Down to Business: Friendly’s has gotten into a real pickle

I’m trying to figure out whether it was hubris or just a bad read on the economy that landed the Fri

I’m trying to figure out whether it was hubris or just a bad read on the economy that landed the Friendly’s restaurant chain in bankruptcy court.

If it was the latter, Friendly’s certainly had company: Everyone, it seems, from professional number-crunchers in Washington to mom-and-pop entrepreneurs on Main Street, misjudged the ferocity of the 2007-09 Great Recession and the slow slog out.

For Friendly’s, the effects were felt as consumers abandoned the iconic family eatery, which had served burgers and sundaes to generations.

“With overall unemployment rates at historically high levels, discretionary income for customers has been severely constrained, directly correlating to depressed restaurant sales and reduced or eliminated customer traffic,” the company’s chief financial officer, Steve Sanchioni, says in an affidavit filed in connection with the bankruptcy case.

The document, which outlines what led to the Chapter 11 filing last week, says sales declined 8.2 percent over the past two years, despite the chain’s best efforts to lure customers with a revamped menu and other initiatives.

Compounding the consumer caution were rising commodity and fuel prices. The price of butter (“which drives the price of cream,” Sanchioni states) rose 57.5 percent during those two years, while milk increased 22.2 percent. And “as fuel prices surged,” according to the affidavit, the cost of shipping Friendly’s products also climbed.

Headquartered in Wilbraham, Mass., Friendly Ice Cream Corp. has company-owned and franchised restaurants in 16 states, most in the Northeast. As part of the bankruptcy filing, 63 locations were closed immediately, leaving the chain with 424 restaurants. Nearly half of the shuttered sites were in Massachusetts; the six closed in New York were all in the Capital Region.

Besides the restaurants, which account for the bulk of revenue, the company also manufactures and distributes branded ice cream and dessert products to 7,000 supermarkets and other retail outlets in 48 states. Last year, ice cream production totaled 17 million gallons, the Sanchioni affidavit states.

The document highlights one other problem facing the company, and here’s where the question of hubris comes in: debt, which totals $297 million. According to the affidavit, Friendly’s revenue slump made it unlikely that earnings benchmarks set by various credit agreements would be met, and “absent their Chapter 11 filing, the debtors may have defaulted as early as the end of October 2011.”

Friendly’s, which dates to 1935, became a holding of private-equity firm Sun Capital Partners in 2007 during an ugly proxy fight that threatened to shake up the then-public company. An affiliate of Sun stepped in and acquired the chain for $337.2 million in cash.

Sun typically buys into companies it views as potential market leaders, repairs what’s broken, then positions them for a sale or public offering in three to five years. Raising debt financing is key to its operations.

Just a day before the Friendly’s filing, though, Sun put another portfolio company, Real Mex Restaurants — parent of the Acapulco, Chevys Fresh Mex and El Torito chains — into Chapter 11 bankruptcy protection, too, citing an inability to work out a debt-restructuring plan with lenders, according to the Wall Street Journal.

Last year, in an interview with the trade publication Investment Dealer’s Digest, Sun co-founder and co-CEO Marc Leder said his portfolio companies were foreshadowing the Great Recession months before it was identified. And while Sun cinched its belt along with everyone else, it still plowed ahead.

“We thought this was an unprecedented time to gain market share in various industries,” he told the magazine.

Marlene Kennedy, a longtime business editor in the Capital Region, can be reached by email at [email protected]

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