published Friday, October 25th, 2013

Krystal seeks to double sales, open 200 more units by 2020

Company at a glance

Started: 1932 at 7th and Cherry Streets in downtown Chattanooga

Founders: Rody Davenport Jr. and J. Glenn Sherrill

Headquarters: Atlanta

No. of restaurants: 350

Chattanooga restaurants: 21 restaurants with 362 employees

Footprint: 11 states in the Southeast

Sales: $404 million

Owner: Argonne Capital Group

Krystal history headed to UTC

The Krystal Co. moved its company headquarters this year to Atlanta, but its Chattanooga heritage will live on the campus of the University of Tennessee at Chattanooga. Krystal, which is endowing a business scholarship at UTC through a $50,000 donation to the university, also is donating its company memorabilia, historic papers and other collectors' items to UTC. The university library and the business school will display some of the Krystal artifacts, including a photograph of former President Ronald Reagan eating a Krystal on Air Force One, and keep other company records and files online for researchers to access on the web.

Krystal Co. plans to get bigger by being smaller.

The restaurant chain famous for its small, square hamburgers expects to add 200 more restaurants across its 11-state region by 2020, helping to meet CEO Doug Pendergast's goal of boosting sales for the Atlanta-based fast-food chain to $1 billion by the end of the decade.

But most of the new Krystal units will be about 500 square feet smaller than the typical Krystal of today and the new units will be built in a factory and shipped to the restaurant site. Their menus will likely stay more limited than most fast-food chains, Pendergast told the Chattanooga Rotary Club on Thursday.

"The new prefabricated restaurants are much more durable and efficient and can be built quicker and for about $300,000 less per unit," he said, citing the Ringgold, Ga., Krystal as a successful example of the new design. "You can do the site work at the same time the building is being erected so the new units can go up much faster."

Pendergast, a Harvard-educated MBA, also expects to gain about $50,000 per unit through quicker depreciation of the factory-built restaurants by accounting for the investments as equipment, rather than as a traditional building.

"We think that's a smart way to grow and a heckuva lot of fun

to watch an entire restaurant set down and overnight see a new Krystal," he said. "As an engineer, I like the efficiency of selling a whole lot of Krystals in a relatively small space."

Pendergast said the approach is similar to the founding philosophy of Chattanooga entrepreneurs Rody Davenport Jr. and J. Glenn Sherrill when they opened the first Krystal restaurant 81 years ago Thursday -- keep it small in size and distinctive in taste.

Krystal is America's second oldest fast-food restaurant chain, behind only its northern nemesis White Castle. Consumer surveys show that Krystal enjoys the fourth highest taste craving among America's 15 largest fast-food chains -- behind only In-N-Out Burger, Five Guys and White Castle, but well ahead of industry leading McDonald's, Wendy's and Burger King.

But surveys Pendergast commissioned when he took over Krystal in April 2012 also found that while the brand is well known throughout the South it rated near or at the bottom among major chains for the quality of its food, the speed of its service and the cleanliness of its restaurants. Prior to the company being acquired by the private equity firm Argonne Capital Group two years ago, Krystal also had shrunk the number of restaurants from 425 to 350 after failed efforts to expand in Texas and other markets outside its traditional 11-state region.

"This great brand punches way above its weight class with the 90 percent recognition in our area, but clearly we have work to do in getting back to our core principles," he said.

Pendergast has revamped the company's management team, including the hiring last week of Gary Clough from Arby's to serve as chief operating officer. He also has used the signature Krystal to introduce new fish and chili pup versions of Krystal.

Pendergast's expansion plans are focused in the company's Southeast footprint, where company officials estimate there is still room to open up another 1,000 Krystal units over time. Within four years, Pendergast expects to have 500 Krystal units, most of them franchised units. By 2020, that number should be 550 or more.

Pendergast, who helped boost same-store sales at Old Chicago restaurants by 25 percent when he was an executive at the Chattanooga-based Craftsworks, also expects to boost sales at existing Krystals.

The philosophy echoes the "Krystal Kreed" upon which the company was founded, Pendergast said. Although Krystal relocated its headquarters earlier this year from Chattanooga to Atlanta, Pendergast on Thursday announced the company will endow a scholarship in the UTC school of business and donate its historic collections to UTC for display and research at the UTC business college and library.

"We'll be picking up the materials from Krystal before the end of the year and start inventorying material as much as we can in our existing library," said Theresa Liedtka, dean of the UTC library. "It will really be when we get to our new library (by next fall) that we will begin to fully process the collection, digitize it and work with the business school on the display aspects of it."

"I think it is going to be a fascinating, rich collection," she added. "The company has done a good job in preserving its history and we're looking forward to displaying some of that and make it available for our students and researchers to learn more about this company and entrepreneurship in general."

Contact Dave Flessner at dflessner@timesfreepress.com or at 757-6340.

about Dave Flessner...

Dave Flessner is the business editor for the Times Free Press. A journalist for 35 years, Dave has been business editor and projects editor for the Chattanooga Times Free Press, city editor for The Chattanooga Times, business and county reporter for the Chattanooga Times, correspondent for the Lansing State Journal and Ingham County News in Michigan, staff writer for the Hastings Daily Tribune in Nebraska, and news director for WCBN-FM in Michigan. Dave, a native ...

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