Cover Story : Road to Fortune : 4 Valley Firms Prosper During Local Recession by Expanding Out of State
While many Valley-based businesses are reeling from the recession, a few are basking in record profits, thanks largely to places like Arkansas, Illinois and Maryland.
Those are some of the states where four local companies--the Cheesecake Factory, International House of Pancakes, Superior Industries and Players International--have established restaurants, factories and riverboat casinos. At a time when many companies have pulled up stakes and left Los Angeles, this quartet of firms has found a way to get away from the drudgeries of the Golden State without actually leaving the area. Their out-of-state expansion has given these four companies the edge during the last three years of the state’s worst economic slump since the Depression.
By moving into economically stronger regions, these companies have found cheaper places to produce and new, booming markets for their goods and services.
Unfortunately, all of this out-of-state growth hasn’t been a boon to the Valley economy. Although these four companies maintain headquarters and some operations here, their local employment overall has actually shrunk in recent years and now pales compared with emerging workplaces elsewhere. Partly that reflects corporate America’s diminishing importance of headquarters, but the jobs have also moved to where the businesses have gone.
The Cheesecake Factory, a Calabasas-based restaurant chain known for its spacious setting and diverse menu, opened its first establishment out of California in January, 1991, on a snowy day in Chevy Chase, Md., an upscale suburb of Washington, D. C. It is now Cheesecake’s highest-volume outlet, with sales topping $10 million last year--more than its restaurant in Redondo Beach, which occupies twice the space. The newest Cheesecake Factory opened in Atlanta last fall and is on target to do even better, says David Overton, Cheesecake’s chairman.
Expanding out of state “was probably the best thing we’ve done,” said Overton, whose parents started the company in 1972 with a small bakery in North Hollywood. Today, Cheesecake owns eight restaurants, six of them in Southern California, including one in Woodland Hills. The company also operates a bakery in Calabasas. Since 1990, the company’s sales have surged by an average of more than 20% a year, to about $60 million in 1993. Last year it earned almost $4.8 million, up 12% from $4.3 million a year earlier.
The company is now looking at opening restaurants in Chicago, Las Vegas and in Eastern states.
Players International’s venture out of state was a $20-million gamble that could have busted the company. That’s what it cost Players, also based in Calabasas, to switch from a marketer of low-cost Las Vegas tour packages to an operator of riverboat gambling casinos.
Ed Fishman, Players’ chairman, saw the California recession coming. So in 1991, after returning from a weeklong tour of Iowa’s burgeoning riverboat casino industry, he gave up on the Las Vegas business and went prospecting for casino licenses in the Midwest.
Last year Players launched two paddle-wheelers in Illinois and Louisiana, bedecked with hundreds of slot machines and table games. The result: Players hit a profit of $12 million for its fiscal nine months that ended Dec. 31, compared with a loss of $4 million a year earlier. And its stock has surged from a $2 a share in 1992 to more than $25 a share recently.
Both Superior Industries and the company that operates the International House of Pancakes, IHOP Corp. of Glendale, went out of state many years earlier, but they accelerated that expansion in recent years.
“Southern California is the only region where we’re negative in sales,” said Fred Silny, IHOP’s chief financial officer. Last year the company took over nine restaurants nationally because they were failing, and seven of those were in California. All told there are 572 IHOP restaurants across the country, with 114 of them in California.
But on the strength of its out-of-state restaurants, including 58 established last year, IHOP’s sales surged 25% in 1993 to $142.5 million from 1992, and its profit climbed 35% to $10.7 million. IHOP gets its revenues both from franchise fees and from royalties on restaurant sales.
Jack Kyser, an economist at the Economic Development Corp., a nonprofit, business-retention organization in Hollywood, calls the expansion out of state “part of the business flight phenomenon.” While Kyser says it’s comforting that these four Valley companies have maintained their headquarters here, he worries that a build-up of too much business elsewhere could eventually lead to a complete exodus.
Top executives at these four companies say that won’t happen, stressing that California remains an important place for them. Still, when asked why their corporate offices are here, they are more likely to talk about family preferences and the balmy Southern California climate than any strategic business reason.
“Corporate (offices) could be anywhere,” said Players’ chairman Fishman, speaking from Las Vegas. “It could be in Alaska.” Companywide, Players has 2,100 employees, but only a dozen of them work in Calabasas. That’s down from as many as 300 employees in Calabasas before the company shifted its business out of state starting in 1991.
Weather may be the most important reason for Louis Borick, chairman of Superior, the Van Nuys maker of aluminum wheels. Borick fled his native Minnesota in 1957, he said, because “I hated the cold weather.” Then 32, he arrived in Southern California and started Superior with $3,000, selling plastic shields to keep car bumpers clean of bugs. But the product flopped, Borick said, because there aren’t as many freeway bugs here as in the Midwest. So Borick turned to other auto accessories--seat covers, steering wheel grips and then, aluminum wheels.
Superior got its big break in 1974, winning a contract from Ford to make 5,000 wheels for the Mustang. Last year the company shipped about 7 million wheels, and it earned $45 million on revenue of $393 million. Its enviable profit margin of 11% is as much due to Superior’s new factories in low-wage, non-union states as it is to the auto industry’s strong demand for the lightweight wheels. Superior makes wheels primarily for Ford and GM, and it is the industry’s most efficient producer.
Superior opened its first out-of-state plant in mid-1986 in Fayetteville, Ark., moving into what was once a truck springs factory. Since then it has opened three more--all of them in right-to-work states. And this year Superior opened its newest manufacturing plant in Mexico, in anticipation of greater demand in that country and the benefits from the North American Free Trade Agreement. Earlier this month Superior said it had received an order valued at $2 million annually to make wheels for Chrysler cars built in Mexico.
In an interview, Borick said he established manufacturing plants in Arkansas, Kansas and Tennessee to be closer to its customers, Ford and GM, but also because they are states where labor unions are weak. Throughout the 1980s, Borick had a long-running battle with the United Auto Workers at Superior’s manufacturing plant in Van Nuys. The UAW did successfully organize the plant’s mostly Latino work force, but it never won a contract and Borick’s hard-charging campaign eventually kicked out the union. “We do not have any unions in our company,” he said.
Today, Superior has 3,500 employees, including 700 in its factory in Van Nuys and 200 at its corporate offices. Reflecting the company’s lean operations, Superior’s conference rooms are bare of any paintings, contain old and drab furniture, and are seldom occupied for very long. “We don’t have big meetings, everything is done quickly,” said Jeff Ornstein, Superior’s chief financial officer. The headquarters aren’t much, he said, “but analysts like it” because of its modest cost.
Setting up businesses out of state hasn’t come without challenges. Superior has had to deflect bad publicity from the UAW, which attacked the company for taking jobs away. Players has had its share of critics of gambling, not exactly seen as a wholesome endeavor by some in Metropolis, Ill., where one Players’ riverboats is docked. Fishman says Players has tried to be a good corporate citizen, conducting blood drives and participating in other community functions.
Cheesecake Factory’s restaurant opening in Chevy Chase, Md., was slowed by snow and the Persian Gulf conflict. “When we first opened, most businesses were closed because of the snow,” said Linda Candioty, senior vice president. “But we didn’t know any better and we opened. I was shocked, we were busy.”
To accommodate regional tastes, Cheesecake has made minor adjustments to its extensive menu, which includes 200 food items over 17 pages, adding crab cakes in Chevy Chase and grits in Atlanta. In California, the company hasn’t raised food prices in two years. “We’re up, but we’d be up more if it weren’t for the recession,” said Overton.
Not surprisingly, by going out of state these Valley companies have found friendlier, cheaper places to operate. Cheesecake Factory pleasantly learned that other states provide tax credits for tips, whereas California doesn’t. Superior said its workers’ compensation costs are up to 40% higher at its Van Nuys factory than at its other plants.
“All the bureaucratic laws, insurance costs, governmental regulations (in California) are far in excess of anywhere else in the U. S.,” said Borick. “That could one day cause us to say, ‘Screw it, we’re not taking it any more.’ ” Borick said the company was unlikely ever to expand in California. The company is now enlarging its plant in Fayetteville.
IHOP’s Silny says his company hasn’t given up on California. The company plans to open 10 new International House of Pancake restaurants this year, four more than last year. “We’re taking a long-term view,” he said. But Silny said clearly it’s been the out-of-state restaurants that have carried the company in the last few years.
“It’s very helpful being a national company,” he said. “It’s allowed us to balance out some weaker performance in the state with stronger restaurants elsewhere.”