The Rise and Fall of Souplantation
Here is the video from this transcript: The Rise and Fall of Souplantation
Souplantation was known for its buffet style dining concept featuring a variety of salads, soups, pastas and bakery items. The chain was famous in the San Diego area and had expanded to over 15 states. However, the chain filed for bankruptcy in 2016, and permanently closed all its locations in 2020. So, what caused the demise of the chain? Let’s dive in.
Michael Mack opened the first Souplantation in 1978 with an aim to differentiate himself by serving healthy alternatives to fast food chains. At first, customers were attracted by the restaurant’s food variety which were presented on buffet tables. Mack was simply taking advantage of the all-you-can-eat trend by offering customers healthy buffets at a fixed price. The concept resonated well with customers and Souplantation was expanding in the San Diego area.
However, other chains were emerging to ride the trend. Soup Exchange and Fresh Choice soon joined the battle of the soup-n-salad wars. They were all competing for the same customers and needed to differentiate their offerings to stand out. Souplantation decided to simplify its menu offerings by focusing only on salads and soup. Mack’s idea to offer customers a simple and reliable menu proved to be effective. While the two other chains faced falling sales, Souplantation was expanding comfortably in the late 80s, reaching over 20 restaurants throughout Southern California.
However, the chain began expanding too fast. Sales was not growing enough to sustain the added overhead costs. And there was no effective management system in place to oversee the expanding number of locations. Thus, in 1990, a new CEO was brought in. John Bifone, who had tremendous experience in restaurant turn around, joined the company. Bifone wasted no time to put his skills at work. He was appalled that Souplantation employees did not have any formal training. That explained why the chain’s locations were inconsistent in terms of design and menu offerings. With the new training program he set up, employees were taught everything, from sanitation to quality control.
Bifone also thought it was best to slow down expansion plans in favor of revitalizing existing restaurant sales. I think he was aiming at getting a better handle on existing locations, perfecting the process, and replicating the success in new locations. And for those of you who wanted to know why Souplantation was also named Sweet Tomatoes, here is the answer. Bifone felt that the name Souplantation sounded too similar to that of other competitors and it also did not emphasize the chain’s renewed focus on salads and soups. He therefore decided to use the name, Sweet Tomatoes, for locations outside of the San Diego area.
All of the strategies that Bifone put in place worked successfully. The mid 90s marked strong growth at Souplantation, with the chain eyeing a national expansion. Bifone still kept a tight control on all the locations with a focus on quality and menu. Bifone’s standardization even brought about a lower overhead cost structure relative to other competitors. The soup menu was also so versatile that it could be adapted to new consumer trends easily. Bifone was also very careful in selecting new locations for the chain. He made sure to select regions that experienced a rise in healthy lifestyles. That included locations in Arizona, Florida and Texas.
The chain was performing so well that they went public under the name, Garden Fresh Restaurant, in 1995. They used the funds generated from the IPO to pay down debt and to prepare for further expansion in the US. Garden Fresh was rising above its competitors by keeping its menu priced around 10 dollars, despite salad products rising. By the end of the 90s, the chain had over 50 restaurants generating a total of above 100 million dollars in sales. Their focus on healthy food attracted more and more consumers as low-fat diets became trendy.
I wanted to share some things I found from their 1999 10K. Buffet style restaurants have a harder time retaining loyal customers. That’s why Garden Restaurant placed a lot of emphasis on hiring guest-oriented employees. They were present at the food bars to assist customers in any way possible. The chain also set up a “zero-defect” program, that established detailed procedures under which popular food offerings were prepared and presented. Marketing efforts to attract new guests included the use of freestanding inserts, which contained information regarding the restaurants, and in some cases, discount coupons.
Here is a snapshot of what was happening from 1996 to 2000. Although revenues kept rising at an impressive rate, overhead costs kept rising as well. But this was natural as the chain kept opening new stores, which entails spending more on capital expenditures and one-time expenses.
Now that Garden Fresh had proven to be successful in the buffet space, it ventured into what it called, the Takery space, which is essentially combining takeout with bakery. The first takery, called Ladles, was opened in 1999 in Encinitas, California. The new concept was designed to be a healthy gourmet alternative to home cooked meals. Everything was pre-packaged and ready to go.
The company was doing okay at the turn of the millennium. Sales was rising albeit at a slower pace. By 2003, the chain had 97 locations in 15 states, generating 220 million dollars in revenues. Then, in 2004, it went private. Centre Partners Management and Fairmont Capital worked out a deal with Garden Fresh’s management team. But after only a year, the chain was bought out again, this time by Triangle Capital Corp and Sun Capital Partners. The chain finally filed for bankruptcy in October 2016. Declining sales and higher overhead costs following sale-leaseback deals to investors were cited as the main reasons.
Now, let’s take a step back. Usually, the culprit for buyout failures is a result of assuming a high level of debt. And in my opinion, this was sadly the case here. Even though sales grew to over 300 million dollars by 2011, it might not have been enough to meet the high level of interest expense.
Let’s turn to the sale-leaseback deals. These transactions usually involve a company selling an asset and leasing back the same asset with the buyer. Since a lot of debt originated from the buyout, I assume that the investors initiated the leaseback transactions to get a nice cash kicker upfront. And since the lease was now owned by a third party, the chain suffered from steep increase in rent prices to match market rate. It would be too costly to move locations. Think about all the capital expenditures involved in fitting up a new place.
Let’s also talk about leadership for a second. Michael Mack, the founder of the chain who was kicked out in 1990 and brought back again soon after, was being permanently kicked out in 2012. I mean sure, Mack did not do a great job in the 1990s but he surely learned from his mistakes and helped the chain grow to new heights. I am not entirely sure that kicking out Mack was a good move. He could have been assigned to another role.
Despite all that, whilst in bankruptcy, the chain found a buyer in 2017, Cerberus Capital, who tried to revive the chain. They called for consolidating best performing locations and reducing the debt to manageable levels. But in 2020, the covid-19 situation exacerbated the chain’s fragile situation. They finally announced that they would close all their locations permanently.
What do you think was the chain’s breaking point? Was it the two rounds of buyouts? Or was it because it fell out of sync with the restaurant environment? As always, let us know what you think.
