The Finest Decision He Never Made
Sometimes the best laid plans are tossed away. Dan Evans did that once and as a result, Bob Evans Farms will soon parlay retail sausage and restaurant expansion into $1 billion in sales.
by Ken Krizner, senior editor
In the early 1970s, Daniel E. Evans had a plan for Bob Evans Farms Inc. The company was about to increase its number of restaurants from five to 15. Of course, it was also selling its Bob Evans brand of sausage at retail stores.
When the 15th restaurant opened, Evans, chairman of the board and CEO of the Columbus, Ohio-based company, was going to "sell off the restaurants and make a lot of money."
Such was his strategy when he walked into the office of a New York financial planner.
The financial planner told Evans that even thinking about selling off the restaurants was a mistake.
"They told us the restaurants could be dynamite, and that we would just be giving them away," Evans remembers. "They said we had the fundamentals figured out in operating a restaurant, and that we have the knowledge and background to expand the operation. If we sold them, somebody else would expand and make more money than we would ever get by selling."
Evans, the cousin of founder Bob Evans, quickly changed his mind. And with hindsight being 20/20, it is easy to see that abandoning the plan was the correct plan.
In the past decade, Bob Evans Farms has increased net sales from $227.7 million to $767 million in fiscal year 1995 (which ended April 30). The company expects to reach $1 billion in net sales in fiscal year 1997.
The Bob Evans empire includes more than 300 restaurants in 19 states, including Bob Evans restaurants, "small town" Bob Evans restaurants, Owen Family restaurants and Cantina del Rio Mexican restaurants. In fiscal year 1994, restaurants were responsible for 71 percent of the company's net sales. There are more than 24,000 employees.
Bob Evans signature commodity, fresh sausage, is sold as various products in retail outlets in 29 states. The company has seven sausage production facilities.
It also sells deli salads in retail outlets in the Eastern United States under the Mrs. Giles Country Kitchen brand name. The company's one non-food business, Brentwood, Tenn.-based Hickory Specialties Inc., produces liquid smoke and charcoal products.
Bob Evans stock is a hot commodity.
Thompson Financial Networks Inc., a New York-based financial investment company, rates Bob Evans stock as "buy" because it is trading at the low end of its price-earning range.
By mid-1996, Thompson expects Bob Evans stock to be at $25 a share. It is currently trading at about $20.
Recently, the stock was listed as one of the "hottest" available in the food category by Jeffrey F. Omohundro of Wheat First Butcher Singer Inc., a Richmond, Va.-based securities brokerage firm.
Omohundro was rated as the No. 1 food stock picker of 1994 by the Wall Street Journal. Sausage may go against the recent health-conscious trend, but it is a growing area nonetheless, he told the Journal. "Consumers talk a lot better than they behave."
Sausage and restaurants
The stock is hot because of sausage and Bob Evans restaurants. No matter what the figures say when quarterly earning reports come in, the two that matter the most are retail sausage sales and Bob Evans restaurant sales.
"All of the statements are important, but these two are the most important," notes Roger D. Williams, senior group vice president. "It is nice to do the other things [charcoal, liquid smoke, Mexican restaurant and salads], but if you start doing anything at the expense of the two babies that brung you, you are in trouble."
Because of the dip in hog prices, Bob Evans has lowered the price of its sausage at the wholesale and retail levels. The company saw a 10 percent increase in retail sausage sales during fiscal year 1995. "We were very pleased," Williams says.
But looking toward the next five years, Williams is not sure about sausage sales.
"We ask ourselves: 'Are people going to buy more sausage?' The answer is: 'Probably not'-unless one of two things happen," he points out. "Either consumer attitudes in health change, which I don't think will happen. They might moderate, but they won't change.
"Or, we have to position Bob Evans sausage as the greatest ingredient and flavor a consumer can buy in the grocery store. We are in the process of doing that," he adds.
Bob Evans has recently expanded sausage sales into Colorado and is looking to expand into other new markets.
As for restaurants, there has been significant capital expenditures toward remodeling and expanding Bob Evans eateries. The company will spend $40 million in 1995 in restaurant expansion, according to Evans.
"Small town" Bob Evans restaurants were designed to efficiently serve communities with smaller population bases. They feature virtually the same menu as traditional restaurants.
"We build them small because the smaller the restaurant, the easier to control. And there is less capital investment," Williams stresses. "This is a strategy to capture the heartland."
Family restaurants, following the lead of fast-food outlets, have sought to increase their market share by introducing value-packed meals. Bob Evans restaurants are no different.
Traditional and "small-town" Bob Evans and Owens restaurants offer "$2.99 Breakfast Breaks," a strategy to support weekday breakfast business, and "Five under $5" dinner entrees to generate additional dinner business.
Also being fine-tuned is a Bob Evans General Store concept. Williams admits that "some are doing well and some are not."
The idea behind a general store theme is for tourists who not only want to stop for a meal, but who want to browse and shop. There are currently seven General Store eateries at various tourist attractions.
Williams says the idea for restaurants is simple.
"We have quantitative research that shows that restaurants don't own customers, they share them," Williams notes. "The penetration strategy for Bob Evans is to reach out and grab all kinds of customers. So we have to have the appeal.
For Bob Evans General Stores, the appeal is tourists who want more than just a 30-minute stop for a meal. For Cantina del Rio, the appeal is dinner.
Cantina del Rio began in 1992 as a way for Bob Evans to find a spot in the casual-theme dinner segment.
As Williams points out, a Bob Evans restaurant is usually not the first choice on Friday nights for many people.
"The casual chains are doing well and we want a piece of that pie," he says. "It is good for the company to get into an expanding dinner category."
Initially, the company did not want it known that Cantina restaurants were Bob Evans property.
"People could walk into a Cantina del Rio and see nothing that would lead them to believe it was owned by Bob Evans," Williams says. "We executed that strategy very well.
"Then we began talking to people who never dined at Cantina," he adds. "We asked them if they would feel differently if they knew Cantina was owned by Bob Evans. They said it would definitely make a difference and that they would try it."
Now, restaurants offer gift certificates that are good at either Cantina del Rio or Bob Evans. "As a marketing group, we have begun to work together," Williams says.
What's in a name
The point about consumers wanting to try Cantina after discovering it was owned by Bob Evans is well-taken. Company officials realize that the company's No. 1 asset, whether it be retail sales or restaurant sales, is the name.
"There is a lot of loyalty to the name 'Bob Evans' and we work hard to keep those standards up," Evans cautions. "We can make a cheaper product if we want to and probably get away with it for a period of time. But in the long run, it would only hurt us.
"We will not cave in to poor quality," he adds. "If we can't do it right, we don't want to do it at all. That is what the name stands for."
Williams recalls attempting to introduce a new line of burritos under the Border brand name.
Research indicated that people in Detroit thought the name meant the burritos came from Canada, and people in Cincinnati thought they came from Kentucky.
When people discovered the burritos were produced by Bob Evans, they said they would try it.
The burritos were re-introduced under the Bob Evans brand and have sold well.
"When people have that much faith in your name and your product, you better deliver," Williams says.
What is unusual about Bob Evans is that the name gets tested in two categories-retail and foodservice. There is a certain amount of synergy involved-cross-advertising between retail and restaurants.
Last December, the company began selling 210,000 cookbooks in its restaurants, prominently featuring Bob Evans Italian sausage.
In the four months that followed, the price, distribution, packaging and promotion of Italian sausage remained the same. But sales of Italian sausage increased by 20 percent-directly attributable to the sale of the cookbooks.
The Bob Evans marketing department constantly grapples with the questions of retail marketing and advertising vs. restaurant marketing and advertising, and how one can translate into better sales for the other.
"It is a great question," Williams says in reference to what synergy there is for a meat processor that also has its own restaurants. "If we knew, we would work half the time.
"The correct way to spell synergy is s...y...n," he notes. "You sell 210,000 cookbooks, the restaurant division makes money and the sausage division makes money.
"If you spell it s...i...n you confuse people," he adds. "People watch a television advertisement and don't know if it is for retail sausage or restaurants.
"We had employees in the 1970s who said the purpose of a Bob Evans restaurant is to sell Bob Evans sausage," Williams points out. "That is wrong. The purpose of a Bob Evans restaurant is to satisfy customers. If we can satisfy customers and introduce them to Bob Evans Italian sausage, that is wonderful. But it is not the purpose of the restaurant. We want separation between restaurants and retail."
To help drive home the message of separation, Bob Evans television advertisements, featuring Dan Evans, have established guidelines. Restaurant ads are shot in the restaurants while retail sausage ads are shot in a home setting.
Evans believes this is part of the evolution from a sausage company to a food company. That evolution, which began about four years ago, may include acquiring more food and non-food companies.
"It can be treacherous to move into areas that you do not know about," he points out. "It makes more sense to enter these areas through acquisitions. There is already a management team in place with the expertise in a particular field."
For example, although it was not looking to enter the liquid smoke business, when Hickory Specialties Inc. became available, Bob Evans Farms jumped at the idea of owning such a successful company.
"We bought Hickory because it is a great company," Evans says. "Its profitability [growing at 18 percent to 20 percent a year] is as good as any in the entire company."
Williams says while evolving into a food company, Bob Evans Farms has to look at three points simultaneously:
-- Continued growth of the core product-sausage. What opportunities will present themselves, what items are growing, what items are not getting support, and what items from the competition are growing.
"We have to focus on the core [sausage], be excited about the core, and believe in the core because we built the company around it," Williams stresses.
-- Continue to be aggressive in test marketing new products.
-- Continue to grow new territories. The goal is to one day have a Bob Evans restaurant and Cantina del Rio on the same lot, as well as find new retail markets for sausage products.
"You are either getting better or getting worse," Williams says. "We have to grow. If we don't, we risk stagnation and allow our competitors to enter markets without competition. They tend to use that to make a lot of money and hit you over the head with it."
But it has been Bob Evans Farms that has been doing most of the hitting.
Thirty years ago, Evans thought the best his company could do was $300 million in sales. Today, the company streaks toward the $1 billion mark and beyond.
"With our growth rate and ever-changing customer tastes, the basics are the one thing that we can continually do well to give our customers the best products and dining experience," Evans says. "We have great momentum in both segments of our business."
The fundamentals that convinced the New York financial planner that Bob Evans Farms could be a mega-hit in the retail and foodservice scene remain as strong as ever today.