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Tumbleweed, Inc.

 


Address:
1900 Mellwood Avenue
Louisville, Kentucky 40206
U.S.A.

Telephone: (502) 893-0323
Fax: (502) 893-6676
http://www.tumbleweedrestaurant.com

Statistics:
Public Company
Incorporated:1995 as Tumbleweed LLC
Employees: 2,200
Sales: $51.3 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: TWED
NAIC:72211 Full-Service Restaurants; 72241 Drinking Places (Alcoholic Beverages)


Company Perspectives:


Riding the range or surfing the web, a cowhand can work up a real appetite. Lucky you, there're savory steaks grillin' on the fire, the chile con queso's bubbling hot and there's a cool margarita to quench your thirst! So what are you waitin' for? Drift on in to Tumbleweed!


Key Dates:


1976: The first Tumbleweed opens in New Albany, Indiana.
1995: Tumbleweed executive John Butorac leads an investor group in a buyout of the company.
1998: The first international Tumbleweed location opens in Ehrlangen, Germany; the company completes a direct public offering.
1999: Tumbleweed is listed on the NASDAQ exchange.


Company History:

Tumbleweed, Inc. owns, franchises, or licenses more than 50 Tumbleweed Southwest Mesquite Grill & Bar casual-dining restaurants. The restaurants are located in Kentucky, Illinois, Indiana, Ohio, Tennessee, and Wisconsin, and also in Germany, Saudi Arabia, Jordan, and Egypt. Tumbleweed's menu consists of two distinct cuisines: spicy Tex-Mex dishes, such as burritos, enchiladas, and tacos; and mesquite-grilled Southwestern dishes, such as ribs, steaks, chicken, and seafood. The price range of the menu items is fairly broad, in order to appeal to traditional casual dining customers as well as more cost-conscious patrons. The average price of a Tumbleweed meal in 1999, including beverages, was between $9 and $10.

1975-95: Founding and Early Growth

Despite its distinctly western-sounding name, Tumbleweed was actually founded east of the Mississippi--in New Albany, Indiana. It was the brainchild of George and Linda Keller, a young married couple who had grown up in the New Albany area, just across the river from Louisville.

In 1975, the Kellers decided to open a Mexican restaurant, convinced by friends in Arizona that the popularity of Mexican cuisine was on the rise. Since Mexican food was in decidedly short supply in Indiana in the mid-1970s, however, the couple had little precedent in the way of recipes and menus. Amassing a collection of cookbooks, they began testing different recipes, using a trial-and-error approach to refine their concoctions. Eventually, they developed a complete menu for the new eatery, which opened in 1976 as Tumbleweed.

Tumbleweed was a big hit right away, with patrons lining up on the sidewalk to wait for one of the restaurant's 28 tables. The venture turned a profit its very first year and continued to do so consistently. Soon, the Kellers came to believe they could turn their single restaurant into a chain; by 1989, they had opened four more Tumbleweeds, all in the Louisville area. In addition, they had sold franchises for five other Tumbleweed locations: two in New Albany, one in Salem, Indiana, one in Lexington, Kentucky, and one in Fort Wright, Kentucky.

By the mid-1990s, the Kellers had expanded their chain to include seven company-owned and seven franchised restaurants in Kentucky, Indiana, and Wisconsin, as well as two joint-venture food-court outlets. The menu had evolved into a combination of mesquite-grilled foods and flavorful, spicy Mexican meals. This dual menu, which created a sort of hybrid between a steak house and a Mexican restaurant, was designed to appeal to a broader range of patrons than either type of restaurant alone could.

The Kellers believed there were tremendous growth opportunities for Tumbleweed. They knew, however, that to take advantage of those opportunities, the business needed an infusion of capital. 'Tumbleweed is nowhere near its potential,' George Keller said in an address to his employees in December 1994, as reported by the Louisville Courier-Journal. Keller said that reaching that potential required 'financial resources greater than the current ownership is able to provide.' In order to secure the capital necessary for further expansion, Keller worked with one of Tumbleweed's executives to structure a buyout.

The buyout was led by John Butorac, Jr., a long-time veteran of the restaurant business. In his 27 years as a restaurateur, Butorac had served as owner, operator, consultant, and senior operations executive for a number of chains--including Chi-Chi's, Fuddrucker, Two Pesos Mexican Cafes, and Kentucky Fried Chicken. He had joined Tumbleweed in 1991 as a consultant and had since then played a key role in the chain's growth and development.

Joining Butorac were James Mulrooney, David Roth, and David Cooper. Mulrooney was an accountant with a background in real estate development and restaurant operations. Like Butorac, he had spent several years in management positions with Chi-Chi's. Roth and Cooper were partners in a local law firm. The principles formed Tumbleweed LLC--a limited liability company established for the express purpose of purchasing the Tumbleweed chain--and set about finding more investors to put up cash for the deal. When the buyout was completed in January 1995, the investor group consisted of more than 60 individuals who, together, put up approximately $15 million. George and Linda Keller received $9.8 million for the company's assets, and an additional $1 million in exchange for signing a non-compete agreement.

Butorac took over as the company's new president and CEO, and Mulrooney served as executive vice-president and CFO. George Keller, who had retained a minority stake in the chain, held a position on its board of directors.

1995-97: Growth Through Franchising

Tumbleweed's new management group had ambitious plans for the chain's growth. Their goal was to have 114 restaurants open by the end of 1998, which would mean adding roughly 24 new restaurants each year. They planned to make no substantial alterations to the restaurants' concept, menu, staffing, or management style--merely to accelerate the pace.

By early 1996, however, Tumbleweed had managed to add only five restaurants, bringing the chain total to 19. Butorac and his team had revised the company's expansion strategy to allow for more modest goals: 40 restaurants open by the end of 1997, and up to 65 by the end of 1998. In a December 1996, interview with Business First of Louisville, Butorac attributed the slower-than-projected growth to the company's inability to quickly enlist qualified franchisees.

In order to attract more franchisees, the owners began to review and modify the existing franchise program. One of the first changes they made was designed to offer more flexibility in restaurant size. Up to that point, the average Tumbleweed consisted of approximately 7,000 square feet, with seating for around 275 people. Because of their size, these restaurants were economically viable only in fairly large markets, which limited the pool of potential franchise sites. Butorac realized, however, that there were many smaller markets where a scaled-down version of the restaurant could be profitable.

Soon, Tumbleweed franchisees had three restaurant sizes to choose from: the traditional 'maxi,' or one of two new, smaller options: the 'midi' or the 'mini.' The midi comprised approximately 5,400 square feet and seated 225, while the 3,500-square foot mini had room for 130. The company's new franchise literature claimed that the flexible Tumbleweed concept was 'adaptable for virtually any size market.'

Another feature designed to make Tumbleweed attractive to potential franchisees was the company's use of a central commissary for the majority of the individual restaurants' food needs. Whenever possible, cooked food ingredients and sauces were prepared in advance at the commissary and shipped to the restaurants, leaving only the final preparation for the restaurant workers. Because the restaurant itself was not responsible for extensive cooking, it required less kitchen space than it otherwise would have. This allowed for more seating space, and hence the potential for greater income. It also greatly simplified day-to-day operations for the restaurant owners and managers, and ensured consistency in the menu items. The commissary did not operate to make a profit; franchisees were charged only slightly more than the actual cost of the food.

By late 1997, there were 29 Tumbleweed restaurants up and running. Of the 29, 17 were company-owned and 12 were franchised. Although most of its growth to that point had been geographically focused in Kentucky, Indiana, and Ohio, the company was preparing to jump into international markets. In November 1997, Tumbleweed teamed up with Terry Smith--a restaurateur in Brussels, Belgium&mdashø put together a licensing deal.

Smith was a Chi-Chi's franchisee with 17 restaurants in ten European, Middle Eastern, and Far Eastern countries. Under the terms of the licensing deal, Smith's newly formed company--Tumbleweed International LLC--was given exclusive rights to develop Tumbleweed restaurants outside North and South America. Smith immediately began converting his 17 Chi-Chi's locations to Tumbleweeds, reopening the first in Ehrlangen, Germany, in February 1998. Restaurants in Jedda, Saudi Arabia, and Brussels soon followed. At the same time, Tumbleweed International began construction on three new locations: one in Amman, Jordan, and one in Cairo.

Because Smith's company was a licensee, rather than a franchisee, it had the ability to grant franchises of its own. Within just a few months of signing the licensing deal, Tumbleweed International had sold franchise rights to investors in Lebanon and Turkey. As of May 1998, Tumbleweed International's plans were to have 40 units operational by late 1999.

1998-99: Direct Public Offering

By the end of 1998, the Tumbleweed chain had grown to approximately 40 restaurants in six states and three foreign countries. More than half of the restaurants were corporate-owned. The company had total revenues of $42.8 million, and net income of $1.3 million.

In September 1998, Butorac received permission from the Securities and Exchange Commission to take Tumbleweed public. The company hoped to raise $12 million by selling 1.2 million shares priced at $10 each. Because $12 million was a small offering, however, the company leaders knew they would have a hard time finding an underwriter to handle it. Thus the company decided to offer its shares in a direct public offering (DPO), a method that eliminated the underwriter that was used in the more common initial public offering (IPO).

Taking the DPO route meant that the company's executives had to market shares directly to investors. After distributing about 10,000 prospectuses, they managed to attract 1,186 investors, who between them purchased 776,543 shares. Most of the investors were customers or company employees, and 80 percent of them were located in the five-county area around Louisville. Although the offering fell short of its intended goal, it did generate almost $7.8 million, a very good showing, considering the difficulties of going public directly, without an underwriter. In conjunction with the offering, Tumbleweed was reorganized from a limited liability company into a corporation: Tumbleweed, Inc.

While most of the proceeds from Tumbleweed's DPO went to pay down debt, part also went to fuel further expansion and to boost advertising efforts. By the spring of 1999, the company had opened two new franchised stores, and four more sites were contracted for. Management's goal was to open a total of 15 new restaurants by the end of the year. The company also dropped $1 million into a new advertising campaign designed to increase awareness in markets outside Louisville. The campaign-with a 'Fun, Food and Friends' theme&mdash--phasized Tumbleweed's Southwestern-style cuisine, rather than its Mexican dishes.

When Tumbleweed went public, it did not immediately meet the minimum criteria for listing on the NASDAQ exchange. Its shares were instead traded on the less-widely followed OTC Bulletin Board. In April 1999, however, NASDAQ approved the company for listing on its National Market exchange. The NASDAQ listing was important because it gave Tumbleweed stock a far greater exposure. In an April 29, 1999 press release, Butorac called the listing a 'corporate milestone' in the company's continuing progress. 'This listing will enhance the visibility of Tumbleweed to individual and institutional investors,' he said, adding 'This should improve the liquidity of the holdings of our current shareholders and help us in our efforts to expand the coverage and sponsorship of the company's shares.'

During the first half of 1999, Tumbleweed's expansion rate accelerated. By August, eight new restaurants had been added, bringing the total number to 48. Of the 48 locations, 28 were corporate-owned, five were licensed to Tumbleweed International, and the remainder were franchised. Tumbleweed was also laying the groundwork for further expansion in the near future. In August, the company signed a development agreement with one of its existing franchisees to open at least 11 units in the coming five years. Moreover, in September, a new franchisee in Virginia contracted to open at least 13 new restaurants over a six year period, giving Tumbleweed entry into a new state.

The Tumbleweed of the Future

At the end of 1999, five years after Butorac's investor group acquired Tumbleweed, the company remained committed to expansion. Although it had failed to achieve the kind of explosive growth the owners originally aimed for, it had nonetheless made significant strides toward reaching its potential. In the five years since the buyout, the chain had more than tripled in size, expanding into two new states and four foreign markets, all the while remaining consistently profitable.

As Tumbleweed rolled into the new century, its management planned to continue growing the chain through the addition of both franchised and corporate-owned restaurants. The company would likely continue to seek entry into new geographic territories, while at the same focusing on increasing its presence in many of its existing markets.

Principal Competitors: Applebee's International, Inc.; Avado Brands Inc.; Brinker International, Inc.; Carlson Restaurants Worldwide Inc.; Lone Star Steakhouse & Saloon, Inc.; O'Charley's Inc.





Further Reading:


Boyd, Terry, 'Louisvillians to Take Tumbleweed Around the World,' Business First of Louisville, May 11, 1998.
Boyd, Terry, 'Tumbleweed Gets Approval for Direct Public Offering,' Business First of Louisville, September 28, 1998.
Cooper, Ron, 'Tumbleweed Growth to be Spurred by Franchisees,' Business First of Louisville, December 2, 1996.
Egerton, Judith, 'Tumbleweed Restaurant Chain to be Sold: Deal to Help Firm Expand,' Louisville Courier-Journal, December 29, 1994, p. C1.
Redding, Rick, 'Tumbleweed Sets Expansion Plans after Stock Sale,' Business First of Louisville, April 5, 1999.
Williams, Shirley, 'Taste for Success Spurs Couple to New Ventures,' Louisville Courier-Journal, November 1, 1989, p. N1.

Source: International Directory of Company Histories, Vol. 33. St. James Press, 2000.




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