Independents Unite: Ground Round Making A Comeback - Operators On Pace To Open Up To Eight New Locations

(Thursday, March 03, 2005) - A year after the spur-of-the-moment shutdown of nearly half its restaurants, the Ground Round is cooking up an unlikely comeback.

After recovering from the parent company's bankruptcy, the casual dining chain has reopened six of the shuttered restaurants and plans to add up to eight new ones before the end of the year.

And a revamped menu is being test-marketed at eight restaurants in advance of a company-wide rollout in May.

"We're continuing to evolve the brand," said Jack Crawford, CEO of the Freeport, Maine-based Ground Round Independent Owners Cooperative.

The company is betting its future on an unusual business model in which individual restaurant owners belong to a cooperative that acts as a franchisor and makes corporate decisions on marketing and purchasing. Owners get one vote for each restaurant they own.

Independent owners of Ground Round restaurants realized they had to band together when their parent company shut down all 59 corporate-owned locations and ceased operations with little warning on Feb. 13, 2004.

With American Hospitality Concepts of Braintree no longer responsible for the collective buying and distribution of supplies for the casual dining chain, the 67 franchised restaurants formed a buying cooperative to assure continued deliveries of food and paper goods.

The arrangement created a bond among franchisees, who spurned offers to sell out to larger restaurant chains, instead forming the cooperative to become franchisor for the 36-year-old chain.

"These people stuck together because they realized the equity of the brand," said attorney Craig Tractenberg, who represented the franchise owners.

Before they could do so, the owners faced an uphill battle in Bankruptcy Court, bidding against far larger national chains.

Franchisees had only $1.5 million in cash to bid at the bankruptcy auction for the rights to become the sole franchisor, compared with $6.5 million by U.S. Restaurant Properties of Dallas, which operates 2,000 restaurants, gas stations and convenience stores.

But the franchisees had another weapon: an aggressive legal team from Nixon Peabody LLP, a Boston law firm that helped them lodge $40 million in claims against the bankrupt company's estate for damages stemming from lost sales and alleged violations of their franchise agreements.

Owners claimed that publicity about the company-owned store shutdowns confused the public and hurt their sales.

"We were going to create monumental uncertainty with litigation and slow the process down," said Richard Pedone of Hingham, a lawyer for Nixon Peabody.

With legal fees approaching $500,000 a month for both sides, American Hospitality Concepts asked the bankruptcy judge to approve the franchisees' lower bid rather than litigate the claims. The group closed on the sale on July 28.

Franchisees became interested in running the company after approaching investment companies, most of which demanded partial ownership and significant control of the operations, said Craig Trachtenberg, an attorney for the independent franchisees.

They used the Best Western hotel chain as inspiration for setting up a cooperative model for the franchisor company.

Best Western motels are individually owned, and pay a fee to parent Best Western International of Phoenix, based upon the number of rooms and reservations at their property. Corporate decisions are made by votes of the owners, with owners given one vote for each property.

Individual members are free to set their own rates and negotiate with various vendors for supplies, said Robert Galligan, owner of the Best Western Adams Inn in Quincy.

"It's almost like a town meeting where you get to participate, vote and support," Galligan said.

Andrew Palmer, a Norwell lawyer who specializes in franchise law, said cooperative franchisor operations are becoming more common in chains that don't have franchisees who own large numbers of store units.

"You have owners who may have different agendas," Palmer said. "To unify their marketing efforts and continue to build the brand: that's why the cooperative makes sense."

Since taking ownership of the company in July, the Independent Owners Cooperative has reduced royalties by 1 percent. Previous franchise agreements called for payments equal to 3 percent or 4 percent of sales, depending upon when they were signed. The cooperative allowed existing franchisees to open as many new units as they wanted during the first year, provided they pay a $20,000 up-front franchise fee.

The incentives seem to be working. Since July, existing franchisees have bought and reopened six former company-owned locations in Maryland, Missouri, Pennsylvania and Wisconsin.

This year, operators are on a pace to open up to eight new locations, including two in the Boston area. Michael Young, owner of Ground Round restaurants in Cambridge and Salem, has agreed to open a restaurant in South Boston and another one in an undetermined location in the area by the end of the year.

The 71-restaurant chain is on a pace to do about $120 million in sales this year, Crawford said.

George Walker of Marion, owner of the Ground Round at 111 Pond St. in Norwell and another at 2 Galleria Mall Drive in Taunton, is optimistic about the chain's future prospects. He is pursuing permits for a third location, in Fairhaven.

"It's a much leaner company," Walker said. "All of the decision-makers are owner-operators. They understand what it's like to operate a hospitality company on a daily basis and it gives our guests a more positive experience."

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