Buying in Featured

5:11am EDT April 29, 2003
Donatos Pizzeria Corp. founder Jim Grote feels the company's destiny is to reach a national, even international market.

So when McDonald's Corp., headquartered in Oak Brook, Ill., approached him in 1999 about buying Donatos, it seemed that dream would become a reality.

"We felt that if we really wanted to see the company reach its destiny, we needed a partner -- the right partner," Grote says.

And the 5,000-employee company did flourish under the expertise of McDonald's; in 2002, Chicago-based Technomic Inc., an industry analyst, ranked Donatos as the ninth fastest growing chain in the United States based on sales increase percentage. But did Donatos bet on the right horse when it joined forces with McDonald's?

When McDonald's purchased Donatos, the economy was booming and there was no hint of the business and national tragedies that lay ahead. McDonald's, in what was considered a sound business decision by analysts, sought to expand its concept portfolio when it acquired Donatos, Chipotle, Boston Market and, most recently, Fazoli's.

But since then, McDonald's has experienced its own financial woes, especially in the past two years, when it closed stores and eliminated hundreds of jobs in an effort to regain profitability.

"Instead of helping McDonald's, adding the additional concepts caused it to lose focus on its core business," says Jerry McVety, president of McVety & Associates, a foodservice consulting firm.

McVety says the original idea behind the purchases was sound.

"I think McDonald's was testing the idea of co-branding [more than one concept in a single store, like Taco Bell and Pizza Hut co-branded stores]," says McVety. "But the impact has not been positive."

McVety feels strongly that McDonald's will soon place its portfolio of restaurant concepts up for sale.

"The other concepts really gave them too much diversity," McVety says. "McDonald's attention and money will be redirected -- as it should be -- on its core business."

So where would that leave Donatos? McVety says there are three possibilities: a buyer will maintain Donatos name and reputation and help it grow; a buyer will place its own moniker on the restaurants and Donatos will disappear; or McDonald's Corp. will hold on to the chain, but growth will be minimal.

These are not encouraging possibilities, and definitely not what Grote had in mind when he started the business as a college student in 1963.

From humble beginnings

You might think a 20-year-old college student would know little about owning a business. But when the student was Grote, it turns out he knew quite a bit.

With $1,300 he borrowed from his father and future father-in-law, Grote purchased the first (and at that time, only) Donatos in Columbus in 1963. Prior to that, he had worked at pizza stores and felt he had a pretty good idea of what to do -- and not to do -- to succeed.

"I started out at a small pizzeria cutting pepperoni with a paring knife," says Grote. "I worked two nights a week and went to high school and played sports."

He quickly became a manager at that shop, and when the co-owners, both in the insurance business, decided to sell the store, they offered it to Grote.

"It was a very tempting offer. I didn't need to put any money down," Grote says. "My Dad knew I was serious when I asked him to look it [the restaurant] over with me."

Grote's father advised him to finish high school and go to college.

"He thought pizza was just a fad," Grote says.

Four years later, the owner of Donatos approached Grote with a similar deal. This time he couldn't refuse. He purchased the store and moved it into a storeroom in front of a plumbing business. As the business grew, it became Donatos Pizzeria Corp.

"I paid $1,000 for the business and had $300 left for inventory," Grote says.

An observant worker, Grote had watched the management styles and business practices of his former employers and modeled his own style after the best practices of each.

"I saw that there was a demand for good pizza, but you also have to treat people like you want to be treated," says Grote.

Grote says he also learned that he had to put most of the money he earned back into the business for equipment and inventory.

"I took out a certain amount every week for my salary, but I learned not to spend my profits," he says.

He equipped his kitchen to handle heavy weekend volume, even though he knew the equipment would be idle the rest of the week.

"It helped me keep my customers," he says.

And he applied his same golden rule for treating people to everyone he dealt with in the business, from employees to suppliers.

"The only advice I received was to get the other guy before he gets you," Grote says. "I couldn't understand why you wouldn't treat the people you do business with the same way you treat family and friends."

His human value principals, as he calls them -- honesty, integrity and compassion -- are the cornerstone of the business and its success.

Then along came McDonald's

Thirty-six years and 146 stores later, McDonald's purchased Donatos. It was Donatos' combination of producing a quality, consistent product and treating the customer well that led to this slow but steady growth, along with a franchising boom.

"It wasn't until 1992 that I started franchising," Grote says. "I waited until I knew we had a system to get the pizza consistent."

At the time, there were just 36 company-owned stores, all financed by Donatos' capital. Franchising accounted for more than 100 Donatos stores between 1992 and 1999. Donatos' franchising policy, which allowed franchisors to buy entire markets at one time, led to this boom.

Grote says that despite his goal of doing it (expanding) right or not at all, the company still experienced its share of growing pains.

He says despite his goal of doing it (expanding) right or not at all, the company still experienced its share of growing pains.

"We grew slowly at first, then rapidly, and we trained managers from Columbus and placed them in other locations," Grote says. "We didn't have enough people in the pipeline, so we had to pull back."

In 2002, Donatos closed all of its 23 stores in Atlanta, which had been in business since 1998, because they underperformed. Still, Donatos Pizza locations spread to Michigan, Kentucky, Indiana, Pennsylvania, New Jersey, Alabama and Florida.

But it was Grote's vision of Donatos Pizzerias coast to coast that led him to sell to McDonald's.

While some might call it selling out, a more accurate description could be buying in, since Grote felt the two companies were a match when it came to underlying goals and principles.

"McDonald's visions and values are similar to ours, and it all comes back to consistency and treating people right," Grote says.

By the time McDonald's offer was on the table, Grote's four children were an important part of the business. So the decision to sell was made by the Grote family by and long-time Donatos employees.

"My whole family was involved in the decision, and that includes my extended family of associates, some of whom have worked here since they were 15 or 16 years old," Grote says.

The consensus was, as long as the Donatos culture could remain -- and Grote says it has -- the financial and human resources of McDonald's could help the company grow.

Since Donatos joined McDonald's portfolio of restaurant concepts, Donatos has expanded its market, but not at the rate anticipated. Originally, the plan was to open about 20 stores per year over the next several years. There are now 200 Donatos locations, still primarily in the Midwest and Southern states, and three stores in Munich, Germany.

Grote says it is thanks to the expertise of McDonald's that the company has been able to locate outside the United States, and that the concept has improved.

"We have learned a lot from McDonald's in a short time," says Grote.

One of the first changes McDonald's initiated was to expand Donatos' eat-in capacity. McDonald's also instituted a drive-thru window.

With multiple product delivery options -- dine-in, carry-out, home delivery and drive-thru -- Grote says the new stores which incorporated them have exceeded sales expectations.

But the company's rate of expansion is still far below its original target.

"We're going to open six to eight new stores this year," Grote says. "Right now, we're developing a pipeline of good solid managers. This is our incubation period."

And Grote says McDonald's is still developing the franchising plan for its subsidiaries, so for now, new stores will be company-owned.

The biggest difference between the pre- and post-McDonald's eras is that Grote is no longer the sole leader. McDonald's Corp. named long-standing executive Bill Rose to the position of president and CEO, while Grote's title is now founder and executive chairman.

"I'm used to calling the shots, so I've had to adjust," Grote says.

He calls Rose "Donatos' bridge with McDonald's."

"He's been with McDonald's many years," Grote says. "He knows how to deal with them."

He says his role has changed as well. Instead of overseeing the company's day-to-day operations, he deals more with overall strategy. And of Grote's four children, just one, daughter Jane, is still employed by Donatos as chief people officer.

Still, Grote is optimistic about the future of Donatos.

"Someday we'll see Donatos around the world," he says. "But we'll take it slow and do it right."

And there's always Grote's second company, J.B. Grote Co., which designs and builds slicers and other equipment for the food processing industry. The company has two locations, one in Columbus and the other in Wrexham, North Wales, United Kingdom, and employs 180 people.

Grote says that while his involvement in J.B. Grote's operations is less than his involvement in Donatos, he still offers ideas and lends his business philosophies.

"There's a great deal of potential for growth there," says Grote.

But when it comes to pizza, Grote is confident Donatos will endure.

"As long as people like the pizza we'll grow," he says. "The big chains may be strong in some areas, but I still see tremendous opportunities for us." How to reach: Donatos Pizzeria, (614) 416-7700

The Top Bananas (or Pepperonis) in the pizza business, as reported in Pizza Today's Hot 100 Companies, July 2002 issue

Restaurant Name City/State No. of Units 2001 Gross

1. Pizza Hut Dallas 11,991 $7.2 billion

2. Domino's Pizza LLC Ann Arbor, Mich. 7,072 $3.78 billion

3. Papa John's International Inc. Louisville, Ky. 2,729 $1.85 billion

4. Little Caesars Pizza Detroit, Mich. 4,000 $1.3 billion

5. Chuck E. Cheese's Pizza Irving, Texas 402 $562 million

9. Pizzeria Uno Chicago Bar & Grill West Roxbury, Mass. 183 $342 million

11. Godfather's Pizza Omaha 352 $315 million

12. California Pizza Kitchen Los Angeles 130 $298 million

16. Donatos Pizza Columbus 197 $175 million

27. East of Chicago Pizza Willard, Ohio 138 $62.5 million

34. Pizza Outlet Pittsburgh 107 $46 million

37. Noble Roman's Inc. Indianapolis 851 $43 million