The cautionary tale of Bertucci's pizza chain.

Bertucci's opened its 86th restaurant in May, but Joey Crugnale, the chain's founder, didn't show up for the ceremonies. He skipped another restaurant opening in June. "It would just be too painful to go," he explains, sounding like a lover who can't bear to see his old girlfriend on someone else's arm. Crugnale agreed to sell Bertucci's this summer, 17 years after he opened the first restaurant in Somerville, Mass. He walked away with $22 million. At 46 he is young enough and energetic enough to start a new business, which he may well do. So please, don't cry for Joey.

Yet the Bertucci's story didn't have the happy ending Crugnale had hoped for. He had offered to buy back Bertucci's because its stock price had been as flat as a pizza for years, but he sold out because another firm had topped his bid to take the company private. Bertucci's went public for $13 a share in 1991, and the stock traded as high as $25 a share at one time. By early this year it was selling for $6. "I like the pizza better than the stock," says James Trozze of Moors & Cabot, one of the few analysts who still bothered to follow Bertucci's at the end.

The Bertucci's story is a cautionary tale of what can happen when a creative entrepreneur takes his company public and has to confront a new set of pressures and answer to a new set of bosses. In this case, the result was a nifty idea that never lived up to its early promise.

When Going Public Goes Wrong  ...continued

Crugnale had a natural feel for food. He knew what customers wanted. He genuinely connected with employees. What he didn't have were the management skills to run a growing chain, especially when he launched an ill-fated push to take the company beyond its Boston base. Nor could he deliver the consistent earnings growth that Wall Street demanded. "The stock market is a very hard taskmaster," says Charles Sarkis, chief executive of the Back Bay Restaurant Group in Boston, another struggling restaurant company. "If you don't deliver 25% annual growth, you're dead."

There were reasons to expect that things would turn out better. By the age of 32, Crugnale had already built and sold Steve's Ice Cream, a successful chain of premium ice cream shops in the Boston area. Sale price: $4.5 million. He had also demonstrated a flair for what would serve him so well at Bertucci's. He understood yuppie tastes. What yuppies want to see in a restaurant is authenticity: fresh, natural ingredients served in a simple, understated way. Before there were premium ice cream shops on every corner, Steve's sold rich ice cream with luscious toppings. Ben Cohen, one of the co-founders of Ben & Jerry's, used to come into Steve's regularly and photograph the operations. In 1981 Time declared Steve's the best ice cream in America.

Bertucci's grew out of Crugnale's Italian roots. The wood-fired brick ovens that became Bertucci's signature reminded him of the way his grandmother cooked back in Italy. He got the name from a character in the play The Count of Monte Cristo. The first restaurant even had a bocce court. The theme was different, but Crugnale's instincts for his audience were still there. He put the kitchens out in the open so customers could see and smell their food being prepared, much as it was in old-fashioned pizza parlors. He insisted that each restaurant have a different decor, even as the number of restaurants grew.

"I hate the idea of chains," Crugnale says. "I won't take my kids to eat at them." Bertucci's was a chain, of course, but it didn't feel like a chain -- a contradiction that explained the restaurant's early success. The same customers who flocked to Steve's came to Bertucci's, only by this time they were a little bit older, lived in the suburbs, and had young children who seemed to like the concept as much as their parents did. Crugnale's wife even came up with an offbeat idea to keep kids occupied: a lump of pizza dough that could be molded and shaped like Play-Doh modeling clay.
Like his restaurants, Crugnale has a distinctive style. He dresses in casual slacks, open shirts, and brightly colored socks. His speech reflects his roots in Italy and Boston's North End. He speaks "regular guy" English rather than King's English. With his Mediterranean good looks and considerable charm, he reminds you of a pop singer -- a young Vic Damone or Sinatra.

When Going Public Goes Wrong ...continued

A later foray into Atlanta had the same outcome: Red ink spilled. Crugnale takes full responsibility for the blunders. "You think you're Superman," he says. "You do well in one market, so you assume you will be a hit everywhere. We screwed up." The company's Boston area restaurants have been consistently profitable.

The breakneck pace of restaurant industry expansion gave Bertucci's some other problems. Newly trained managers regularly jumped ship for jobs at other growing chains, such as Boston Chicken or Einstein Bagels. As a result, Bertucci's would be forced to promote people who weren't ready. "We took some good managers and promoted them to bad regional managers," says one senior executive. "We paid the price." Crugnale didn't help matters by choosing to stick with some employees for longer than he should have. "Joey did not like firing people," says Doppelt.

The improving economy drove up the price of help, another factor that contributed to shrinking margins. In 1997 Bertucci's earned just $3.5 million, well below the $5.6 million it earned in 1993 when sales were much lower. Bertucci's could take some small comfort from the fact that other restaurant companies were performing at least as poorly as it was. Between early 1994 and early 1998, the Salomon Smith Barney restaurant stock index underperformed the stock market as a whole by roughly 60%. Crugnale didn't blame Wall Street for its lack of interest. "We weren't a growth story," he says. "We were off the radar screen."

But Joey had a plan. He would buy the company back. It would be his show again. Without conceding that going public was a mistake or explaining how he would run things differently, Crugnale decided that taking Bertucci's private was the right answer. His only partners would be his employees, whom he planned to reward with a profit-sharing plan that would give them 25% of the company's pretax earnings. "I think he wanted to go back and build the company the way he originally built it," says Jimmy Burke, a friend. Crugnale does not disagree: "It would have been nice."

It never happened. Less than two months after Crugnale proposed his $72 million buyout plan, a competing bid came out of left field. In April, NE Restaurant Corp. offered to buy Bertucci's for $89 million. NE, also based in Massachusetts, owns 31 Chili's Grill and Bar restaurants, a Tex-Mex chain.

When Going Public Goes Wrong ...continued

The higher bid put Crugnale on the spot. Should he try to top the new offer or walk away? Friends say he agonized over the decision. Two days before his answer was due, he still had not committed himself. "I called my lawyer and said, 'I might throw a monkey wrench into this whole deal,' " says Crugnale. But the numbers didn't add up. Increasing his bid would have made the profit-sharing plan unworkable. It also would have forced him to issue junk bonds to finance the purchase and live with a level of debt he found scary.

Crugnale took the money and left. A few weeks after the decision was made, he was philosophical about his experience as he spoke to a visitor in his magnificent home, high on a hill outside Boston. The six-acre estate could be a palazzo in the Italian countryside. It even has a brick oven in the backyard, just like the one Crugnale's grandmother had in Italy. He says he is mulling over his next move. Friends predict he will be back in the restaurant business. Crugnale says he will miss the company and the people, but he would not miss the pressure to make his quarterly numbers.

Gesturing to the green lawn beyond, he conjured up a winter scene, the lawn covered with snow. "When it snowed, I was always a wreck," he recalls. "The stores get killed in the snow. If I was making a snowman with my kids, I could never enjoy it. I'm looking forward to this winter. I'm looking forward to making a snowman without worrying."

Source: Charles Stein, Fortune