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A Recipe for Sbarro's Successful Exit from Bankruptcy

Wasn't it only a matter of time? Struggling pizza chain Sbarro is filing for Chapter 11 bankruptcy protection to restructure $200 million in debt. That's a heck of a lot of lukewarm slices of mediocre pizza. And while Nicholas McGrane, interim president and chief executive officer of Sbarro, maintains that the company has "one of the most recognizable restaurant brands in the world," it's going to take more than a cash infusion to make Sbarro's dough rise again -- it's going to take a whole new recipe for both its pizza and its profits.

Double whammy
Sbarro has been sinking slowly during the recession, in part because it's set up shop exclusively in malls and airport food courts. That was cutting edge when it opened its first eatery in 1967, but the chain's expansion to operate more than 1,000 stores in about 40 countries, including Qatar, Egypt and New Zealand, has made ubiquity a problem.

Both shopping malls and airports have been hard hit since 2008, with foot traffic and consumer spending hitting rock bottom. Sprinkle in a bit of e-commerce and patrons had even fewer reasons hit the food court stateside. Egypt's political strife is a key ingredient to Sbarro's struggles overseas.

Shrink vs. swell
The result is that Sbarro closed more than thirty six locations in the past two years and posted losses of about $29.3 million through the first nine months of last year on sales of roughly $239 million. But some pizza joints were just hitting their stride. Yum Brands (YUM) Pizza Hut chain ended 2010 on an 8 percent increase in the U.S. and 14 percent internationally with operating profit rising to $21 million for the full year.

Pizza Hut also wisely tapped the Chinese market early, opening 507 new restaurants for the full year including a record 262 in the fourth quarter. Thanks to revamping its menu every six months and leveraging various value initiatives, Yum saw Pizza Hut's comps (at stores open for a full year) rocket up 14 percent for the year.

Consumers demand better food
Value propositions aren't as necessary when you've got a captive audience stuck in an airport. Or when you're catering to vast groups of teenagers trawling the mall aisles on a Friday night. That's probably why Sbarro got away with serving up what some critics call "cardboard" pizza for so long.

On the competitor's side, Papa John's (PZZA) stands for "Better Ingredients. Better Pizza." Dishing up toppings such as freshly sautéed mushrooms and quality sausage is far more appealing to America's rapidly growing older population who are focused on great-taste, rather than scarfing sheer volume.

And pizza lover will tell you that the crust is half the experience. Papa John's rises high and is at once satisfyingly crunchy and chewy. Sbarro's, not so much. No wonder Papa John's comps increased 0.7 percent for the fourth quarter, representing the seventh consecutive year for even or positive domestic system-wide comparable sales. More impressive was the chain's international franchise system sales: up 21 percent for the fourth quarter and 17 percent for the full year.
Getting back in the game
Speaking of ingredients, there is no shortage of artisan outposts where folks can indulge a penchant for pizza. All the more reason Sbarro needs to step up its game to get back in the running as a go-to for the best slice. If corporate management want to think strategically, they should go back to Sbarro's traditional Italian roots. Back in 1956, when the Sbarro family opened an Italian grocery store in Brooklyn, N.Y., they peddled homemade mozzarella, imported cheese, sausage and salami -- the good stuff.

Sbarro could have an edge again by sourcing the best ingredients, local to each region. That would effectively appeal to both garden-variety foodies and the more demanding locavores. By buying locally produced cheeses, flour, and sauces Sbarro could capture a new market, not to mention save untold thousands on mozzarella, a key ingredient that the chain says has become a prohibitively high-priced commodity.
Image via Sbarro
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