Donatos' family owners deliver value

By Margaret Steen

Jim Grote and his family built Donatos into a successful pizza chain, then sold it to McDonald's. In 200, they bought the company back -- when it was losing millions of dollars. Now back in the family's hands, the company owns or franchises 155 restaurants in seven states.

As a teenager working at a pizza restaurant, Jim Grote got his first lesson in customer service. He noticed that one of the owners was generous with pizza toppings and the other stingy. “The one that made good pizza and wasn’t stingy with toppings, his nights were busier than the other guy’s, who watered down sauces and stretched toppings,” Grote recalls.

The value of treating customers well stuck with Grote. This year marks the 50th anniversary of Donatos Pizza, the company that he built, expanded, sold and then bought back.

Today, Donatos owns or franchises 155 pizza restaurants in seven states: Ohio, Kentucky, Indiana, Virginia, North Carolina, South Carolina and Alabama. (About one-third of the restaurants are company-owned; the rest are franchises.) The restaurants generated revenues of $166 million in 2012. A subsidiary started in 2008, Jane’s Dough Foods, makes pizza shells and pre-topped pizzas.

Jim Grote, 70, and his daughter, Jane Grote Abell, 46, are the only family members currently working for the company. Abell, who is chairman, owns about 20% of the company; Grote owns 70%. The rest of the shares are owned by other family members and a few employees.

Donatos is based in the Columbus, Ohio, area, where Jim Grote has his roots. He grew up in the south end of the city, a blue-collar area where his father was a buyer for a restaurant. With money tight, Grote and his four siblings got jobs as soon as they could. Grote started delivering papers at around ten years old and got his first job at a pizza restaurant when he was 13.

Pizza was relatively new to Columbus then, and the company that hired Grote had no equipment. “They hired me to slice pepperoni with a paring knife and shred cheese with a grinder,” Grote recalls.

By the time he was 15, Grote was managing the store on the owner’s day off. When he was 16, the owner offered to sell him the store, but his father said he needed to finish high school and go to college.

When Grote was 19 and a sophomore at Ohio State University, he had another chance to buy a pizza place, this time Donatos. At the time it was run by a seminarian and open only on weekends. He borrowed $1,300 from his father and his future father-in-law, and Donatos opened under Grote’s ownership on June 26, 1963. (Grote did not finish college owing to the restaurant’s success and the workload associated with growing the business.)

A principled business

One of Grote’s goals in opening his own business was to become financially independent. “That was exciting for me, especially coming from a real poor area,” he says. Another goal was to “bring my principles to work with me,” he explains. “I said, ‘I’m going to prove that we can make a good pizza, give good service—we can grow, we can make money, we can keep our principles.’ ”

Treating others as you would want to be treated is a cornerstone of Donatos’ mission: “To promote goodwill through products and services, principles and people.”

Grote soon discovered two key challenges to succeeding in the pizza business: consistency and speed.

“When a person comes in, they get a pizza and they like it,” Grote says. “When they come back, they expect to have the same good pizza.” Grote worked out a system of weighing toppings for each size pizza, for example, so each pizza had exactly the right amount.

Another issue was that as business picked up, customers had to wait longer for their pizzas. The restaurant was in front of his house, and he would send customers there to wait.

When she was a child, “People from the restaurant were always at our house,” Abell remembers. “Every single night we had customers in our living room. I didn’t know other people didn’t grow up like that.”

The proximity of the house to the pizza place also meant that they could see the store’s sign with blinking arrows. “Our bedroom would blink every single night,” Abell says. “Dad would get us from our bedrooms, and we would go late at night in our pajamas and stand under the sign. He would say, ‘One day you’re going to see Donatos around the world. But we’re only going to do it if we can do it and be the best, if we can promote goodwill and have good principles.’

“These are some of my earliest recollections and why emotionally I am so connected to this business,” Abell says.

By the early 1990s, Donatos had 17 stores and was continuing to expand. Along the way, Grote looked for ways to improve efficiency and consistency. One bottleneck was putting on pepperoni. (There are 100 pieces on a large pepperoni pizza from Donatos.) Grote created a machine that would slice the pepperoni over a pizza, a device that ultimately led to a separate restaurant equipment business, the J.E. Grote Co., started in 1972.

Grote’s four children grew up surrounded by and working at the family business, but Grote didn’t want them to feel obligated to work there as adults if it wasn’t their passion.

Abell worked for Donatos while attending Ohio State. After graduating with a degree in organizational design and communication, she began training managers at the family company. She later became “chief people officer.” Her older brother, Tom Grote, graduated two years before she did, from Miami University. He became the chief operating officer.

A new path to expansion

In 1999, McDonald’s approached Donatos out of the blue. The hamburger giant was trying to diversify. In addition to a Mexican restaurant (Chipotle) and a chicken restaurant (Boston Market), it wanted to acquire a pizza chain. McDonald’s had done a nationwide search for the chain that made the best pizza and had the most repeatable processes.

As Grote tells it, his first reaction was, “Are you kidding? That’s my baby. We’re not selling our place.”

“My dad was expressionless,” Abell recalls. “I was very emotional about it, and my brother was very excited about it. I was like, ‘This is crazy: This is our family business—we would never sell it.’ ”

The family had been discussing what its next steps would be in expanding the business—by 1999, it had about 140 restaurants in five states —but selling the company had never been discussed.

Jim Grote and his children Jane and Tom flew to Chicago on McDonald’s private jet to discuss the possibility. (Jim Grote and the children’s mother had divorced, and she was no longer involved in the business.) They were impressed with McDonald’s corporate culture and with the company’s plans for Donatos.

The decision to sell was “really tough,” says Chuck Kegler, a partner in the law firm of Kegler Brown Hill & Ritter, which has been working with Donatos since the 1980s. “It was complicated in a lot of ways by their [the Grotes’] love for their people, the community and the way they do business.”

Kegler remembers asking Grote what his long-term vision was for the company; Grote replied that he wanted to sell Donatos pizza all over the world. That goal required a “significant amount of capital,” which made the idea of selling to McDonald’s more appealing, Kegler recalls.

“It took about three months for us to get to the point to say, ‘OK, we’re going to sell,’ ” Abell says. Their only hesitation: “Can we be bought by the world’s largest restaurant and keep our culture?”

The sale let Grote’s children, who all had shares in Donatos, pursue new interests if they wanted to. His son Kyle bought a ranch in Colorado. Grote and his other three children stayed involved in the company after the sale. Grote’s daughter Katie worked for McDonald’s for a time, then left to pursue other interests and move to Florida. Tom also stayed for a few years before leaving to go to business school.

While Donatos was owned by McDonald’s, Tom Krouse, now the president and CEO, was recruited from Wendy’s to lead the company’s marketing efforts.

“We were changing the concept, we were building restaurants quickly, we were adding lots of people,” Krouse recalls. “The product stayed the same, but for everything around it, the pace at which change came was really quick.”

The McDonald’s sale created a lot of uncertainty for employees, says Roger Howard, who started out sweeping and mopping floors at Donatos when he was 14 in 1967. “We always worked for the family and we always knew what was expected of us,” Howard says. Even though things worked out all right, “there was a lot of ambiguity when McDonald’s was coming in.”

Howard had been Donatos’ vice president of operations for about five years when McDonald’s purchased the company. He stayed during the McDonald’s years. “For a guy who had hardly even left Columbus, I ended up flying a lot of miles,” he says.

Four years later, McDonald’s stock was slumping after the bursting of the tech bubble. A new CEO decided the company should focus on hamburgers again. Donatos was up for sale.

Grote recalls his daughter’s reaction: “We’ve got to get this company back. Our people are still there. They won’t have jobs, and there are people who have been with us since we started.’”

Grote was less certain about the idea.

“I didn’t know if I really wanted to do it again,” he says. But Abell “made it happen with her excitement.” Grote and Abell both put in money to buy the company back. They, along with Krouse and other advisers, met on their days off to plan a strategy for reacquiring the company.

When Abell and Grote bought the company back in December 2003, they faced a huge turnaround task. Donatos was losing millions of dollars a year, and it had 75 buildings sitting empty.

Abell focused on the people and product, visiting stores. Krouse worked on a long-term strategy for the company. They kept the products the same. “The turnaround was [achieved] because our people started caring again,” Abell says.

Today, Donatos has an advisory board that includes Grote, Abell, Abell’s brother Tom Grote, and the company’s financial adviser. The company leaders continue to get legal and strategy advice from Chuck Kegler.

In late 2010, Grote stepped back from his day-to-day responsibilities, and Abell became chairman. Krouse became president and CEO. Donatos officials say that sales and profits are better than they were during the McDonald’s era. The year after the family bought the company back from McDonald’s, they say, Donatos made $10 million more than it had in the prior year.

Krouse likes the fact that the company can easily invest in a bakery facility if needed, without worrying about Wall Street’s quarterly expectations. “On the other hand,” he says, “having worked for publicly held companies, I understand the need for performance.”

Although this is his first time working for a family business, “I don’t think I’ve ever felt more comfortable in my skin,” Krouse says. “I was not really family, but I certainly believe in and understand the mission and culture of this company.”

Spreading values to the community

Those who know the Grotes are impressed by the family’s values.

Howard, for example, says he was perplexed as a teenager by the company’s philosophy that “as soon as a customer hung up the phone, we entered into a contract with them to take care of them,” instead of merely taking an order. “I always thought it was weird,” Howard says. But he soon learned what Grote meant: “We just made a promise to the customer: We’re going to make the best pizza and get it there on time.”

Once when Howard was about 18, an intoxicated customer gave him a $10 tip—a huge amount at that time—for a pizza he delivered. “Being young, I was going to keep it. But when I got back to the store, Jim said, ‘You have to take that back,’” Howard recalls.

Howard saw the Grote family’s commitment again many years later, after his wife passed away in 2006. After taking a leave to be with his wife in her final months, he did not want to return to the same job. “Jim and Jane both said, ‘You’ve been here your whole life. You tell us what you want to do,’” Howard says. He decided he would like to run a store, so they sold him a store as a franchise. That store has done well, and he recently opened a second one.

Family members say their commitment extends to the community. “Every single store, part of their promise is to be a good neighbor,” Abell says. Donatos stores sponsor local sports teams, for example, and work with schools and other non-profits in their local communities.

Abell, who serves on the local board of Goodwill Industries, works with both Goodwill and a community shelter to put homeless people to work. Donatos has employed six people through the program.

The mayor of Columbus has asked Grote to be a champion of the city’s south side, and Grote has been donating both money and time to help develop homes and create a learning and development center that will offer job training.

Kegler says Grote and Abell’s leadership inspires others. “When they reach out, other people want to join,” Kegler says. “If it has the blessing of the Grote family and Donatos, people are more likely to contribute and want to be a partner.”

The company is committed to maintaining its culture. As Abell puts it, “We don’t have to be the fastest, we don’t have to be the biggest, but we believe that we have a destiny.”

Margaret Steen is a freelance writer based in Los Altos, Calif.

 

 

 

 


 

 

 

 

Copyright 2013 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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