Cain and a Godfather's Pizza

Part 2

In Part 1, we saw that Godfather’s Pizza had been one of the most successful Pizza companies in America for over ten years. For a couple of years before Pillsbury appointed Cain manager in April, 1986, it had not made much profit. In 1984, Diversifieds Foods Inc, Godfather’s  new owners, trying to match the success of number one Pizza franchise Pizza Hut, introduced a “pan pizza.” The results were a failure and it was quickly replaced. A franchise owner Concepts Development with about 125 of Godfather’s nearly 900 units sued the company in February of 1985. Three months later, on May 19th, just three days before Pillsbury announced an agreement to buy the company, the N.Y. Times reported that analysts were mixed about the immediate future of the company.

 Analysts are divided over the outlook for Godfather’s, and, by extension, for Diversifoods. “They’re taking positive steps at Godfather’s, paring costs at the unit and corporate level,” says Margaret M.V. Preston, who follows the restaurant industry for Alex. Brown & Sons in Baltimore. “Once they start making money again, the earnings leverage might be great, but I’m not banking on them until late in the fiscal year.”

But Richard E. Pyle of Piper, Jaffray & Hopwood of Minneapolis, is not so sure. “It will be a very sick franchise for some time to come,” he says of Godfather’s[1].

Thus, in the middle of 1985, days before one of the largest Food companies in America, Pillsbury, bought the company, ten months before Cain took over, analysts were mixed about if Godfather’s would return to profitability in 1985. At this point, Godfather’s had been profitable every year since its inception in 1973 through 1984. There was simply no talk of bankruptcy.

Pillsbury President and CEO, John M. Stafford gave this optimistic assessment on September 11, 1985, in the Wall Street Journal less than six months before Pillsbury placed Cain in charge:

“With management help from our restaurant group and technical support from our frozen pizza business, we expect to restore Godfather’s profitability in the near term,” he said.

The CEO Stafford expected to restore Godfather’s profitability in the near term. Three months later, three months before Cain took over, Stafford was still upbeat.  In a newspaper article, published December 23, 1985 in the Chicago Tribune, we read:

In Diversifoods, Pillsbury got a well-named company, comprising nearly 400 Burger Kings, Godfather`s Pizza chain, Chart House dinnerhouses and Luther`s Bar-B-Q.

Pillsbury has jettisoned Chart House and has similar plans for Luther`s, but likes pizza and decided after 45 days of looking at the chain to keep Godfather`s.

“The more we saw of Godfather`s, the more we saw there might be real opportunities to bring our fast-food expertise and our pizza expertise and to put some strong management behind the system, which was asking us to help. The pizza category is a growth category, and Godfather`s is perceived to be the best-tasting product,“ Stafford said.

According to Stafford, Godfather`s franchisees welcomed the new boss with open arms.

“The management and the owners of the company store base said: `Boy you guys look like natural parents for us.’ You put pizza technology and your people from your R&D operations in our place and already we are starting to see huge opportunities develop between Pillsbury and Godfather’s,” he said[2].

The statement by Herman Cain that Godfather’s Pizza had been on the edge of bankruptcy when he took over was mostly a lie. PolitiFact checked and instead of exposing the lie, declared that the company was widely considered troubled when Cain took over. It is difficult not to see this as a cover-up of Cain’s falsehood. Instead of giving the facts of the situation, Politifact simply gives Cain’s version of the situation when he took over:

Cain was an executive with The Pillsbury Co. when the company bought Godfather’s in 1985. The purchase was almost incidental, according to press reports from the time. Godfather’s was part of Diversifoods Inc., a conglomerate that included more than 300 Burger King franchises. Pillsbury wanted the Burger Kings, and the chain of more than 800 Godfather’s pizza restaurants came with it.

“The value of Diversifoods was its ownership of the Burger Kings, and the deal made sense without Godfather’s,” John McMillin, an industry analyst, told the Chicago Tribune shortly after the deal. “Pillsbury got Godfather’s for nothing, and some said they got what they paid for.”

The chain’s problems included franchisee lawsuits, an overly long menu and a dejected workforce. Even its TV ads seemed hapless, showing a car full of executives driving around, unable to find a Godfather’s. (“Find one. It’s worth it,” the ad lamely concluded.) As Cain said later, the chain had “had one foot in the grave and the other on a banana peel.”

Press reports at the time Pillsbury bought Diversified Foods do say that Pillsbury had no interest in Godfather’s Pizzas. However, when you are bargaining to buy a company, it is a good strategy not to show interests in the assets that you really want. Its like going to a yard sale and seeing some antiques that you know are worth thousands of dollars in an old bag with a lot of junk. You say that you’re really interested in the junk, but since the antiques are already there, you might as well take them too for an extra buck or two. Obviously, Pillsbury would have just negotiated for the Burger Kings, if that was all they wanted.  Horn and Hardart actually outbid Pillsbury for Diversified Foods, offering over $400 million to Pillsbury’s $392 for the 375 Burger Kings and supposedly worthless 875 Godfather’s Pizzas. Horn and Hardart sued Pillsbury claiming that executives at Pillsbury had bribed officials at Diversified Foods to win the company.

Economically, the deal made no sense unless Pillsbury was expecting profits of $20 million a year or more from Godfather’s in the near future. Note this about Pillsbury at this time. It is from FundingUniverse company profile and History:

Pillsbury’s business boomed during the 1970s, as Spoor solidified Pillsbury’s strategy and made several smart purchases. Green Giant and other frozen-food companies gave Pillsbury a much larger share of the food industry and more consistent earnings. Profits in 1976 were divided almost evenly between three groups: consumer foods, agricultural products, and restaurants. By 1984, the agriproducts group had shrunk to only 4 percent and restaurants provided 53 percent.

By 1984, Pillsbury was making more than half its profits, 53%, from its restaurant businesses. The profile continues:

Pillsbury owed much of the credit for its extraordinary growth to its restaurants. By expanding Burger King’s operations and hiring Donald Smith from McDonald’s, it became the second largest fast-food chain operator. The purchase of Diversifoods–at $390 million Pillsbury’s biggest acquisition–included nearly 400 additional Burger King outlets as well as Godfather’s Pizza, Chart House, and Luther’s BarBQ. Pillsbury decided to compete with McDonald’s not in size but in per unit sales. As Burger King continued to grow, franchising became more common and only 20 percent of the restaurants remained company owned.

John M. Stafford inherited a healthy company when he was appointed president in 1984. Each year between 1972 and 1986, the company set records for both sales and earnings. Pillsbury had a reputation for quiet, conservative growth, despite nearly doubling its earnings between 1980 and 1985, from $100 million to $190 million.

With total earnings being about $190 million and that being 53% from restaurants, we can estimate that they were making about $100 million a year in profits from their restaurants. How much could Pillsbury expect to make more in profits if they purchased 375 more Burger Kings to add to the nearly 4,000 they already owned. Cain tells us the answer in an article from December 5, 1983’s Computerworld.

Right now, the position of general manager of the Philadelphia region encompasses all Burger King activity within a seven-state area. That represents $325 million of Burger King sales a year, which I am responsible for overseeing. It represents 400 Burger King restaurants, some 1,600 direct employees. My profit contribution represents about 14% of Burger King’s total profit for the year.

Burger King was not Pillsbury’s only restaurant chain, so we may assume that Pillsbury was making about $80 million from its Burger Kings of its $100 million restaurant profits. Making 14% of $80 million, we can assume that Cain’s 400 Burger Kings were making about $11.4 million in profit. We can say that Pillsbury could have expected at best about $10-15 million in profits a year from the additional 375 Burger Kings bought from Diversified. Making $15 million a year and paying $390 million for 375 Burger Kings means that Pillsbury could have expected to make back their $390 million investment in 26 years. It would have been a totally absurd deal for Pillsbury without the Godfather’s Pizza restaurants. If Pillsbury had expected to make roughly $25 million from Godfathers (as forecasts from Diversified indicated), then they could be making $15 million (from 375 Burger Kings) and 25 million (from Godfathers) or $40 million per year. This, along with the 100 or so other restaurants that Diversified was selling meant a recovery of their full purchase price of $390 million in about 8 years. Only with expected profits of $20+ million or so per year from Godfather’s does the deal really make any sense.

We should also note that Pillsbury management had been looking at buying a large Pizza chain for a year and a half before it bought Godfather’s. According to an April 23, 1984 article in Nations’ Restaurant News (“Power Shift at BK heralds major diversification drive – Burger King” by Joe Edwards):

Campbell disclosed that Burger King plans to acquire or develop another fast-food, nonbeef chain. Haagen-Dazs ice cream stores, which Burger King’s parent Pillsbury acquired last year, already report to Campbell.

Two Burger King officials indicated Campbell is most interested at this point in the fastfood pizza segment but has not made any decision…

Campbell said he is interested in starting a new “convenience restaurant” chain, one tht does not specialize in hamburgers. A Burger King Spokesman defined “convenience restaurants” as dining concepts that include, but are not limited to, fast food.

Burger King will either develop a new concept or acquire “a small, successful chain and develop that,” spokesman John Weir said. “It might be fish, it might be chicken, or it might be pizza.”

Campbell “feels the pizza area is somewhat intriguing,” Weir added.

Buying a Pizza chain made sense for Pillsbury, now making half its profits from its restaurants. Pizza was possibly the most rapidly expanding food product in the mid-80’s. Just four months after purchasing “Godfather’s Pizzas,” in December, 1985, Pillsbury, the number one seller of frozen pizzas in the world, bought out the number two seller Jeno’s Pizza. Pillsbury paid an estimated $120 million dollars for Jeno’s which was doing sales of $125 million a year in 1984. It is a little difficult to believe that Pillsbury would purchase a frozen Pizza company doing $125 million a year in sales, but Pillsbury, the second largest fast food restaurant owner in the United States, was uninterested in purchasing the fourth largest Pizza Restaurant chain in the country, which was doing $325 million a year in sales.  According to Pillsbury officials, they, somehow, almost by mistake, ended up buying Godfather’s Pizza. Buying Godfather’s and Diversified’s other restaurants was the largest single purchase Pillsbury had ever made. The line that Godfather’s was incidental to the deal smacks of corporate managers wanting to cover themselves if anything went wrong with their decisions. Sure $20-25 million a year in profits in the near future might have been forecast by Diversified’s owners, but what if profits were near zero as they had been in the past year. The safest course was to say that they were really interested in just the Burger Kings. That way they could say that they still made a good deal if they were forced to sell Godfather’s at its approximately $150 million value that they had paid for it.

In any case, instead of giving us a real financial analysis of the situation, the PolitiFact article simply gives us a smart aleck quip from the Prudential analyst McMillion about Godfather’s Pizzas being valueless. It comes from a Chicago Tribune article written more than two years after Pillsbury bought Godfather’s, [3]. This Chicago Tribune article is simply one of a stream of Cain publicity pieces that praises and glorifies Cain for his great work at Godfather’s without any hard facts, evidence or critical analysis. McMillion was simply echoing the company management line about not paying anything for Godfather’s and Cain’s line that Godfather’s was on the edge of bankruptcy.

The PolitiFact article adopts Cain’s propaganda in talking about what he did with the advertising, saying “He declared the company’s advertising account up for review, pitting ad agencies against each other in a bidding war.”

The “hapless” ad that PolitiFact referred to with people looking for a Godfather’s was produced by Dailey & Associates, the people who created the Wendy’s “Where the Beef” ad, one of the most famous and successful restaurant ads of all time. Upon, taking over Godfather’s, Cain essentially fired them and replaced them with an ad company[4],J. Walter Thompson, that he had worked with at Burger King. The Daily agency was “stunned” according to Ad Week (April 28, 1986, Matthew Lewis).   This was an $8 million dollar ad campaign which was essentially a no-bid contract. Cain selected four companies and gave them a week and a half to come up with an advertising campaign. He ended up selecting his old company as the winner. This would be considered an ethical violation at many companies and would be a criminal offense for a manager of a government agency. There was no bidding involved, Cain simply picked the ad he liked, which just happened to be from the only company that he had worked with before. Its like picking four women for a beauty contest including your girlfriend and then selecting your girlfriend as the winner.

We won’t go more deeply into the ad situation since PolitiFact did not charge itself with investigating ethical misconduct by Cain or reviewing the quality of advertisements, but only on Cain’s claims to turn the company around from alleged bankruptcy. If the ads Cain had been more successful than the ads he replaced, there would have been some reason perhaps to credit Cain, but there is no evidence that they were. Cain went through four different Ad agencies in his first two years at Godfather’s. None of them produced successful ads.

All that PolitiFacts needed to do was to look at the optimistic company outlook that Cain himself gave when he took over Godfather’s to see that it was not a company on the verge of bankruptcy. Rather, according to Cain, it was a company that had simply slipped from being the third largest to the fourth largest pizza company over two years and now was in an excellent position to start growing again.

This is what Cain reported about the conditions he found at Godfather’s one week after being named the new CEO on April 9, 1986[5]:

 “Godfather’s is not dead,” Cain said. “We’re alive and well, and we’re going to come back in a very strong way.” Once No. 3 in the pizza restaurant business, Godfather’s has slipped to No. 4, behind Pizza Hut (4,000 restaurants), Domino’s (2,500) and Little Caesar’s (1,000).

After a week as president of Godfather’s Pizza, Cain said he already knows that the company does not need a “major overhaul of the talent here.” He said the current headquarters management is excellent and deeply committed to the success of the chain, a part of Pillsbury Co. since last summer.  

Compare this bright and optimist tone to Cain’s later pronouncements in September 1987, a year and a half later, that Godfather’s Pizzas had “one foot in the grave and the other on a banana peel” when he arrived[6].  A week after arriving, Cain gave full credit to his predecessor, Henry V. Pettis for giving him a company in good shape with a promising future[7]:

 Despite the setbacks, Cain said, the past year has been a time when Godfather’s has taken steps, such as settling the franchise lawsuit, that will pave the way for improvement in the future.

He said his goals are to increase sales 10 percent a year for the next three years and to make a profit in fiscal 1987.

Once profits return, the number of restaurants will grow again as current and future franchise holders see that the chain can make money again.

Cain gives much of the credit for the past year’s progress to Henry V. “Pete” Pettis, who headed Godfather’s from January 1984 [sic] until this month.

He said Pettis moved the headquarters back to Omaha and held the firm together until Pillsbury acquired its parent company, Diversifoods Inc. He led a campaign that convinced Pillsbury to keep Godfather’s rather than to sell it.

Pettis made strides toward mending relationships with franchise owners, Cain said. He said Pettis’ decision to step down and to go into business for himself was a mutual conclusion reached by Pettis and by Jeff Campbell, chief executive for Pillsbury’s Burger King, Godfather’s and Quic Wok fast – food divisions.

Pillsbury Ownership Godfather’s headquarters staff signed a poster – size card for Pettis, now displayed at the company receptionist’s desk, that reads, in part: “We are excited about our future with Pillsbury, and want you to know that we are behind you 100 percent in making Godfather’s Pizza what we all know it can be the No. 1 Pizza Chain in the Country.” Pettis is acting as executive vice president and will be an adviser to Cain, remaining at least on call for several months, Cain said.

Note Cain’s goal to increase sales by 10% over the next three years and make a profit in 1987. Sales fell over the nest three years from $275 million in 1986 to $260 million in 1987 to 242.5 million in 1988. We may presume that the company was not profitable in 1987 and that is the main reason Pillsbury put the company up for sale in 1988. They had given Cain his shot and he had failed to turn the company around or to bring about the profits they had expected. They obviously did not think that Cain was going to turn the company around anytime in the near future.

In Part 3, which I plan to have up next week, we will see how Cain repeatedly made highly suspect claims about how the company was doing. Along with these unverifiable and misleading claims, he kept promising bigger and better things for Godfather’s Pizzas. His promises never materialized. For part 3, click here.

[1] May 19, 1985, Leib, Jeffrey, The Rise and Fall of Godfather’s Pizza, N.Y. Times

[2] December 23, 1985, Gorman, John, Chicago Tribune, Pillsbury—Fat, Sassy and Very Profitable

[3] September 28, 1987, Gorman, John, Godfather’s Gets Well on Some Fatherly Advice, Chicago Tribune.

[4] May 7, 1986, Jordon, Steve, and Batson, Bill, Godfather’s Selects Chicago Advertising Firm, Omaha World-Herald (NE)

[5] April 9, 1986, Jordon, Steve,  Janda, Richard, “New ‘Godfather’ Plans Boost in Pizza Market,” Omaha World-Herald (NE).

[6] Above, note #2.

[7] Above, note #4.