The Fundamentalist

Kam Talebi,
Crave Restaurants:
612.355.4448
ka**@**********ca.com
www.craveamerica.com

Why Crave’s CEO won’t use
‘Monopoly money’ to build his company

interview by Beth Ewen

Want to hear more? This is the first interview in the new Upsize Entrepreneurs Series, sponsored by Crown Bank, featuring notable Minnesota entrepreneurs in print and in podcast. To hear the entire interview, click here.

Kam Talebi, 41, CEO of Crave Restaurants, sits in one of his stylish new locations, in the West End development in St. Louis Park, where he was the first tenant to open in October 2009. Jackhammers blast away outside as workers rush to complete new storefronts for retailers finally moving in, many having backed off when the economy collapsed shortly after Crave’s lease was signed. With the lunch rush getting underway on a gorgeous June morning, Talebi (rhymes with PAL-a-bee) details why he believes that economic meltdown became the perfect opportunity for his $17 million company to start a nationwide expansion. The former technology company entrepreneur vows that fundamentals will guide his decisions, not the wow factor that restaurants, retail and real estate ventures too often chase.

Upsize: Tell me about your company as it stands today.

Talebi: Currently we have three locations here; we started in Minneapolis. The original one was in the Galleria, in 2007. Subsequently we started in the Mall of America, in April of last year. And the third one was in October of 2009, here in West End.

Upsize: And you’ve just started your first out of state restaurant.

Talebi: In the midst of our second and third restaurants, we thought the concept had a lot of strength from a brand perspective and from a concept perspective. We wanted to take it outside of the borders of Minneapolis. Florida has always been a strong market for restaurants. We looked at several different locations, and Orlando came up, outside of the Millennium Mall. It became available for us and we jumped on it quickly and were able to put together a lease quickly. That was our first location out of state.

We are going to start construction on our fifth restaurant, in Omaha, Nebraska, as part of a Mutual of Omaha lifestyle development, involving retail, theaters, an athletic club and condos. We are anticipating construction in the next two or three weeks, and hopefully we’ll open in late August, early September. We continue to look for other markets, and are analyzing other deals. We have deals in the works in the state of Florida in other locations including Coral Gables, and possibly a couple of others. And we’re also looking at the East Coast, Boston, New Jersey.

Upsize: Sounds like ambitious plans in very uncertain economic times. How do you roll out an ambitious growth plan when people are so nervous?

Talebi: I look at it differently. We do live in challenging times. In some ways the economic times are a lot better today than they were a year ago. When I looked at pressing the button for growth 18 months ago a lot of people questioned it: is this the right time to be doing it? I just felt as a small company with an understanding of what allows restaurants to succeed: it goes back to location, location, location, and getting the best economic deal possible. That was the best time for a small company to be treated like a big company.

Not a lot of people were growing. A lot of people that had grown during good times, had grown the wrong way, or were real entrenched in having to go fix their problems, right? They were in bad real estate, expensive real estate. So when times turned the last thing they were thinking about was growth.

For us we had a solid concept, we were profitable, and we felt this was the time for us to focus on growth. We were able to capitalize on great real estate that became available to us.

Upsize: Were you able to get bargains that wouldn’t have been available before?

Talebi: Yes, and bargains come in many ways. A lot of large landlords, like the General Growths, etc., they usually look at the safe tenants, the large public companies. When no one was growing, for us to be able to present our track record, there was an opening for us.

Upsize: So those landlords wouldn’t have listened to you before?

Talebi: Three years ago, absolutely not. They would have said, We have proven restaurants to look at. I think the tough times, that drove a more normalized way of doing business. We weren’t desperate to grow, we weren’t chasing deals. Two years ago if you were a public company, you have to put up six units, you have to focus on top line growth, so there were some silly deals being done. As a private company, I didn’t have to do that. Obviously being able to walk away gives you strength in negotiating.

Upsize: This restaurant in the West End, in St. Louis Park, you were saying you had signed the deal here prior to the economic collapse in late 2008, and that left you in an interesting position to say the least.

Talebi: Once again when you look at this particular location, it was geared for Brio restaurant, a public company, which backed away. And when we sat down with the developer, Duke, there were a lot of uncertainties in the marketplace. Once again I was an optimist. I thought we would work through this. But there again, the hardest thing is getting great real estate. We stuck to the fundamentals. We were able to capitalize on low construction costs, to be able to build the store much cheaper than we did two years ago. All the fundamentals that I thought would happen, we’re reaping the rewards. We’re the busiest restaurant here.

 

Upsize: You came into a huge new retail development that hadn’t been tried before: where were the people going to come from? You took a big gamble. Were you a bit nervous?

Talebi: I was. I was. The timing, we were a little bit ahead of the true turmoil and breakdown. After the signing of the lease, we saw a lot of retailers take a step back. But if you look across the country, there are only two or three new developments going up. For any retailers looking to grow, there are not a lot of options. And this Minnetonka and west market is under-served, and for me I felt even if the retail support came later, this market needed more restaurant seats.

For us to come in with our concept, I felt comfortable taking that risk, that we would be able to survive and do well even with the delay of the retail market. And we did. A lot of retailers took a step back to wait, so the development took a step back. Now you can hear the noise, and the restaurants and retail are going up. We were the first ones to open, so it felt a little lonely. But the restaurant has always been busy from day one.

Upsize: How do you use your existing restaurants to then go to the next expansion and the next expansion? Do you build off the revenue and profits of one to go to the next?

Talebi: By having multiple units you develop operations. We have great human capital to use in our next one. During economic turmoil you have access to great people, great people. We’ve been fortunate to hire great managers, great staff. We have a lot of depth in the operation.

With my plans to grow I always want to have that depth. We’ll take management out of existing operations, and move them to Orlando for example. There are a lot of synergies in having a big footprint in Minneapolis to use elsewhere. One thing we’re seeing is the ability to market throughout the country to relocate talent. Minneapolis is evolving for us to be a corporate training headquarters. They’ll run one of the stores and have three to four months under their belt, and then they’ll go on to a new one.

Upsize: Will you own and operate the restaurants?

Talebi: Yes. I felt we could control the quality of the food and the quality of the service better under one umbrella. And we’re not looking to grow 20 units. For us modest growth is absolutely acceptable. For me it’s one store at a time, and we’ve go to do it right, and if we do it right it gives us the right to do another one. I like to be controlled.

Upsize: There has been story after story of restaurant companies expanding and growing, going all over the United States, and then flaming out. What do you think about that, and how do you guard against it?

Talebi: It comes back to fundamentals. I come from a finance background and an operations background and for me it’s not about top line. It’s about a viable business model that allows you to make money. That’s what I want, that’s what investors want, that’s what bankers want. I look at our growth to be well planned for and well capitalized.

What we saw in the industry was the fact that there was plenty of money in the market, and a lot of companies were growing too fast because they had access to capital. Once again, there were ambitious plans to grow and go public or grow and sell. Everything was about the top line. When you looked at the bottom line of so many companies, it was mind-boggling that they weren’t making money. Some said well someone will come in and fix the bottom line.

Upsize: Fixing meaning getting rid of the people, getting rid of the expenses.

Talebi: Right, there’s a mindset some have that fixing the bottom line is easier. I thought a lot of startup investments were quite silly. You had people putting in construction costs; when the Monopoly money was there, people spent it. Then there comes a day when everyone gets measured against the initial investment. Operations from a financial business model were flawed. When the top line starts to slow down, they’re in trouble. They were not able to scale back expenses quickly, hence backruptcies, shutdown of stores, etc.

Upsize: Tell me more about what you focus on financially, and in your day-to-day operations.

Talebi: It comes down to a few fundamentals. No. 1, the location has to make sense for us. We have to go into locations with lots of retail. That’s tough to come by. We’ve been able to cross that barrier. We know Simon the mall owner very well, for example. We are now one of their up-and-coming concepts that they’d like to do business with.

No. 2, it has to be the right investment model. We have to invest the right amount of capital to generate ROI. Whatever the variables are, it has to be right. We’ve done enough to know what it takes to make a successful operation and we stick to it. You can really be wowed into a lot of different locations. But for me, I know what works. Or I know what I don’t understand. You have to understand the investment model, you have to go into a location that does not cripple you.

And third is the right operating model. You have to have sound management, good financial discipline, and that comes with people. Hence, I could do 10 deals but a lot of the growth has to do with how many people I can bring on and train to be successful. If I feel like we are behind the curve, then we’re not going to grow as fast, if I feel we don’t have the seasoned management behind the growth.

Upsize: Tell me about how you capitalize the company, and how it’s changed since your first restaurant in 2007.

Talebi: It’s a combination of equity and debt, so private investors plus bank financing. It’s very difficult, to work with the banks. That’s one of the biggest challenges you have as a growing company. We have stayed consistent and will be consistent through this year. The next couple of locations we’ll primarily self finance, but after that I’m looking at different methods of financing.

Upsize: When you say self finance what do you mean?

Talebi: Our own capital, with very little debt financing. Banks are very slow right now. We will continue to reach out with the banks that we work with. The landscape is going to change in a year, the bad elements have worked themselves out. We’re going to continue to work with them, but I’m not going to let that slow us down. There’s also a stage in a company, when we reach a certain threshold, when you’ve earned the right to look for other sources, whether it’s venture capital or other sources, and we’ll probably reach that stage next year.

Upsize: Your background is in technology; you grew and sold two technology companies. How did you apply that background to the restaurant business?

Talebi: I think it’s being a good businessman. I was CFO for a company, and ended up taking on different operating roles; Sylvan Learning was one of the earlier companies. I had spent 10 years in corporate America, and felt like I had seen everything an entrepreneur could see. I was blessed to do that an an early age.

I invested in a technology company, a CRM customer relationship management company, that I went on to run. It revolved around good people. Regardless of what indsutry you’re in, it’s always about good people. We were fortunate enough to have some great talent, and subsequently sold it to Microsoft in 2001.

Upsize: Nice timing, right before the tech bubble burst. How did you manage that!

Talebi: laughs Yes! Phewf! We had started to invest in the dot-net platform, and we knew Microsoft was going to go after the small- to mid-sized businesses, so we developed software geared to that. And we sat at a table with my partner and said we will sell to Microsoft in a few years. We built a great company and with a great product.

After the sale Microsoft asked me to go with the company to Redmond. I’d been there and done that, and I came back to Minneapolis and took over another company, an auction automotive company. GE was heavily invested. Same thing. We came in, repositioned the company, started to invest in the right people and technology and in a couple of years sold it to Cox, which owns the biggest bricks and mortar auction company for cars.

Upsize: Why did a technology/ finance/operations guy like you get drawn to the restaurant business?

Talebi: I was tired of technology. I had been in it since I was 22. The passion was gone. I had so many offers to go run tech companies, but it didn’t excite me any more. For me I have to be excited about doing something. I looked at different lines of business. In the meanwhile we had invested in restaurants.

Upsize: Bellanotte was one of the high-profile ones.

Talebi: Yes, but I was never involved in operating it. We had a foot in the business so to speak. We understood the marketplace. But for me it’s the same business fundamentals.

One of the things that you see, and your heart goes out to people wanting to own restaurants, but unfortunately they don’t have the right business acumen. They miss the business disciplines, and no matter how great you are, if you’re in a bad location or you’re paying too much rent or people are stealing from you, it won’t work.

Upsize: Is that what happened at Bellanotte, which was a great success but then abruptly closed last year?

Talebi: Bellanotte was a victim of the fine dining collapse, and we were in a very challenging location, Block E in downtown Minneapolis. It was unfortunate that it didn’t work out, but I think we’ve all moved on to bigger and better things.

Upsize: And you took some lessons away from that experience?

Talebi: I felt like the biggest lesson was if I’m behind something I need to own it and operate it. When we looked at doing another restaurant, it was important for me to know there was one voice behind the company and where it was going.

Upsize: Your primary business partner is your brother, Keyvan. How do you work together? Who’s the older brother?

Talebi: I’m the older brother.

Upsize: Of course you are, because you’re the CEO! If I was in business with my older sister she’d be the CEO too.

Talebi: We work great together. Keyvan is great at managing people and he fights the day-to-day battles. I tend to do more strategy. There’s nothing like family to work with.

Upsize: Why do you say that?

Talebi: The trust factor. At the end of the day knowing someone cares as much as you do. We understand what each is capable of doing, so we work together perfectly.

Upsize: How did you come here to Minnesota?

Talebi: My mom had to receive care at Mayo Clinic, she had cancer. She was given three months to live and that was back in ’79 and she’s with us now, so she’s one of their miracle stories. She’s an inspiration. We are from Iran. I was 10 years old at the time, we had some family here.

Upsize: What do you remember about the move?

Talebi: Difficult, and foggy. Not knowing what was going on with Mom. But there’s a lot of strength that develops during those times.

One of the things that I think is prevalent in any company I run, we run it as a family. There is no hierarchy. Of course you have to have segregation of duties and some hierarchy, but we run it as a team. I think that’s indicative of knowing you’re in tough times, you have to come together and operate as a family or as a team.

Upsize: What has been the biggest turning point for your company to date, when something happened and things became much better?

Talebi: When you talk about growth, it’s one thing to talk about it and one thing to have it be executed. And when West End opened, October 2009, the market said, these guys are for real. We were in the Galleria and Mall of America, and people said why would you go to the Mall of America, and my goodness. But I saw the vision of the owners. I felt it was a solid move in a city that was gong to reinvent itself. But once again people said, hmm, I’m not sure. We opened with great success.

But this one, in West End, was the one that put us on the map. People said, they do well in three different markets, and that fueled the fire.

Upsize: What have been the worst days at your company?

Talebi: We’re blessed that we’ve not had disasters. What were difficult times is when you have two restaurants under construction: so you’re new, you haven’t been in the industry, the economy is going down in a major way, and you’re building two restaurants. So there are days when you take a step back and say, are you really sure? So there were times when we were nervous. It’s human nature. No matter how much you plan, or how much you’re methodical, it makes you nervous.

It goes beyond the restaurants. It’s people-you employ people, it was the nation as a whole. Where are retirees going to live? How will we put food on the table, as a nation? It was human to say, wow, I’m confident that this will turn but I hope it will.

Upsize: How did you get through that time?

Talebi: Gut it out. Stick to fundamentals. For our operations we stuck to doing the best we could. We offered value. We committed to great service, great food. We revisited our pricing, put out value pricing for some items on the menu. We came through it with flying colors.

Upsize: What lessons have you learned that you can share with other entrepreneurs?

Talebi: You have to do your homework. In today’s climate, to grow, it’s a difficult ordeal. Make sure you’re prepared for what’s around the corner. Secondly, have great people. You’ve got to have great people to help you grow your way into new business.

Upsize: Five years from now, if we’re having this interview as a follow-up: Where are we? What does Crave Restaurants look like?

Talebi: We’re right here. There’s no construction going on. It’s a lot more quiet. laughs I hope Crave has become a national brand. Number of units? I don’t know. We let that ride its course. A lot of that depends on how well we do. Who knows? There might be ways we can grow faster. But my goal is to build a well-recognized and well-respected brand and operation. Whatever I have I want it to be successful, I want it to be profitable, I want to have great employees that enjoy working here.