There aren’t many high-growth “darlings” in the restaurant industry today, but along with Panera Bread and maybe Chipotle, Buffalo Wild Wings is one of them, a stock analyst recently noted.
In 2009, when Buffalo Wild Wings made Forbes’ list of the 200 Best Small Companies for the third year in a row, revenues totaled $538.9 million, up almost 28 percent from 2008, which itself was up 28 percent from 2007. The company’s five-year average growth rate was 27 percent for revenues and 39 percent for earnings per share. The five-year average return on equity was 13 percent.
Next year, the Golden Valley–based restaurant chain will expand into Canada. Two Toronto-area restaurants will open in the spring, the first of 50 Canadian units anticipated within the next five years. And Canada is just the first stop in a global expansion that is mapped out, at least in preliminary form, through 2020.
As of mid-July, Buffalo Wild Wings’ domestic restaurant count stood at 683 and climbing. CEO Sally Smith’s goal of 1,000 restaurants by the end of 2013 appears within easy reach.
Smith, by the way, was the backup choice for CEO. She got the job in 1996 only because an outside candidate changed his mind at the 11th hour.
“This guy was going to come to work for us. We were going to relocate him, we had negotiated all the way through the employment contract—everything was set,” Smith recalls. “He was supposed to show up for work on a Monday. He didn’t show. We called and said, ‘Gee, we thought you were going to be here today.’”
It turned out that his existing company appeared likely to be sold and “he didn’t want to give up the cash-out opportunity,” Smith says. “So we were kind of back to square one.”
Smith had been with Buffalo Wild Wings only two years at the time, having come on in 1994 as chief financial officer for the privately held sports bar and restaurant chain that was based in Cincinnati. It had 35 locations, mostly in Ohio and mostly franchise operations. Smith figured CFO would be a part-time job. She worked in Minneapolis, in office space borrowed from a friend.
As she remembers it, when the new CEO didn’t show, she and some board members were sitting in a Minneapolis conference room—“Well, ‘conference room’ is an overstatement, but there was a flip chart.” One of the board members, either investor Kenneth Dahlberg or attorney Warren Mack, said, “‘Why don’t we have Sally be the CEO?’ That’s how it happened,” Smith says.
Buffalo Wild Wings has never had an unprofitable year since. The annual rate of revenue growth has hovered around 25 percent, regardless of the economy. In 2003, Smith took the company public and raised $50 million in the only IPO (Nasdaq: BWLD) in Minnesota that year.
Dahlberg retired from the Buffalo Wild Wings board in 2008, but Mack, an attorney with Fredrikson & Byron of Minneapolis, is still a director. “I think Ken and I both claim to be the person who said it should be Sally,” Mack says. “When something works out really badly or really well, you get revisionist history.”
Commodity Prices and Share Prices
Buffalo chicken wings are said to have been invented in 1964 by Teressa Bellisimo, owner of the Anchor Bar in Buffalo, New York. Smith knows this. In fact, she says, “I know a lot more about chicken than I ever expected to.”
She knows, for instance, that “chicken isn’t produced or raised for the wings.” Demand for breast meat is what drives production and prices. Wings are a byproduct, a plentiful and low-cost commodity as long as lots of chicken breasts are being sold.
When Smith came to work for Buffalo Wild Wings, the menu consisted of chicken wings, chicken dinners, and an assortment of burgers, ribs, hot dogs, kebabs, and pocket pizzas. Chicken wings were 40 percent of overall sales. “That’s enormous,” Smith says. “That’s a very high number for one menu item.” And it meant high exposure to market swings in wing prices.
Seven years ago, when Buffalo Wild Wings began selling boneless wings, they gave a measure of protection against price swings. Boneless wings are made of breast meat. It’s easier to lock in purchasing contracts for them because breast meat is the market driver.
Traditional bone-in wings are now just 20 percent of overall sales (boneless wings are another 20 percent), and Buffalo Wild Wings floats with the market price for bone-in wings. Last year, when their wholesale price spiked to 39 percent above 2008 levels, it illustrated one vulnerability of a business that still relies heavily on a single commodity.
The company paid an average of $1.70 a pound for wings in 2009, compared with a $1.22 average in 2008. Prices kept climbing until March 2010, when they peaked at $1.91 a pound.
In both the first and second quarters of 2010, Buffalo Wild Wings’ revenues were well above even last year’s impressive growth—up 15.7 percent and 12.4 percent, respectively, over the same periods last year. Net earnings increased by almost 25 percent in the first quarter over 2009’s first quarter ($10.6 million compared with $8.5 million), and were up more than 31 percent in the second quarter ($9.2 million compared with $7 million).
But those hefty increases were due entirely to opening new restaurants. Same-store sales were essentially flat versus 2009 in both quarters.
Investors who were made nervous by wing prices looked at the stagnant same-store sales in last April’s first-quarter report and punished BWLD with a 25 percent drop in its stock price, from a 52-week high of almost $53 to a low of $34.33.
But the stock soon climbed back into the $40-plus range, and investors, more comfortable at those prices, didn’t bat an eye when Q2 numbers showed the same pattern as Q1: revenue growth coming from new stores, and same-store sales remaining essentially flat.
Smith doesn’t bat an eye, either. “We could contract for traditional bone-in wings,” she says, but producers always want to lock in when the price is high. “When we look back on the year, if we look at what we could have entered into a contract for versus what we ended up paying, it’s always at least equal to or better than what we’d have been offered.”
Peter Mahon and Gregory McKinley, analysts for Dougherty & Company in Minneapolis, gave BWLD a “buy” rating in their July report and set a target price of $50. (The stock closed at $48.63 on October 1.) They cited falling wing prices, strong performance from the latest crop of new stores, and evidence that same-store sales would improve in the second half.
Smith points out that, given the deep and prolonged recession, most restaurant chains would jump for joy to see even the flat sales that Buffalo Wild Wings reported earlier this year: “The industry is negative over negative in sales to prior year.”
What Financial Statements?
Buffalo Wild Wings was founded in Ohio in 1982 by Jim Disbrow and Scott Lowery, a pair of young entrepreneurs who missed the Buffalo-style chicken wings they’d had when they spent time in upstate New York. They opened their first restaurant near the campus of Ohio State University in Columbus. Its full name: Buffalo Wild Wings and Weck. (Weck is a sandwich roll also popular in upstate New York.) It was a straight-ahead college sports bar: TV sets, beer, and spicy wings that were ordered and picked up from a counter.
In 1994, Disbrow, having recently married Ken Dahlberg’s daughter, sought financing from his new father-in-law to continue the growth of what by then was a 35-restaurant chain with locations in four or five states. Dahlberg wanted to see some financial statements.
Dahlberg asked Smith to step in and straighten out the finances. She had come to work for Dahlberg, Inc., maker of the Miracle Ear hearing aid, in 1983, around the time Ken Dahlberg began a drive to create a franchise network of Miracle Ear Hearing Centers. Smith had grown up in North Dakota, majored in accounting and finance at the university there, and moved to Minneapolis in 1980 as a CPA for the firm now known as KPMG.
There were about 250 Miracle Ear franchisees in 1993 when Dahlberg sold his company to Bausch & Lomb, Smith says. By then, she was chief financial officer and had considerable experience in retail franchising. She planned to stay with the hearing aid company for a year after the sale, then look for something new to do. Buffalo Wild Wings became that project.
Smith recruited another Dahlberg employee to be controller and help sort out the restaurant business. Mary Twinem, now Buffalo Wild Wings’ CFO, recalls finding financial records heaped in boxes. “There was no budgeting process,” she says. “And tax preparation was a little sketchy.”
The founders were extending a lot of credit to franchisees (“I don’t think they knew how much,” Smith says), who were using the company as a bank to finance their monthly operations. Buffalo Wild Wings was close to bankruptcy and in trouble with the Internal Revenue Service.
It took a year to unsnarl the finances. Smith also closed money-losing restaurants and designed stricter criteria for accepting new franchisees. Looking back, though, she credits the founders’ very recklessness with keeping Buffalo Wild Wings up and running.
“They were tenacious. They put a lot on the line. They charged things on their personal credit cards. They lived above some of the early restaurants just to make it go,” she says. “If they’d had someone in there early telling them, ‘Gee, you’ve got to do this, watch out for that,’ I don’t know that we would have succeeded. I think they had to, I don’t want to say ‘not care about the financials,’ but I think they had to be kind of oblivious to the risk they were taking in order to take the risk.” Because Disbrow and Lowery were so all-in committed to the business, Smith says, “when I came in, we had cult followers.”
None of that stopped Smith from making changes, and as a result she hasn’t always been a hero in franchisees’ eyes. She stopped their practice of using the company as a bank. She required them to contribute to a national advertising fund. And she set about transforming a college-beer-bar concept into something more suitable for expansion into suburbia, with the bar and dining areas more clearly separated, new menu items, and other changes.
Over vocal resistance, she changed the corporate name and logo. Buffalo Wild Wings and Weck was known to loyal customers as BW-3 or B-Dubs. That was the brand, and franchisees were not happy about Smith’s decision to drop the “Weck” in favor of Buffalo Wild Wings Grill and Bar.
But Smith never demanded that they make the change. She just opened corporate-owned stores with the new name, the new winged-buffalo logo, and brighter décor. Sales at those restaurants quickly convinced recalcitrant franchisees to make the switch, too.
She took the same approach to introducing table service to an operation that had served food only from a counter. Franchisees watched her try it in corporate stores, saw the sales numbers, and hired more servers.
This is a key reason why Smith today enjoys excellent relations with the company’s franchisees, suggests Bobby Pancake. He owns six Buffalo Wild Wings in Delaware and Maryland, and is on the company’s national Leadership Council. Franchisees are responsible for delivering the brand experience to customers at 64 percent of Buffalo Wild Wings’ stores. But there is no hint of “my way or the highway” in Smith’s leadership style or approach to franchisees, Pancake says. There’s still counter service at a few restaurants where die-hard guests want it. Smith “never cared that she was ‘right’ to introduce table service,” Pancake explains. She just cared that it worked.
Mack says something similar about Smith and a talent for culture building: Smith has a way of “listening to people who are in a position to know,” and bringing them into the decision-making process with authority and responsibility.
How to explain the effect? “When her executive team members report to the board, they try to make the other members look good,” Mack says. “You don’t see that a lot . . . It’s the essence of how you put together a team.”
Judith Shoulak, Buffalo Wild Wings’ executive vice president of operations and human resources, says Smith’s style accounts for the stability and longevity of the executive team. There’s CFO Twinem, a 16-year veteran. Shoulak, who was a VP of human resources for Office Max, has been with Buffalo Wild Wings for nine years. Kathleen Benning, executive vice president of marketing and brand development, came from local marketing and ad agency Neimer Fieger & Associates and has been on the job for 13 years. Executive Vice President James Schmidt has been general counsel for eight years, and had Buffalo Wild Wings as a client before that, when he was a Cincinnati attorney.
Smith says, “One of the first things I say when I interview people is, you have to be very comfortable with the fact that the entire group, in the home office and in the field, will be really interested in what you’re doing—not because they want your job, but because they want to understand what you’re doing and how it interplays with what they’re doing.” There’s no need for protecting turf, she says. “There’s enough work here for everyone, and enough opportunity.”
“McDonald’s Doesn’t Just Sell Hamburgers”
For Buffalo Wild Wings, too, there’s still “tremendous development opportunity,” Smith says. California has fewer than 20 restaurants, and she just signed a franchise agreement for the first store in Boston.
But with every bar and burger joint now serving chicken wings, how can Smith count on growth? She says more “menu innovation” will be one avenue to increasing sales.
The company just introduced four “dry rub” spice combinations, an idea that originated when Chesapeake Bay–area restaurants asked for a variance to use Old Bay seasoning on their wings. Now, Smith says, guests are asking for the spice rubs not only on wings, but on items like French fries.
The rubs and an array of sauces that has grown to include 14 flavors are key to bringing in repeat diners who might make Buffalo Wild Wings one of their regular lunch or dinner spots. “It’s kind of mass customization,” Smith says. “Everyone gets a custom flavor on a set group of products that we’re serving.” (See “The Secret’s In the Sauce” sidebar on page three of this story.)
Aside from that, “our guests still really like that sharable food item,” she says—wings, but also menu offerings like popcorn shrimp, trios of mini sandwiches called Slammers, or flatbreads that are topped and sliced like pizza. “So what are the other sharable things that we could put on the menu?” Smith asks. Ideas sometimes come from much higher-end restaurants. She draws a parallel to the process by which couture fashion is translated into off-the-rack retail clothing. Slammers derive from the trend a few years back for tonier restaurants to serve little “sliders” made with foie gras or filet of beef, she says.
Another way to drive domestic growth: “Because we’ve been around for 30 years, we have a number of restaurants that are in trade areas that have probably shifted,” Smith says. The work of relocating them to more desirable, high-traffic sites started already this year. The company also is adding more tables and in some cases patio seating as it remodels its stores.
Above all, Buffalo Wild Wings wants to endear itself even more to sports fans as the place to go for food, beer, and dozens of TV screens. Last year, it launched a new online Fantasy Football league. This year, Trey Wingo, host of ESPN’s NFL Live, is commissioner.
The question now is, how can the sports-fan experience of Buffalo Wild Wings be translated to other geographies? After Canada, England is probably the next country the company will enter, Smith says, and Germany after that.
A surprising fact of the company’s international expansion plans is that it doesn’t seek out places with a fondness for spiced-up chicken wings. Instead, Buffalo Wild Wings looks at the way locals relate to sporting events.
“As we’re researching countries, not only are we trying to determine what sports are the most popular, but also what sports are broadcast, and how many TV stations the countries have that would be broadcasting sports, and what TV viewership is like,” Smith says. She’s curious about polo fans in the Middle East, and China’s millions of basketball fans look promising. Smith figures that if Buffalo Wild Wings can attract a country’s sports fans, the menu can be adjusted as necessary: “In China, McDonald’s doesn’t just sell hamburgers.”
Meanwhile, Canada is giving Smith a taste of the challenges international expansion will bring. Some franchisees want to jump straight into Canada themselves, rather than letting corporate-owned stores lead the way.
And here is where Smith’s reputation for a cooperative rather than a command approach could work to the company’s advantage again. Of her decision to go in with corporate stores first, Pancake says, “I think this is her saying, ‘We’re going to figure out [the international market]’ versus saying, ‘Okay, we’ll take your money.’ She’s willing for corporate to make mistakes and figure it out, instead of letting a bunch of franchisees try to figure it out and fail.”
Some eager franchisees disagree with that reasoning, Pancake says, but most believe that Smith isn’t just trying to cut them out of a lucrative opportunity. And as Warren Mack might say, that kind of trust is not something you see a lot.