Sizzling Returns

Thompson hospitality was in crisis mode. Founded a few months earlier in 1992 when CEO Warren M. Thompson negotiated a leveraged buyout of 31 Big Boy restaurants from Marriott Corp., the fledgling company was neck-deep in debt. Herndon, Virginia-based Thompson Hospitality Corp. (No. 12 on the be industrial/service companies list with $321 million in revenues) acquired the Washington, D.C., Maryland, and Virginia restaurants for $13.1 million. THC also raised $1.9 million in capital from about 25 investors, and Thompson anted up about $100,000 of his own cash to convert the locations into Shoney’s restaurants. But the transaction wasn’t going according to plan.

It sounded like a good idea at the time. Shoney’s was a brand with household name recognition, and THC would repay Marriott in interest and principal over a six-year period. And Thompson had plenty of relevant experience. In his nine-year career at Marriott International, he held a number of positions within the hotel giant, from assistant manager at one of its Roy Rogers restaurants to vice president of operations for the East Coast division of Host International, where, at the age of 29, he oversaw dining facilities at 18 airports. “I hired everybody younger than I was at the time,” recalls Thompson. “We called ourselves The Renegades. We were going to change the way people ate in airports. We put the first Pizza Hut at JFK. In 500-square-feet, we did about $2.5 million to $3 million a year.”

But as an entrepreneur, Thompson wasn’t faring as well. Shoney’s parent company was facing major problems, probably the most notorious being a class-action lawsuit that alleged racial bias against African Americans. The allegations, which dogged the company for years, caused irreparable damage to Shoney’s reputation in the marketplace. The franchises started losing revenue, and so did THC. It was apparent that converting the rest of the locations might sink Thompson. THC had to get out fast.

In the midst of all this, Thompson’s father and mentor, Fred, passed away. With the loss of the man who taught him about both life and business, he needed to regroup. “I got away one weekend, reflected on my life, the company, and putting all of that together, I came back in and said to the team, ‘We are now going to move into the contract food service area,’” Thompson remembers. “I rallied the team together, decided yes, we are going to move into that area full force, and we did. That is actually what kept us afloat during those difficult times.”

THC’s original business plan called for the company to shift into contract food service in five years. Essentially, the plan was to diversify operations from strictly retail restaurants to include managing cafeterias for educational institutions and corporations. Crisis mode produced greater urgency. So within 10 months of its inception, Thompson and his team took on the painstaking effort of redefining the business. During the course of nearly eight years, THC sold all 31 restaurants and extracted the intrinsic real estate values of the properties, allowing the company to pay back some of the $25 million it lost in the deal. “It put us in a very difficult position in that we were heavily leveraged starting out,” recalls Thompson. “I did start to question whether I could really pull this off. Could I do what it is that I set out to do or would I need to go back to corporate America?”

Business improved. In 1993, THC landed its first contracts, with Baltimore City Community College and Saint Paul’s College in Lawrenceville, Virginia, and used profits to pay off its debt. While selling off the Shoney’s and Big Boys, Thompson would successfully transition THC from a restaurant operation to a food service company with contracts with corporate giants such as IBM and American Express as well as more than 90 educational institutions, including 19 historically black colleges and universities. The company invested more than $15 million to develop food service contracts during the transition.

Along the way, THC has generated double-digit revenue gains each year, growing from a $37 million business in 1993 to a powerhouse projected to generate nearly $375 million in revenues for 2010. And in 2009, when most companies saw revenues plummet, THC’s top line grew 15.5%.  For its phenomenal financial performance in one of the nation’s worst economic downturns and successful positioning as a high-growth company, black enterprise has named Thompson Hospitality Corp. as our 2010 Industrial/Service Company of the Year.

BEATING THE RECESSION
THC’s diversification has helped the company weather the unforgiving downturn of the past few years. The strategy has given the company maximum flexibility because if one business line has been hit, another has offset. “Generally speaking, the restaurant industry has been down 15%, but THC has done much better than the industry average,” says Ali Azima, THC’s chief financial officer. “Part of 2008, part of 2009 were really tough from the sales perspective. But we have also added some new contracts [for the food service business] that we have been awarded that helped increase our revenue.”

In 1997, Thompson formed a partnership with Compass Group North America, a division of publicly traded global food service provider Compass Group PLC. The joint venture, Thompson Hospitality Services L.L.C., gave majority owner THC economies of scale enabling it to purchase large quantities of food and supplies at a deep discount. And over the past five years, the company has expanded its reach into healthcare. It has also re-entered the retail arena with ownership of 23 outlets that include Austin Grill restaurants; Marvelous Market, gourmet-style convenience stores; and American Tap Room, a bar and grill in Reston,Virginia, with another location scheduled to open this summer. (see chart on next page). THC now consists of five lines of business:

Retail (10%) incorporates casual dining restaurants and a local chain of Tex-Mex restaurants as well as a gourmet convenience store bakery concept. This group also includes a car wash business, Ashburn Car Wash.

Business and industry (38%) focuses on corporate dining, providing cafeteria food services, vending, and coffee service to large corporations around the U.S.

Education (36%) provides food services to colleges and universities as well as K—12 school districts.

Healthcare (8%) contracts with hospitals across the country to offer food services.

Facilities management (8%) provides janitorial services, window washing, landscaping, concierge service, and mail room management to corporations as well as colleges and universities. Like a savvy investor, Thompson has structured a balanced portfolio of businesses to minimize risk. “The economy hurt the retail part of the business but it really helped the contract side of the business,” says Thompson, a 1981 graduate of Hampden-Sydney College in Virginia who earned an M.B.A. from University of Virginia’s Darden School of Business. “During these economic hard times, we have seen an increase in the number of students eating in the cafeterias in urban school districts. We have also seen about a 9% growth in students on historically black college campuses over the last three years.”

His executive team watches the numbers closely, though. “We have a saying in the company: ‘You manage the nickels and the dollars will take care of themselves.’ We do a weekly operating report and it’s shared all the way up to Warren’s level,” says Shawn O’Quinn, senior vice president of business development. “We flash these numbers, as we call it, which shows all the controls and the metrics and the dashboard reporting in every location in every type of

business. It’s all there for the entire executive team to review and comment on. We’ve got to figure out a way to save money and be able to stay competitive or somebody else will come in.”

BASIC TRAINING
Entrepreneurship was in Thompson’s blood. Growing up in Windsor, a rural Virginia town about 180 miles south of Washington, D.C., his late father taught him the importance of having multiple streams of income. Both parents were educators; his mother, Ruby, taught home economics, and his father taught math. “I became very good at math, and I could also cook. That sort of gave me the groundwork for getting into the restaurant business at a very early age,” Thompson says. In fact, one of the early businesses the Thompson family ran was a hog farm.

Sister Benita Thompson-Byas, vice president of joint ventures and vice chairman of THC’s board, recalls: “Some of them we would kill and pack the meat and some of them we would sell to the slaughterhouse because Smithfield Packing was literally 10 miles down the road. So, that was just another way that my father supplemented his income.” Thompson-Byas isn’t the only sibling involved in THC; Fred Thompson is its chief administrative officer.

The family also sold produce, buying apples and peaches from the mountains where the Thompson children’s grandfather lived and selling them in the Tidewater region, of which Windsor is a part. In turn, the family purchased corn, collard greens, and other produce to sell to the residents in the mountain areas. “I bought an old school bus when I was about 15 years old,” Thompson says. “I took all of the seats out of it and used that to haul my produce around.  I didn’t have a driver’s license, but I acted like I did, and no one ever stopped me.”

When Thompson’s father advanced in his career, it became difficult for him to continue with the family businesses. “I actually bought his half of the hog business out, so that was my first leveraged buyout,” Thompson says with a grin. “He gave me a loan to buy him out, and I paid him off. I raised about 100 hogs at a time. I sold those off when I went off to college.” He paid his dad about $5,000 and got a 30% to 40 % return on the business.

Those early years helped Thompson acquire a keen insight into the way a business should operate–experience that has helped him

manage a company during hard times. “He’s very hands-on, very into the business details,” says O’Quinn. “He’s very good at analyzing opportunities and looking beyond the obvious opportunities into some entrepreneurial ways to approach it differently. So, knowing that he’s going to ask all the hard questions and want the detailed information, it keeps us sharp in terms of digging deeper, doing more analysis, and making sure we’ve looked at this from all angles.”

That attention to detail is extended to THC’s clients. Among them, Earl Richardson, Ed.D., president of Morgan State University in Baltimore, who says he was impressed by Thompson’s willingness to gain feedback and suggestions regarding menu items. “Because institutional food can never be ‘mother’s cooking,’ available whenever you want it, students will sometimes have complaints,” says Richardson. “But when they do, Mr. Thompson and his staff personally meet with the students and negotiate workable solutions.” Although Saint Paul’s was THC’s first HBCU client, Morgan State was its first major university client in 1995.

THE NEXT CAMPAIGN
Thompson is franchising his Austin Grill and Marvelous Market concepts. “I think it’s going to be a major driver, and within five years I expect those to be largely a franchise group. We’re seeking good franchise partners outside the Washington mid-Atlantic area.” Now 50, Thompson will have to continue to draw on every lesson learned from his four decades as a businessperson. Research firm Standard & Poor’s forecasts consumer spending at restaurants will continue to be adversely affected by a weak U.S. economy, high job insecurity, and continued decline in the number of restaurants. However, over the longer term, S&P expects a trend toward an increased portion of food spending on meals outside the home as families with at least two income earners lack time to prepare food at home.

THC is proof that sometimes the road to success is paved with earlier failures, having battled back from a setback that was potentially catastrophic. Indeed, companies have gone belly-up as a result of lesser mishaps, but Thompson and his team’s fortitude and business acumen have enabled them to withstand not only a soured deal but the ravages of an unforgiving economy. And the enterprising chief executive wouldn’t have it any other way. “I have no regrets that we got into business through purchasing the 31 Big Boys from Marriott because it gave us the foundation and the platform to build what is today a very successful company.” That’s Thompson’s recipe for growth.