strategy, real estate developers were building shopping centers at a furious pace to serve the expanding suburban customer base. In the 20 years from 1970 to 1990, the number of shopping centers nationally grew from about 10,000 to 37,000, according to the International Council of Shopping Centers. Shopping at malls became a leisure-time activity, and mall developers incorporated food courts into their plans to keep customers within the facility. For the Sbarros, food courts appeared to offer the perfect opportunity to combine their dine-in focus with quick service while reaching a dependable flow of customers, and they took it.

Under the food court concept, shoppers were able to select their meal from a variety of restaurants and take the food to an open, common dining area. Sbarro's food court restaurants were small, occupying about 500 to 1,000 square feet, and contained only enough space for kitchen and service areas. The menu was more limited than at the larger, sit-down units, and there were fewer staff, usually between 6 and 30 employees. The decor of all Sbarro units incorporated the green, white, and orange of the Italian flag, and many had replicas of cheeses, salamis, and prosciutto hams hanging from the ceiling, harking back to the company's origin as a delicatessen.

At the time of Gennaro Sbarro's death in 1984, the company had 97 stores grossing $20 million. Mario headed the company as chairman and CEO. Tony became president and chief operating officer, and Joe was named senior executive vice-president. Carmela was vice-president and continued to make her cheesecakes. The following year Mario opened 36 more restaurants and took Sbarro public, raising $8 million on the American Stock Exchange for 30 percent of the equity. Mario used the money to pay down bank loans made to finance the expansion and to develop the franchising side of the business.

By mid-1987, Sbarro had grown to 157 company-owned restaurants and 63 franchises, with units in the United States, Puerto Rico, and Canada. Business Week ranked Sbarro 21st on its list of America's 100 hot-growth companies, and the company agreed to let Marriott Corporation open 20 franchises on selected highways, testing the Sbarro concept beyond the shopping mall. Sales for the year rose 70 percent over 1986, to $58.5 million, and profits jumped 43 percent, to $4.8 million.

The company was opening between 65 and 70 restaurants a year. Wanting to increase the number of franchise operations, Mario started a program in 1989 offering managers with three years' seniority the opportunity to buy their own franchise with 100 percent company financing. During the first year, four managers took advantage of the program. Company revenues for 1989 reached $149 million, a 27 percent increase over 1988, and profits reached $14.5 million.

The Early 1990s

In 1990 the first Sbarro restaurant opened in Europe, in the London suburb of Woking. The move was made through a joint venture with a British partner, Forte plc (formerly Trusthouse Forte), and was part of Mario's plan to achieve systemwide sales of $500 million.

The company was growing by nearly 16 percent a year but was still operating much as it had 20 years earlier. When a problem arose at any outlet, the manager could pick up the phone and call Tony. The brothers needed better information systems and operating controls for the more than 300 restaurants the company owned if they were to reach their goal. They hired several computer specialists familiar with the restaurant industry to set up new information systems. To improve operations, they established a new regional and district structure and brought in 20 managers from such larger chains as McDonald's and Roy Rogers.

Problems quickly developed as resentment grew among longtime Sbarro managers and employees toward new forms and rigid rules. Sales per restaurant began to drop. Earnings for the first quarter in 1992 were one-third lower than expected. The Sbarros realized they had made a mistake going outside and not promoting their own employees. "Many of our own people had the qualifications to do the job," Mario told Robert La Franco in a 1994 Forbes article. "It was a case of 'the grass always looks greener.'"

Mario and his brothers corrected the situation; during the second quarter of 1992 they fired 14 of the new managers and began promoting Sbarro managers to district and regional positions. By the fall, sales and earnings were improving. The company ended the year with 587 restaurants (131 of them franchises) and revenues up 13.2 percent to $237.5 million.

Employees at Sbarro units prepared the food fresh daily, according to special recipes developed by the family. John Bowen, one of Sbarro's early franchisees, explained in a June 1995 article in Inc., "I lean upon the operations manual. They are successful procedures. If you are going to make a cake--in our case, a pizza--and you don't follow that recipe, it's going to turn out a little different every time." Restaurants bought pastries locally, but in 1996, Carmela Sbarro was still overseeing the preparation of the company's cheesecakes in the kitchen of the original Sbarro's in Brooklyn.

During 1993 and 1994, Sbarro continued to open new restaurants and franchises, though at a slower rate of about 10 percent a year. Sales from company-owned restaurants increased by more than 11 percent annually, well ahead of the average for the pizza restaurant industry. In 1993 the company began paying quarterly cash dividends, which increased approximately 20 percent each year. By the end of 1994, Sbarro had 729 restaurants. Of these, 162 were franchised. Host Marriott Services Corp., with 19 units, and Concession Air, with 11 units, were among Sbarro's biggest franchisees, with units at airports and at travel plazas on toll roads. In September 1994, Sbarro moved its stock listing to the New York Stock Exchange.

Pizza, sold primarily in individual slices, accounted for about half of Sbarro's sales. The pizza restaurant industry, structured into several tiers, was highly competitive. In the mid-1990s, three giant chains led the industry. Pizza Hut, with 9,566 restaurants in the United States and 2,989 international units, had sales of $6.9 billion in 1994. Domino's Pizza (5,100 domestic restaurants and 860 overseas) reported sales of $2.5 billion. Little Caesar had sales of $2 billion from its 4,600 locations in the United States, Canada, Puerto Rico, Guam, and the Czech and Slovak Republics.

The second tier of pizza chains included Papa John's International (730 restaurants in 21 states), with reported sales of $297.6 million for 1994; Sbarro, with $296 million; and ShowBiz Pizza Time (327 units) with $267.8 million. Round Table, a private company with 560 locations, was believed to have sales in that range, and Pizza Inn reported sales of about $218 million from its 485 restaurants. Chains with 1994 sales between $100 and $200 million comprised a third tier, and included Uno Restaurant Corporation, Shakey's Pizza, and Bertucci's Brick Oven Pizzeria.

In 1994 the $20 billion pizza business grew at a rate of 2 percent, below the overall restaurant industry's rate of 4.1 percent. That figure was skewed by relatively flat sales for the big three companies; the gourmet and casual dining segments grew faster, as evidenced by Sbarro's growth. Pizza operators, however, were taking steps to expand their business in the face of competition. For some it meant more international operations; others added new menu offerings such as buffalo wings, stuffed crust or deep dish pizza, roasted chicken, and pastas. Some chains beefed up delivery services and moved into nontraditional locations. Little Caesar, for example, opened pizza restaurants with some seating in 561 Kmart stores and began delivery service.

The Mid-1990s

In the mid-1990s Sbarro, too, was looking at ways to remain competitive. During 1995 the company explored new growth opportunities through joint ventures with other restaurateurs. The first of these, Boulder Creek Steaks & Saloon, a steakhouse, had two restaurants opened by early 1996. The second, BICE Med Grille, was a moderately priced, casual-dining restaurant featuring Italian and Mediterranean food. The third new opportunity was a family restaurant concept, Umberto's of New Hyde Park Pizzeria. This offered both sit-down and takeout service, and featured pizza and other Italian-style food. The initial locations of these two ventures opened in April 1996, with more planned for later that year.

Within its existing units, the company began testing a buffet format in 45 of its restaurants. Sbarro also expanded abroad, with franchise restaurants opening in Israel, Lebanon, and Saudi Arabia in 1995. As in the United States, overseas Sbarros were located primarily in malls and airports. In England they were also found at service areas along major motorways. At home, company-operated restaurants continued moving into locations other than shopping malls, such as the Balboa Naval Hospital in San Diego, Florida State University in Tallahassee, St. Joseph's Hospital in Towson, Maryland, and Hofstra University Student Union, in New York City. Sbarro also operated restaurants in downtown areas of major U.S. cities, including New York, Boston, Chicago, and Philadelphia. By the end of 1995 the company had 771 restaurants in 14 countries on six continents. Of these, 200 were franchised. Company revenue grew 7 percent to $319.2 million for the year. Sales systemwide, including franchised units, increased 8 percent to $416.3 million.

Despite the growth in sales, the company had a rough 1995 financially, with net income down. After taking various steps to control costs, profits for the last half of the year were greater than those of 1994. In December 1995, the company announced plans to close 40 underperforming locations and to open about 80 new units during 1996, half of which would be company-operated. In the mid-1990s Sbarro was strong financially. It paid quarterly cash dividends of $.19 per share in 1995; in March 1996, the company increased quarterly dividends to $.23 per share. The company also was debt free, paying for its expansion with cash from existing operations.

Changes in the Late 1990s and Beyond

The company's financial position remained strong going into the late 1990s, but the rapid growth it had experienced in years past began to slow. At this time, Mario Sbarro began to set plans in motion to regain full control of his family's company. Sure enough, in early 1998 the Sbarro family made a $380 million play for its namesake, hoping to reclaim the shares it did not already own by taking the company private. Several shareholders balked at the idea and eventually Mario Sbarro and his family members withdrew their bid in June. The family came to the table once more in November with a cash offer valued at 3.5 percent less than their first attempt. The privatization process was eventually completed in September 1999--the family acquired the remaining 65.6 percent of Sbarro at $28.85 per share in a deal valued at approximately $389.5 million.

As a private company, Sbarro entered the new millennium intent on bolstering it holdings through joint ventures as well as increasing its restaurant count. The company grew in size from 800 units in 1999, to more than 900 by 2001. By this time Sbarro had added several new concepts to its arsenal as a result of joint venture activity over the past several years. These included Mama Sbarro, which operated as a quick and table service casual-dining restaurant; an Italian table service restaurant named Salute; and Baja Grill and Waves, two quick service Mexican-style restaurants. Sbarro also focused on international expansion, opening its 30th unit in Russia in 2003. Future plans included branching out into the African and Chinese markets.

Meanwhile, the company began to launch a new brand campaign in an attempt to revitalize its image. In a November 2003 Nation's Restaurant News article, a company spokesperson commented, "We have not been doing a good job in explaining to our guests what goes on behind the scenes of the product that [they're] eating. No one knows that we make our dough from scratch in every single restaurant around the world, that we buy the industry's best flour, that we buy the industry's best cheese." Sbarro looked to industry veteran Michael P. O'Donnell to head up these new management initiatives. O'Donnell was named president and CEO of Sbarro in 2003 and became the first nonfamily member to oversee company operations. Mario Sbarro remained chairman.

The new leader had his work cut out for him. Indeed, Sbarro reported the largest loss in its history--$17.2 million--in 2003 as revenues fell. The company pointed to the downturn in the economy, international tensions, the closure of restaurants, and higher ingredient prices as culprits in the earnings decline. Management remained optimistic, however, and pledged to turn around its namesake Sbarro restaurants while continuing to look for profitable new concepts in which to invest. The company believed its strategy would result in higher profits and revenues in the long run, and that Sbarro was on track for growth and success in the years to come.

Principal Competitors: Noble Roman's Inc.; Pizza Hut Inc.; Pizza Inn Inc.


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