The Decline of Sbarro...What Happened?

[Music] Sbarro you go down to the mall past that food court get the big smell of the pizza cooking the smell is fantastic the taste is not as fantastic in my opinion but I will say it they've always been there they are spread out across the country in malls airports universities casinos theme parks but it's mostly malls this company has been going through some tough times in 2011 and they filed for bankruptcy then in 2014 they filed for bankruptcy there's a lot of reasons behind this - I know you're thinking of a few obvious ones the economy malls but there's more to it I have some reasons that there's no way you're thinking of right now and I'd like to build to them while presenting the big picture Sbarro started out is the classic story of a family immigrating to the US to start their own business Sbarro was actually their last name Carmela and Gennaro it's Sbarro not the easiest names for me to say along with her three sons left Naples Italy to move to Brooklyn New York with aspirations of starting their own business this was in the 1950s by the way and it took them a little time to get started four years they worked to save up enough money Carmela was a seamstress that apparently specialized in sewing clothes for dolls which actually had a pretty high demand at that time Gennaro along with a couple of his sons that worked at a deli which in addition to the money it gave them the experience they needed to start their business in 1956 it finally happened - everything had come together and they were able to open and operate a successful Italian style deli in their new hometown of Brooklyn two things motivated them to transform that Italian deli into a pizza place for one they noticed that a lot of their customers were buying their deli foods so they can eat them right away they'd order some pasta and instead of taking at home like you would expect if they would just stand there and eat it so it was a logical move to set up a little dining area nothing fancy of course just a few tables and chairs off in the corner and then to go along with this their other motivation was all this foot traffic walking by their stores specifically shift workers on breaks ordering their lunch trying to find something quick and easy to eat during their limit time carmela saw the demand and filled it by simply selling them pizza by the slice so now they are still primarily a deli but then they also have this dining area and are making foods specifically to be eaten there I'd say almost unintentionally they were slowly transforming into a restaurant in the middle of the 1960s they opened their first actual Sbarro's restaurant that only made pizza to further expand the business the sbarro family wasn't crazy about the idea of franchising it they wanted to actually own their restaurants which is understandable but it makes things much more difficult really if you look at almost any popular fast-food or quick service restaurant they use a franchising model it's cheaper for the company it gets the name out there it's just sort of a great way to grow but the Sbarro's were looking for alternatives the method that they found was using the food court which worked very well for them think about it when you go to the food court in the mall these are smaller restaurants in Sbarro's case one of their larger locations would be about 1,000 square feet meaning most of them were not much bigger than your garage at home smaller locations means they're cheaper to open which means you can open more of them to go along with the smaller size there would be more limited menus fewer employees all of which made them cheaper to operate in plus advertising when they started opening in malls in 1970 almost no one knew who they were and now that they had thousands of people walking past them every day at each mullo keishon people were recognizing them even if you never tried their pizza if they were at your local mall you knew the name it was a means of advertising and getting the name out there that was completely free given that it provided them with a cheap and easy way to open operate and advertise new locations this mall approach turned out to be a great alternative to franchising to speed things up even faster they would enter into these profit sharing agreements with the store managers as a way to retain ownership but also get outside help and expanding up until 1985 when Sbarro had well over a hundred locations it was 100% owned by the sbarro family and then some changes happened see in 1984 Gennaro died and he left his sons in charge of the business the next year under their action Sbarro was put on the stock market they sold 30% of the company to the public for the price of 8 million dollars and then they took that 8 million and used it to establish a franchising system the method of expansion that they had actively avoided for the past 20 years was now going to be their plan moving forward and it just about doubled the size of the company within three years they opened more than 100 new locations about half of those new ones were owned by the company and half were franchises they continued along these lines for the next decade or so not really changing up the strategy much but succeeding with the one that they were using actually throughout the 1990s is where you can say most of their growth happened they ended the decade with around 800 locations and to this day they've never exceeded 1100 the family would either take out dead or sell more equity to raise money to continue funding this expansion in 1999 they decided that they wanted to become 100% owners again for the first time in 14 years by buying back all of the stock that they had sold at that point that sold about 2/3 of it so here they bought it all back for the price of three hundred and ninety million dollars but then eight years later in 2007 they went the opposite way by selling 100% of the company to a private equity firm called mid-ocean partners for the price of 450 million valuing the company considerably lower than their deal in 1999 so for the first time in Sbarro's existence the sbarro family had nothing to do with the company and i have to say they sold it at a perfect time because soon after is when everything started going bad let me try to explain what happened because they were suddenly hit by a storm of issues the combination of which amounted to something much larger than the sum of the parts I'll start off with the obvious ones the recession I don't think I have to say much here in 2008 the economy was struggling and it was bad news for Sbarro they continued opening new restaurants that year with barely an increase in sales and then by 2009 they were closing them and making less money overall the second obvious reason is malls in the 1970s malls were exploding beyond belief and as we saw it was a perfect way for Sbarro to grow I think I'm safe in saying that Sbarro would have never reached this size without that's where most of them are located and it's kind of their identity now that the malls don't quite have the same traffic that they used to that's bad news for Sbarro those are the obvious ones but there's a lot more to it what about the price of ingredients something we don't think about its customers but there was a huge spike in the price of flour and cheese around this time at raising their expenses and making their situation worse other popular pizza chains such as uno Chicago grill and round Table Pizza were also having major issues partially attached to this how about this one I hate to say this but Sbarro is just not very good is it of course we all have our own tastes and preferences but I've never cared for their pizza and I think most people are in agreement barro standard pepperoni slice going and it wasn't extremely close it was acceptable here right now just go down to the comments section look through a few of them and my guess is that it's filled with people saying how much they dislike Sbarro I just don't think people like it and a reason for it is that it's pre-made so you can order and get it quick effectively sacrificing the quality and the taste for convenience again in my experience they're not very cheap or tasty or healthy I'd argue the only thing that they compete on is convenience you want to get a slice of pizza and you're at the mall or an airport more often than not they're your only option if you were to take them outside of these areas they're now forced to compete with Pizza Hut and Domino's on all of these other factors which quite honestly I don't think they can to go along with that they're not as big just the fact that they're smaller makes them weaker and more likely to be affected by these outside conditions like I've said they've never crossed over 1,100 locations today there's something like 600 of them in the US compare that to the 7,500 Pizza Hut's in 6,000 Domino's meaning there are at least 10 times smaller than the biggest chains in their industry now everything I just mentioned would be reflected it through their operating income if their sales go down or expenses go up that would hurt their operating income these figures are no longer available after 2009 but looking at the 10 years leading up to that it's really clear where things went bad now let me add another layer to this remember the sbarro family sold the chain in 2007 well about 200 million of the 450 million they paid for it was funded through debt so let's look at their debt graph it's always been a little high they were funding expansions were dead arguably more than they should have even before all of this but the acquisition took that debt to a new level I'd like this also comes with high interest payments around 30 million dollars a year which wasn't even included in this operating income graph let me show you their debt to equity ratios because I think it'll help add perspective to this this is a ratio comparing their debt to their equity ideally you want the number to be lowered that would mean that you're not as leveraged and likely in a better place to pay back debts in the first eight years here it was hanging around three to four meaning three to four times more debt than equity which already isn't ideal but then these final two years with that acquisition and everything else happening it got a little out of hand a high ratio like that means they probably can't pay off their debts so two years later in 2011 they couldn't pay off their debts when you can't pay off your debts you file for bankruptcy and that's what happened according to the court documents their debt was four hundred and eighty seven million dollars going into the bankruptcy giving them a ratio of thirty point four through these proceedings ownership was exchanged for debt reduction meaning the new owners had a company with only 165 million dollars in debt they were optimistic and brought in this new CEO with this great turnaround plan that I won't talk about because it was mostly just worthless after another three years in 2014 the new owners filed for bankruptcy because it turns out that was still way too much debt those filings showed a ratio of 16 which is better but still ridiculous they've since come out of that bankruptcy with another turnaround plan which I don't have much faith in but hey if they've gone a few years without filing for bankruptcy so that's good some of the major changes they've made their headquarters is now in Ohio as opposed to New York they say that they've placed a bigger emphasis on fresher better ingredients which I don't really know if that was ever their issue they started this chain of higher quality standalone restaurants which actually makes your pizza after you order it but it goes by a different name and considering there's only a few locations in the Columbus area I can't imagine that having much of an impact rebranding it they've dropped that Italian flag theme in favor of this pizza slice outline I actually kind of like it it looks more modern and reflects that they sell pizza by the slice there's been some other efforts but other than that lack of bankruptcy I just don't see many signs of recovery and quite honestly I don't know what they should do maybe there's no real answers here the pizza industry is highly competitive and I don't know if they have what it takes to compete and until they do they're stuck in their world of malls and airports and I don't know how bright the future looks for that either let me know in the comments what do you think they should do I know your go-to answer is going to be start making better pizza but in doing that they may have to sacrifice convenience and I don't think they can afford to do that and even if they do what is that going to be enough I don't know I'm sorry I've been so negative toward them but the way that they've always competed and managed to grow to this size just doesn't work anymore also are you one of the people that does like the pizza and if so maybe you can offer a different perspective on all of this I'd like to hear what you have to say thank you for watching [Music]

Channel: Company Man

Views: 1,630,964

Rating: 4.8891897 out of 5

Keywords: Sbarro, Pizza, Malls, Company Decline, Business, Domino's, Pizza Hut, Fast Food

Id: eLwHim8W8TY

Length: 12min 32sec (752 seconds)

Published: Wed Feb 19 2020

Reddit Comments

[u/casey_h6]

My favorite authentic New York pizza

[u/jenniehaniver]

My childhood mall food court had a Sbarro and as much as I love/d pizza I only remember eating there once or twice– it was somewhat intimidating for a 6-year-old used to just ordering her McNuggets and getting them in a box from the mysterious kitchen in the back. Standing in line, seeing your food, picking what you wanted...it all seemed VERY grown-up.

[u/SensibleReply]

The very definition of a 5/10 pizza.

[u/bobbyleeswag]

Slice of pepperoni and a garlic knot!

[u/[deleted]]

COMPANY MAN!!!

[u/bobdabuildingbuilder]

I’ve never had sbarro pizza and have ever been disappointed. Such a shame

[u/birdboix]

You mean to tell me mall food courts aren't a growth industry?!

[u/Noy_Telinu]

Eh I still like it. Yeah yeah quality and crap but it is at the mall and they give free refills. So... Also the only other pizza in the mall is blaze And I don't care for the thin crust

[u/MelonRingJones]

... You're making me crave rosemary and pepperoni.