Executive Trying to Build New Chain at Same Time : Butler Struggles to Get Naugles Back on Its Feet

Concealed from customers at the drive-up window of most Naugles restaurants is a computer that quietly counts the number of seconds it takes to fill each order. A branch manager’s monthly bonus depends on how quickly the customers are fed.

A clock of a different sort is ticking for Harold Butler.

For the chairman of Fullerton-based Naugles Inc., who earlier founded the giant Denny’s coffee shop chain, 1985 may be a watershed year in his lengthy career. After several years of rapid growth, Naugles has stumbled badly and Butler is working on big changes. But he’s also wrapped up in expansion plans for Herschel’s, his new delicatessen chain, and he’s hinting that he may soon reduce his role at Naugles.

“It’s foreseeable that I’d leave as chief executive (of Naugles) but remain as chairman,” Butler, 63, said during an interview in his posh, two-story office that sports a fireplace and sauna.

If he does ease out of Naugles to spend more time with his new chain, it would be in character for him. Moving from one restaurant venture to another has marked Butler’s 30-year career. He is generally cited as a pioneer whose concept for Denny’s--low prices, high volume, uniform menus and fast service--helped create the modern restaurant chain. But critics also complain that despite his bold ideas, he sometimes stumbles in managing rapid growth and is slow to change when the marketplace demands it.

Perhaps because of the recent problems at Naugles, however, Butler is backing away from his long-held belief that a plateful of good food is enough of a draw to attract plenty of customers.

Makes Concepts Work

The costly design of his snazzy new deli chain pays heed to today’s image-conscious consumer who wants pizzaz in the surroundings as well as the food. “Butler has the ability to take a concept and make it work,” said Jay Fairfield, an analyst at Piper Jaffray & Hopwood Inc., a Minneapolis investment firm.

The concept for which he is most famous is La Mirada-based Denny’s Restaurants Inc., a chain of coffee shops he founded more than three decades ago. But in 1969, his ambitious plan to expand Denny’s into the Las Vegas hotel-casino industry failed and led eventually to his resignation as chairman in 1971.

Denny’s made an offer to purchase Parvin-Dohrmann Co., a Los Angeles firm that owned a number of Las Vegas hotels, including Caesars Palace. But the Securities and Exchange Commission, in a civil lawsuit filed in 1969, accused Butler of privately making a better offer to some Parvin-Dohrmann shareholders that was not available to all public shareholders. The SEC action was settled by a consent decree.

Meanwhile, the deal fell through and Denny’s stock value plummeted. Butler eventually sold his Denny’s stock for about $3 million. That same stock was at one time worth nearly $80 million, he said. “If we had bought Caesars, I’d still be with Denny’s,” Butler asserts. At the time, Denny’s had 800 restaurants, about three-fourths its current size.

Ran Against Trends

When he took control of Naugles, Butler added to his reputation as a maverick, employing ideas that run against the grain of industry trends. He keeps all the restaurants open 24 hours, has steadfastly refused to advertise, charges among the highest prices for fast food, and hires at least two disabled and two elderly hourly workers at each store; he calls them his most reliable employees.

But Naugles’ best customers are considered among the industry’s least reliable. Nearly 70% of the chain’s business is rung up at its 24-hour drive-through windows, and much of that comes late at night from swing-shift workers zipping through to gobble nachos and burgers. By comparison, other major chains do less than half their business at drive-through windows, and most do not stay open all night.

Said one restaurant industry writer of the chain’s unorthodox operations: “Naugles flies in the face of everyone else’s perception of how to operate a fast-food business,” which includes heavy advertising, lower prices and shorter operating hours.

But the predecessor of Denny’s, called Danny’s Donuts, was also an industry enigma. It started out as a 900-square-foot doughnut shop in Lakewood that sold fresh doughnuts stuffed with jam (not jelly), and served high-quality coffee--something few competitors offered.

Expanded Menu

Early success prompted Butler to build a second Danny’s in Garden Grove, but when customers failed to show up, Butler says, “I found out I couldn’t walk on water.” Instead of sinking, however, he added a grill. Suddenly, he operated a doughnut shop that also sold hamburgers.

Contrary to common belief, the coffee shop was not named after a relative or friend. Butler says he chose the name Danny’s simply because it was popular. But customers began to confuse the shop with another chain, Coffee Dan’s, so Butler changed Danny’s to Denny’s.

The simple doughnut shop evolved into a giant coffee house chain mostly through ambitious franchising, but inconsistent quality and service eventually persuaded Butler to buy back almost all the franchises.

Franchising is a mistake he made again with Naugles, he acknowledges, forcing him recently to pull back when quality went awry.

Shortly after he sold his Denny’s stake, Butler founded Jojos Restaurants Inc. At Jojos, the menu was broader and more expensive, but the chain’s profitability was marginal. In 1980, New York-based W. R. Grace & Co. bought a 51% stake in Jojos and another Butler-controlled chain, Naugles. The following year, Butler swapped the remaining 49% interest in Jojos for Grace’s 51% stake in Naugles. Shortly thereafter, Naugles made an initial public offering of stock, and its shares began trading over the counter.

Purchased Three Restaurants

Butler had bought Naugles in 1971, making him among the first to sense a wider market for Mexican fast food. That year, he purchased three Naugles restaurants from Richard M. Naugle, founder of the chain. At the time, all were losing money, but Butler figured he could turn them around.

Within 10 years he added 60 more Naugles, then surpassed the 200 mark last year before steep losses strangled growth. At the peak, 60 to 70 of the Naugles outlets were outside its California base, and 17 were franchised--with almost all the franchising done in the past few years.

But the chain reported a fiscal 1985 second-quarter loss of $230,000, compared to a profit of $748,000 for the second quarter ended Dec. 31, 1983. For the first half of its fiscal year, profits plunged 86%.

Naugles, which employs 6,800, was rocked by losses of more than $5 million in fiscal 1984, apparently the result of rapid growth gone awry. Late last year, the company was forced to sell off 35 restaurants and scrap all future franchising plans. Butler also pulled the plug on ambitious plans to expand outside California. Of 32 Naugles scheduled to be built in fiscal 1985, only four will be outside the state.

“If you look at the stock market you’d think Naugles is a company with a lot of problems,” Butler said, adding, after a pause, “but we’re not.”

Stock Price Plunged

Over the past year, the price of a Naugles share has dropped from a high of $14.75 to a recent low of $4.875. On Friday, the stock closed at $5.375 on the over-the-counter market.

Nonetheless, Butler is preparing more changes in the way Naugles operates. He has cut food prices at some stores, begun closer inspection of all units, and is even considering a first-ever advertising campaign to help give the chain a stronger public identity.

Some industry experts believe that lower prices may be the most critical change. In Naugles’ test-market program at key outlets, tacos that were $1.09, for example, are now 99 cents. Skeptics, however, claim that the changes have come late.

Within the Mexican fast-food market, Naugles has two key competitors: Del Taco and Taco Bell. But Taco Bell dwarfs both Naugles and Del Taco, and its exclusively Mexican menu tends to appeal to a different niche. This leaves Naugles and Del Taco battling for the same consumers.

“Naugles has only recently realized that they will have to be a little smarter about their marketing. It’s about time,” says Wayne Armstrong, president of Del Taco.

On the advertising front, Naugles has a lot of catching-up to do. Del Taco will spend about $3 million on advertising this year, primarily in Southern California. Taco Bell is expected to spend nearly $50 million nationwide.

Considering Advertisements

Butler acknowledges that he is considering advertisements for Naugles and has talked to advertising agency representatives, but declines to discuss the potential campaign.

In the meantime, Butler says, “I’d rather put more food on the customer’s plate than dish money out to the media.”

Before Naugles advertises it needs a clearer image of itself, critics say. It has to offer something unique--besides good food--to its customers, analysts agree. Naugles is generally recognized by industry analysts for selling some of the best fast-food products on the market. It does not use processed cheese, while some competitors do. Even its soft drinks are blended in a special manner that keeps them carbonated longer.

But while Butler struggles with changes at Naugles, his eyes gleam as he contemplates the delicatessen concept he’s been testing. Using his own money, he opened the first Herschel’s in 1983, which combines a deli menu with an art deco setting, in San Bernardino. Another one was recently opened in Fullerton, and a third opened last week in Troy, Mich.

The restaurants, which cost about $1.4 million each to build, have caught the public’s fancy. The first two restaurants are expected to post combined second-year sales of nearly $5 million, Butler says.

With Herschel’s, Butler is offering the “something different” that critics claim is missing from Naugles. Herschel’s has atmosphere aplenty. It is big, bright and offers everything from a fresh bakery to a soda fountain with a 1950s look.

He says he’d prefer to keep the company private and add five more Herschel’s this year and eight more in 1986. The new chain’s name, which is the Yiddish equivalent of his first name, reflects how close Harold Butler feels to this latest endeavor.

And, Butler said, Herschel’s will almost certainly be his final fling in the restaurant industry--one last mark he can leave upon an industry that already bears his imprint.

“I make a living out of feeding people,” he said. “It is all I want to do.”