The Cheesecake Factory Inc. History

Address:

26950 Agoura Road
Calabasas Hills, California 91301
U.S.A.

Telephone: (818) 880-9323
Fax: (818) 880-6501

Public Company
Incorporated: 1978
Employees: 3,100
Sales: $117.2 million (1995)
Stock Exchanges: NASDAQ
SICs: 5812 Eating Places

Company Perspectives:

We draw on a number of key elements--value, large portions, delicious food and beautiful decor.... These elements all come together to create an experience that is truly unique to the industry.

Company History:

The Cheesecake Factory Inc. manages a mid-priced, casual dining restaurant chain known for its elegant interiors and its diverse menu. Customers often wait up to two hours for a table in order to select from some 200 items on its 18-page menu, including more than 40 kinds of cheesecake. As of the middle of 1996, the company operated 16 restaurants in seven states and the District of Columbia. Cheesecake Factory leads the industry with its individual restaurants averaging sales of over $8 million a year. Through its bakery subsidiary, Great World Foods, Inc., the company produces cheesecakes and other desserts at a state-of-the-art baking facility in Calabasas Hills, California. These are sold by mail-order and to other restaurants, supermarket chains, and discount stores. Revenues for 1995, from restaurant sales and sales of bakery goods, totaled $117 million.

Early History

Cheesecake first appeared in Greece at least 2000 years ago and was originally made with cottage cheese. By the 1950s, when Evelyn Overton began making cheesecake in her basement in Detroit, cream cheese was the main ingredient. Evelyn's cheesecakes proved so popular with her friends and at bake sales that she and her husband, Oscar, started a bakery business. In 1972, the Overtons moved to the Woodland Hills suburb of Los Angeles and built a wholesale bakery, producing cheesecakes and other desserts for local restaurants.

In 1978, with backing from his parents, David Overton opened a small salad and sandwich shop in Beverly Hills featuring 10 flavors of the Overton's cheesecakes on its one-page menu. "We were completely naive about food service," Overton told Milford Prewitt in a 1995 article in Nation's Restaurant News. "We simply wanted to open a restaurant that would showcase our cheesecakes. At that time, most restaurateurs were using every excuse to explain why they could not carry our product, including expenses."

The 1980s

Evelyn's cheesecakes proved popular with California diners, and in 1983, Overton opened a second restaurant, in Marina del Rey. By 1987 the Beverly Hills shop had grown to a 78-seat restaurant and was grossing $3 million a year, even without a bar area, with diners spending an average of $8 for dinner. The Marina del Rey location had a bar and combined indoor and outdoor seating for 270 people. With average checks of $11, that location grossed over $8 million in 1987. In fact, annual sales were increasing by 15 percent a year, and Overton opened a third restaurant, in Redondo Beach, south of Los Angeles. The company spent $2 million renovating the location into a 21,000 square foot, 300-seat restaurant. The new unit was located on the waterfront at King's Harbor, a popular tourist destination.

The chain's one-page menu had expanded, offering items ranging from pizza to meatloaf to omelets to chicken tacos to baby back pork ribs. In the Marina Del Rey kitchen, three prep cooks worked full-time, and separate lines handled broiling, sautéing, frying, and the oyster bar. However, the specialty of the house continued to be cheesecake--fresh banana cream, Southern pecan, Craig's crazy carrot cake, brownie fudge--with 42 varieties baked at the company's facility in Woodland Hills. Despite diets and health consciousness, 70 to 80 percent of Cheesecake Factory customers ordered dessert.

In a 1987 Restaurant Business article, Marina del Ray general manager Douglas Zeif told Dolores Long, "Dessert sales boost our check average by about 15 percent. We're just the opposite of most other dinner houses that don't promote desserts because they're anxious to turn the tables. But we want everybody eating cheesecake; the profit margin on this item is between 65 and 70 percent for us."

To encourage such behavior in health-conscious California, work shifts received incentives for the most cheesecake orders, especially for seasonal or special flavors, as well as for daily specials and new menu items. While the company introduced new flavors of cheesecake, strawberry was the favorite, followed by white chocolate raspberry truffle, chocolate mousse cheese, white chocolate macadamia, and chocolate chip.

Although it concentrated on its restaurants, the company also sold a limited number of cheesecake flavors (chocolate chip, lemon twist) at the retail level. Customers included major restaurant chains in Southern California, such grocery store chains as Kroger's and Dominick's Finer Foods in Chicago, and food warehouse companies such as the Price Club in San Diego.

Cheesecake Factory's success directly contrasted with the country's eating habits. According to MRCA Information Services, which monitored in-home and away-from-home eating patterns, the total consumption of cheesecake in the United States fell a huge 27 percent between 1987 and 1988, with the big loser being the "plain" cheesecake.

1990 to 1994

Overton began the decade by opening his fourth restaurant, at the Warner Center in Woodland Hills, California. In 1991, the chain took its successful concept across the continent, to Washington, D.C., for its first restaurant outside Southern California. The new location, in the fashionable Chevy Chase section of the District, followed the formula Overton described to Michael Hartnett in a 1993 Restaurant Business article: "Scour large metropolitan areas to find 'trophy sites' offering high visibility, easy access, and close proximity to traffic-builders like shopping centers and tourist attractions." Overton built his restaurants to seat between 250 and 750 people and designed them to fit the individual site, incorporating the view if there was one, or, if there wasn't, adding architectural features such as sweeping staircases and dramatic lighting. The average cost for a new location, not counting the land, was $250 to $350 per square foot.

In 1992, Overton and his mother incorporated the company and took it public in September. Cheesecake Factory's stock closed that first day at a price of 18. The company's profits that year were $4.7 million on sales of $51.9 million. Restaurant sales accounted for $42.8 million (82.5 percent of sales) and the wholesale bakery for $9.1 million. Annual sales at the five restaurants averaged $8.6 million, on an average check of $13.57.

Nineteen ninety-three saw the opening of two more restaurants in California (on the water in Newport Beach and in Brentwood) and, in November, the second unit outside California, in the Atlanta suburb of Buckhead. By opening 3 or 4 units a year, Overton hoped to generate 25 percent-a-year sales increases, but this figure was easily surpassed. The three new restaurants contributed to 1993 revenues of $67 million, an increase of 30 percent. In its first 10 days of operations, the 12,000 square foot Atlanta location had sales of $322,000.

Top menu items for the chain were pasta dishes, followed by Cajun Jambalaya and Spicy Cashew Chicken. The company changed the menu twice a year, in June and in December, with new items added from the annual food trips Overton made with his staff to New York and Boston. The list of offerings included pasta, burritos and fajitas, steaks, seafood, ribs, pizza, burgers, omelets, salads, sandwiches, and vegetarian dishes. In addition to cheesecakes, dessert options ranged from hot fudge sundaes to fresh fruit to cakes to apple dumplings.

It is uncertain how much Cheesecake Factory's growth contributed to the comeback of cheesecake eating, but MRCA reported a 4.9 percent increase between 1988 and 1993. More important, in its "1993 Menu Census," Restaurants & Institutions magazine found that cheesecake was the most offered dessert on the menus of local fast-food, family-style or white tablecloth restaurants, or local bakery/cafes. Cheesecake was on the menu of 64 percent of the restaurants in the country; apple pie appeared on the menu of 61.5 percent.

The survey also found that cheesecake was the fifth best-selling menu item. It was out-ranked only by french fries, two chicken dishes, and pizza, with pizza beating cheesecake by only one percentage point. Further, the popularity of cheesecake was not limited to restaurant diners. The 1993 Retail Bakery Study conducted by Bakery Production and Marketing, reported that 54 percent of retail bakers across the country offered cheesecake, and in-store bakers reported increased sales of pre-packaged, frozen cheesecakes. Bakery estimated that total sales of cheesecake products in the United States was $430 million, more than $30 million higher than in 1988.

Overton continued to open new restaurants, financing the growth in part from the sale of 1.1 million shares of common stock. By early 1995, the chain numbered 11, with a new unit in Bethesda, Maryland, a Washington suburb, and two restaurants in Florida, in the Miami suburb of Coconut Grove and in Boca Raton. Restaurant sales for 1994 grew by 31 percent to $73 million, and Cheesecake Factory was number 25 in Restaurant Business's top 50 growth chains, ranked by percentage increase in system units. Earnings for the year increased 53 percent, to $7.2 million.

1995 and Beyond

The chain's expansion saw no let up as three more restaurants opened within an 11-week period late in 1995--in Chicago at the John Hancock Center, at the Galleria in Houston, and at the Atrium in Chestnut Hill, a suburb of Boston. Cheesecake Factory's average building costs of about $3.5 million a unit were 2-3 times (or more) those of competitors such as Ruby Tuesday, Applebee's, Landry's Seafood, Chili's, or Outback or Lone Star steakhouses. The company's new sites were running 14,000 to 24,000 square feet with seating for 400 to 700 compared to chains whose 5,000 to 7,000 square-feet units accommodated about 200 people. Cheesecake Factory filled each seat an average of four times or more a day, and even its smaller units were doing well. The Cocowalk restaurant in Coconut Grove had annual sales of more than $6 million a year--better than $1,000 per square foot. Average sales per square foot were $800 to $900, much higher than comparable casual-restaurant averages of $400 to $500.

The preopening costs for three big restaurants in different areas of the country combined with the expenses of training new staff did have an impact on the company's bottom line in the last quarter of the year--for the first time, the company's net income did not grow. The preopening costs for the Chicago unit were estimated to be near $1 million, for example, but by its third month, that restaurant was generating about $1 million per month in sales. The Chestnut Hill restaurant, although open only a few weeks in December, generated more than a half million dollars in sales in 1995.

In a May 1995 article in National Restaurant News, Overton further described what he looked for when selecting sites. "What we like in a site is one that gives us 250,000 people in a five-mile radius, medium-to-high income, and we like opening near apartment dwellers rather than around home owners. Apartment dwellers go out more frequently. People who own homes tend not to go out as much." However, he went on to explain that by the end of the decade, his "trophy sites" would be harder to find, and that the company was therefore already working on a smaller prototype, about 4,500 square feet in size.

One problem the company was experiencing was producing enough bakery goods for its growing number of restaurants, along with its wholesale and mail order business. To correct this, construction began on a new bakery facility, capable of producing 1,000 cheesecakes an hour using vats the size of hot tubs and customized machinery from Italy. The new facility was 45,000 square feet, replacing one only 14,000 square feet. The company's plans for expanding its retail distribution included selling its cheesecakes through Sam's Club and Price/Costco discount stores and additional supermarket chains. It also was working with RJ Nabisco on developing new products.

In July 1995, Overton selected Gerald Deitchle, a former executive at Long John Silver's Restaurants Inc., to be chief financial officer and senior vice-president. Deitchle succeeded William Kling, who retired. In November 1995, Cheesecake Factory appeared on the 1995-96 list of the Forbes 200 Best Small Companies in America for the first time, ranking number 79. To qualify for the list, "a company must show a five-year average return on equity of 12.4 percent [Cheesecake's return was 21.1 percent], five-year average earnings growth of eight percent [Cheesecake's was 35 percent], and five-year sales growth of 15 percent [Cheesecake's was over 25 percent, the highest on the list]." The company was ranked sixth of the nine restaurants on the list.

By the end of the year, Cheesecake Factory had moved from Woodland Hills to its new corporate headquarters in Calabasas Hills, California, hiring additional staff, and beginning production at the new bakery facility. These costs also contributed to the fourth quarter results. For the year, the company had revenues over $100 million for the first time, reaching $117 million. Although flat in the fourth quarter, net income for the entire year increased to $8.6 million. Restaurant and bakery sales each increased by 37 percent. The workers in the bakery actually produced sales of nearly $1.5 million per month before moving into the new facility. For the restaurants, their unit sales continued to average $8.6 million a year, significantly higher than the $1.3 million considered good by its competitors.

At the end of the year, the company raised its menu prices about 2.7 percent, the first significant price increase in three years. During the summer of 1996, two restaurants opened--in the Old Orchard Center in Skokie, Illinois, and in Baltimore's Harborplace. These brought the total units to 16--and two more were expected to open by the end of the year, at Country Club Plaza in Kansas City and in Old Town in Pasadena, California. The Pasadena unit marked the first new Cheesecake Factory in California since 1993.

In a departure from its traditional distribution strategy, Cheesecake Factory contracted with Host Marriott to set up a dessert outlet at Los Angeles International Airport. If successful, the company expected such licensed outlets could lead to a new component in Cheesecake Factory's brand identity.

Very protective of the Cheesecake Factory name and the concept, David Overton refused to franchise. His plans for the future depended on accelerating the number of restaurant openings and developing new bakery products and customers. Some analysts worried that the expense of building large, opulent restaurants would continue to cut into profits. The company also had to contend with articles such as that in the June 7, 1996 issue of Time, which reported "A single slice of the Cheesecake Factory's original plain cheesecake has as much fat (49 grams) as a Pizza Hut Personal Pan Pepperoni Pizza plus two Dairy Queen Banana Splits." Yet customers continued to flock to the restaurants. With no debt, and with those big restaurants generating sales at an impressive pace, the company considered its capital expenditures good investments for the future, and planned to keep opening more.

Principal Subsidiaries: Cheesecake Corporation of America; Great World Foods, Inc.; The Houston Cheesecake Factory Corporation.

The Cheesecake Factory Inc. History

Company Perspectives:

Company History:

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