Buffalo wild wings code of ethics

Buffalo Wild Wings, Inc., 2013

www.buffalowildwings.com , BWLD

Headquartered in Minneapolis, Minnesota, Buffalo Wild Wings (BWW) is the largest chicken wing–based sports bar in the USA. BWW offers a welcoming atmosphere, open layout catering to families, sports enthusiasts, and chicken wing lovers. The typical store offers 20 to 30 different beers on draft and tap, up to 10 projection TV screens, and up to 50 smaller TVs for people to watch sporting events.

BWW specializes in traditional bone-in chicken wings and boneless chicken wings complimented by its 16 different wing sauces. BWW also sells burgers, other finger foods, and alcoholic beverages. The typical restaurant offers a diverse selection of beers, wines, and liquor options. As of year end 2012, BWW operated 891 stores of which 381 were company-owned and 510 were franchisee-owned. The company expects to increase its total number of restaurants by 105 in 2013 and approximately by the same amount in 2014. The typical restaurant is between 4,000 and 10,000 square feet and costs around $2 million to build, including the land, building, appliances, etc. Each has 50 high-definition flat-screen TV’s and 10 large projection screen TV’s. Takeout orders comprise 14 percent of BWW sales.

In their company-owned restaurants, BWW employs 25,500 people, 2,800 full-time and 22,300 part-time, which it calls team members. Five of the top nine executives are females including the CEO, Sally J. Smith. BWW operates its 817 stores in 48 U.S. states and Canada. BWW opened five new restaurants in 2012 on the parking lots of big-box retail stores such as Home Depot. BWW expects to have 1,500 restaurants in the USA and Canada by 2016, and many of them will be in vacant space of Sears stores, parking lots, and malls.

Copyright by Fred David Books LLC. (Written by Forest R. David)

History

In 1981, James Disbrow, from Buffalo, New York, along with friend, Scott Lowery, went looking for a Buffalo-style chicken wing restaurant around the campus of Kent State University in Ohio while judging a figure skating competition. Unable to find a satisfactory restaurant in the area similar to what they knew was good from back home, the concept of opening Buffalo Wild Wings and expanding this tradition of Buffalo, New York, to other areas of the country was born. The first restaurant named Buffalo Wild Wings & Weck or BW3, was opened in Columbus, Ohio, in 1982 near the campus of Ohio State University. In 1991, BWW began its franchising program and in 2003 the company completed its initial public offering.

Vision and Mission

BWW refers to its mission statement in its code of ethics, but the firm does not provide an explicit mission or vision statement on its website or its annual report. However, BWW does provide its “concept and business strategy” as follows:

· Continue to strengthen the Buffalo Wild Wings brand

· Deliver a unique guest experience

· Offer boldly-flavored menu items with broad appeal

· Create an inviting, neighborhood atmosphere,

· Focus on operational excellence,

· Open restaurants in new and exciting domestic markets and new countries and

· Increase same-store sales, average unit volumes and profitability.

EXHIBIT 1 BWW’s Organizational Design

Source: Company documents.

Organizational Chart

As indicated in Exhibit 1 , BWW appears to operate from a divisional by geographic region structure.

Internal Issues

Statement of Ethics and Governance

BWW has two statements of ethics: one for regular employees and one for executives. For employees, the Code of Ethics provides an overall standard for ethical conduct in conjunction with what is viewed today as ethical business behavior. The statement also provides the following: (a) how to report violations of conduct, (b) extensive personal conduct policies, (c) conflicts of interests, (d) protecting trade secrets, (e) disclosure of financial data, (f) environmental impact, and much more. The executive code of ethics is similar to the document for employees. Both codes of ethics stress doing the job to the best of one’s ability and seeking help before making a decision on any matters of which the employee is not sure of.

BWW provides a well-detailed corporate governance document for view on its website. This document stresses all key issues related to the governance of BWW, including but not limited to: board size, board leadership policies, selection of new directors, retirement, compensation, and stock ownership policies.

Business Segments

As indicated in Exhibit 2 , 22 percent of BWW’s revenues come from alcoholic beverages. Not included in the chart but important to note is that 13 percent of BWW’s sales come from takeout orders, an area in which BWW states it does not try to compete on and do not consider takeout wing establishments its primary competitors. But 13 percent is quite large and may be a growth area for the company in the future.

Exhibit 3 reveals strong revenue growth for BWW’s company-owned and franchised stores over the last three years. Revenue from company-owned stores increased 34 percent in 2012. Exhibit 4 reveals average revenue per store. Note that franchised stores are outperforming company-owned stores on average, but this is partly the result of BWW repurchasing underper-forming franchised stores.

EXHIBIT 2 A BWW Revenue-by-Product Percentage Analysis

Traditional Wings

Boneless Wings

Alcoholic Beverages

Other Food/Beverages

Years

20%

19%

24%

37%

2011

20%

19%

22%

39%

2012

Source: Company documents.

EXHIBIT 3 BWW Revenue Analysis: Company Owned versus Franchised Restaurants

2012

2011

2010

2009

Company Owned

$964M

$717M

555M

489M

Franchised

$1,510M

$1,326M

1,148M

992M

Source: Company documents.

EXHIBIT 4 BWW’s Average Revenue per Restaurant

2011

2010

2009

Company Owned

$2.25M

2.14M

2.11M

Franchised

$2.66M

2.43M

2.36M

Source: Company documents.

Strategies

BWW is currently employing both market penetration and market development strategies and plans to have around 1,500 restaurants within the next several years, nearly double what they currently own. BWW is considering adding locations outside its current two countries: USA and Canada. The company also expects to maintain its 60–40 split of franchised-owned to company-owned stores. Opening new stores especially in new countries would create additional risks, such as limited brand awareness, supply chain issues, unknown competitors, and much more. BWW is considering expanding into international markets via joint ventures with an established global brand.

Exhibit 5 reveals BWW growth over recent years. Note in 2012 the 19 percent growth in company-owned stores and 2.4 percent for franchised stores.

Marketing and Advertising

EXHIBIT 5 BWW’s Growth: Number of Restaurants

2012

2011

2010

2009

Company-Owned

381

319

259

232

Franchised

510

498

473

420

Source: Company documents.

Since its inception in 1982, BWW has specialized in offering a unique brand experience for guests with the wide array of 6 award-winning sauces, beer variety, conveniently located TVs, a great social and sporting atmosphere, and though not acknowledged by the company, sex appeal with young attractive female waitresses. BWW instituted Tablegating at its restaurants in 2011 to promote sporting events, good food, beverages, and fellowship among fans. BWW maintains a year-round advertising presence but increases this advertising around its peak seasons, generally NCAA football in the fall and NCAA basketball in the spring. Each BWW franchise pays a royalty fee of 5.0 percent and an advertising fee of 3.5 percent of restaurant sales.

Finance

In 2011 alone, BWW built 50 new company-owned stores and repurchased 18 franchised stores. Exhibits 6 and 7 are the financial statements for BWW. Note net income increased 13.6 percent from 2011 to 2012. Note on the balance sheet that BWW currently has $32 million in goodwill, up from $17 million in 2011.

EXHIBIT 6 BWW’s Income Statements

(Amounts in thousands except per share data)

Fiscal years ended

December 30, 2012

December 25, 2011

December 26, 2010

Revenue:

Restaurant sales

$ 963,963

717,395

555,184

Franchise royalties and fees

76,567

67,083

58,072

Total revenue

1,040,530

784,478

613,256

Costs and expenses:

Restaurant operating costs:

Cost of sales

303,653

203,291

160,877

Labor

289,167

215,649

167,193

Operating

141,417

109,654

88,694

Occupancy

54,147

44,005

36,501

Depreciation and amortization

67,462

49,913

39,205

General and administrative

84,149

72,689

53,996

Preopening

14,630

14,564

8,398

Loss on asset disposals and store closures

3,291

1,929

2,051

Total costs and expenses

957,916

711,694

556,915

Income from operations

82,614

72,784

56,341

Investment income

754

118

684

Earnings before income taxes

83,368

72,902

57,025

Income tax expense

26,093

22,476

18,625

Net earnings

$ 57,275

50,426

38,400

Earnings per common share – basic

$ 3.08

2.75

2.11

Earnings per common share – diluted

$ 3.06

2.73

2.10

Weighted average shares outstanding – basic

18,582

18,337

18,175

Weighted average shares outstanding – diluted

18,705

18,483

18,270

EXHIBIT 7 BWW’s Balance Sheets

(Dollar amounts in thousands)

December 30, 2012

December 25, 2011

ASSETS

Current assets:

Cash and cash equivalents

$ 21,340

$ 20,530

Marketable securities

9,579

39,956

Accounts receivable, net of allowance of $25

20,203

12,165

Inventory

7,820

6,311

Prepaid expenses

3,869

3,707

Refundable income taxes

4,122

7,561

Deferred income taxes

5,774

6,323

Restricted assets

52,829

42,692

Total current assets

125,536

139,245

Property and equipment, net

386,570

310,170

Reacquired franchise rights, net

37,370

21,028

Goodwill

32,365

17,770

Other assets

9,246

7,146

Total assets

$ 591,087

$ 495,359

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Unearned franchise fees

$ 1,763

$ 1,852

Accounts payable

36,418

30,089

Accrued compensation and benefits

39,637

30,499

Accrued expenses

11,461

7,580

System-wide payables

51,564

44,250

Total current liabilities

140,843

114,270

Long-term liabilities:

Other liabilities

1,752

1,544

Deferred income taxes

37,128

38,512

Deferred lease credits

27,992

23,047

Total liabilities

207,715

177,373

Commitments and contingencies

Stockholders’ equity:

Undesignated stock, 1,000,000 shares authorized, none issued

—

—

Common stock, no par value. Authorized 44,000,000 shares; issued and outstanding 18,623,370 and 18,377,920, respectively

121,450

113,509

Retained earnings

262,047

204,772

Accumulated other comprehensive loss

(125)

(295)

Total stockholders’ equity

383,372

317,986

Total liabilities and stockholders’ equity

$ 591,087

$ 495,359

Source: 2012 Form 10K, p. 37.

Locations

BWW’s home office in Minneapolis consists of 48,000 square feet and is under a lease that terminates in 2017 with an option to renew for another five-year term. BWW has 891 restaurants in 49 different U.S. states and 7 additional restaurants in Ontario, Canada. Exhibit 8 provides the top 10 U.S. markets ranked by total number of BWW restaurants. Note that Texas has the most BWWs, followed by Ohio. Exhibit 9 reveals that approximately 43 percent of all BWW restaurants are located in Midwestern states. The Northeast, West, Canada, and other world locations are still relatively untapped by BWW.

Restaurant Franchise Operations

Approximately 59 percent of all BWWs are franchised and owned and operated by the franchisee. Franchises fees range from $25,000 to $42,500 depending on the owner’s restaurant experience and the number of stores he or she currently operates. The general lease is typically for a 20-year initial term with the possibly to renew subject on certain conditions that the company does not specify.

In addition to the initial start-up costs, franchisees also pay royalty fees of 5 percent on all restaurant sales, with an additional 3.5 percent of sales revenue being attributed to advertising. There is a provision in all contracts whereby BWW can increase the fees by 0.5 percent once every three years. It is unclear from company documents whether this would amount to a 5.5 percent fee or a 5.025 percent fee. BWW does not expect to enact this provision in the next two years.

EXHIBIT 8 BWW’s Top 10 U.S. States (Number of Stores)

2011

2012

2011

2012

2011

2012

USA

Company-Owned

Franchised

Total

Texas

37

43

51

45

88

88

Ohio

32

32

53

53

85

85

Illinois

13

18

46

43

59

61

Indiana

7

7

42

42

49

49

Michigan

0

0

43

47

43

47

California

11

18

24

28

35

46

Virginia

15

16

20

20

35

36

Florida

4

5

26

27

30

32

Minnesota

23

23

5

5

28

28

Missouri

7

6

20

21

27

27

Source: Company documents.

EXHIBIT 9 BWWs’ by U.S. Region (2011)

Region

Total Stores

Percent

Midwest

353

43

Southeast

282

35

West

107

13

Northeast

71

9

Canada

4

-

Total

817

100%

Source: Company documents.

Competitors

In the competitive restaurant industry, BWW is attracting customers based on taste, quality, service, and ambience. Primary competitors include Hooters, T.G.I Friday’s, Chili’s, Applebees, and many regional and mom-and-pop sports bars across the USA and Canada. In addition to sports bars and chicken wing-themed establishments, BWW does not consider quick-service restaurants (QSR), such as McDonald’s and Kentucky Fried Chicken, as competitors, nor surprisingly quick takeout chicken wing establishments. This corporate view is surprising because many quick-service chicken wing stores can offer much lower prices than BWW because its overhead is significantly less. Recall that 13 percent of all BWW sales are derived from takeout customers. This 13 percent can somewhat be considered a gift because BWW does not promote its takeout business with volume discounts, “tailgate specials,” or any other marketing strategy.

Exhibit 10 provides a financial comparison of BWW with DineEquity (owner of Applebees’s) and Brinker International (owner of Chili’s). Note that BWW has the highest price-earnings ratio but has the lowest revenues among the three.

T.G.I. Friday’s

With about 1,000 locations worldwide, T.G.I. Friday’s (often shortened to “Friday’s” in most countries, and stylized “FRiDAY’S”, or “T.G.I.s” in the United Kingdom and the Republic of Ireland) is a U.S. restaurant chain focusing on casual dining, similar to BWW. T.G.I is owned by the Carlson Companies, a privately-held firm, so financial information is difficult to obtain about T.G.I Friday’s. The company name, however, is taken from the expression TGIF, which stands for “Thank Goodness It’s Friday,” although some recent television commercials for the chain have also made use of the alternative phrase, “Thank God It’s Friday.” The company is known for its red-striped canopies, brass railings, Tiffany lamps, and frequent use of antiques as dècor.

Hooters

HOA Restaurant Group (Hooters), based in Atlanta, Georgia, was founded in 1983 in Clearwater, Florida, and currently operates more than 430 franchise restaurants in more than 27 different countries, and additionally, the company operates 160 stores. The theme and concept of Hooters has changed little over the last 30 years and chicken wings is a main product served. The typical Hooters restaurant experience includes the sex appeal of female waitresses, jukebox-style music, sports on television, and a menu that focuses around chicken wings, but also includes seafood, salads, and sandwiches. Around 68 percent of all Hooters sales are derived from food and nonalcoholic beverages, 28 percent from beer or other alcoholic beverages, and 4 percent from merchandise, such as Hooters calendars and appeal.

EXHIBIT 10 A Financial Comparison of BWW with Brinker International and DineEquity

BWW

DineEquity

Brinker Int.

Market Capitalization

1.61B

804M

2.4B

Number of Employees

2.8K

640

60.3K

Revenue

1.04B

1.02B

2.81B

Gross Margin

0.26

0.40

0.18

Net Income

57.2M

72.6M

146M

EPS Ratio

2.90

4.00

1.77

P/E Ratio

29.91

10.99

18.00

EPS, earnings per share; P/E, price-to-earnings.

Source: Company documents.

Applebee’s

Founded in 1976 as the International House of Pancakes (IHOP) and based in Glendale, California, with 640 full-time employees, DineEquity today operates both Applebee’s Neighborhood Grill and Bar and IHOP. As of year-end 2011, the company operated 1,842 Applebee’s franchise restaurants in the USA and 16 different foreign markets and 177 additional company-owned restaurants. There were 1,535 IHOP-franchised restaurants in the USA and 5 in foreign markets and 10 company-owned IHOP restaurants. DineEquity has experienced a 40-percent decline in revenues from $1.4 billion in 2009 to $1.0 billion in 2011.

The Applebee’s segment of DineEquity competes with BWW by serving chicken wings, burgers, and other bar finger foods along with alcoholic and nonalcoholic beverage items. Applebee’s also sells steaks, its most popular item, and have begun a new fresh menu offering new chicken, seafood, and salads in an attempted to capitalize on a healthier-minded consumer. In addition to the historical similarity in food times with BWW, Applebee’s also markets itself as a neighborhood bar and grill and provides a limited sports bar atmosphere around the bar area during times of significant sporting events. New CEO Mike Archer of Applebee’s is currently reducing the pop culture feel of Applebee’s decor, adding healthier items such as its less-than 500-calorie menu, so it has yet to be determined how close of a competitor of BWW Applebee’s will remain.

Chili’s

Founded in 1975 as Chili’s in Dallas, Texas, Brinker International operates both Chili’s Grill & Bar and Maggianos’s Little Italy. As of year-end 2011, Brinker operated 1,534 Chili’s and 45 Maggiano’s. The company has restaurants in all 50 states and in more than 30 countries. The company experienced an 18-percent decline in revenues from $3.2 billion in 2009 to $2.7 billion in 2011. The Chili’s segment most closely competes with BWW offering many similar food items, alcoholic beverages, and a care-free atmosphere. However, Chili’s does not incorporate a sports bar aspect into its stores.

External Issues

Chicken wing prices in 2012 increased 62.8 percent over the prior year to an average price per pound of $1.97. Chicken wings accounted for 27 percent of BWW’s cost of sales in 2012, up from 19 percent the prior year.

Domestic Economy

Unemployment is hovering just above 8 percent and interest rates are low but banks are not readily lending. Consumers continue to pinch pennies. “Dining out easily can be postponed, so many restaurants are a “very visible indicator” of what’s happening in the economy,” says Malcolm Knapp, a New York-based consultant who created the Knapp-Track Index and has monitored the industry since 1970. “Amid declining confidence, consumers don’t have the appetite to eat away from home as frequently,” he said. The USA is facing more than $600 billion in higher taxes and reductions in defense and other government programs in 2013. U.S. retail sales are weakening, and consumer sentiment, measured by the Bloomberg Comfort Index, is declining. “It doesn’t feel like we’re out of a recession for many middle-class American households,” Knapp said. In what’s become an “allocation nation,” consumers must choose between different categories of discretionary spending, and dining out is “very sensitive” to changing habits.

Commodity Prices

BWW does not engage in any form of futures contracts for purchasing wings, instead purchasing at market prices and accepting the volatility that comes with that strategy. BWW acknowledges this problem and is actively looking for a long-term pricing agreement but has yet to come to agreement with any provider of chicken wings. Also, most BWW supplies are provided by third parties, leaving BWW with limited little control over its supply chain. Failure to deliver chicken wings, sauce, paper products, beverages, and such on time could severely impact its business.

Future

BWW is one of the fastest-growing restaurant chains in the USA and also one of the hottest stocks for investors. The company’s strategy to focus on chicken wings, beer, sports, and attractive waitresses continues to be a winning business model. Perhaps the most important challenge facing BWW is with its expansion policy. The company expects to double its total stores in the next three to four years. CEO Sally Smith is currently faced with continuing expansion in stronghold markets in the Midwest and Southeast or exploring markets in the Northeast, West, Canada, and other international markets. BWW has two franchise development agreements for restaurants in the Middle East and Puerto Rico.

BWW lacks control over its supply chain and has no real futures contracts in place to hedge against volatile chicken wing prices. Should CEO Smith actively establish contracts with chicken producers to buy chicken wings on a futures contract? Are there other backward integration strategies CEO Smith could pursue to help protect against untimely delivery, poor quality, or volatile pricing of supply chain products?

Another strategic issue facing BWW is its neglect of the takeout business. Although the company focuses on selling a casual sporty dining environment, many sports fans enjoy watching games at home, tailgating at the event, or even just enjoying a day at the lake or beach. Currently BWW does not offer any type of marketing package or takeout options for this customer group, rather it expects the customer to pay full menu dine-in prices with little price discount for volume purchases. However, with 13 percent of sales, and a much larger percent of food sales because takeout typically does not include alcohol, there is an opportunity to grow this business.

Develop a three-year strategic plan for CEO Sally Smith at BWW.