Franchiser Ed Bailey vs. McDonald’s Corp.

THE INNOVATOR: Restaurateur Ed Bailey found success “upscaling” his McDonald’s stores, like the one seen here. photograhy by Elizabeth Lavin

Ed Bailey may be the most influential restaurateur you’ve never heard of. 

Bailey, who started two decades ago with a single McDonald’s store in Dallas, now has 64 McDonald’s locations in North Texas, making him one of the company’s largest U.S. owner/operators. Which is why it’s all the more surprising that he recently went to war—or to court, anyway—with the giant McDonald’s Corp.

Bailey’s big in North Texas, sure, but his adversary in this food fight is a behemoth. While it’s not the largest company in the United States in terms of sales or market value, McDonald’s is the country’s second-biggest employer and arguably the most iconic symbol of America short of the Stars and Stripes. So if this wasn’t a David vs. Goliath struggle, it’s the next best thing.

It’s hard to say exactly where all the bad blood began, but here’s the gist of the tussle:

In 2006, Bailey was entertaining the idea of owning a “sit-down, white-tablecloth” restaurant concept. Because owner/operator agreements preclude McDonald’s operators from owning competing restaurants, he says he sought to get it in writing that honchos at the Oak Brook, Ill.-based McEmpire would have no problem with the white-tablecloth idea. About the same time, McDonald’s granted at least one local franchise to another operator, and Bailey says that violated an existing pact that gave him first rights to new locations in North Texas.

Six months after he requested written clearance for his white-tablecloth concept, McDonald’s sent Bailey a letter saying that would be fine. In the meantime, though, he’d purchased Dallas icon Patrizio—with eateries in Highland Park Village and Plano—from local restaurateur Jack Knox. While McDonald’s was OK with the white-tablecloth concept, Bailey says, executives expressed “grave concerns” over his ownership of Patrizio in a face-to-face meeting in Dallas.

Given McDonald’s cache, that would have been enough to cower most owner/operators. But beneath Bailey’s dapper style, quiet demeanor, and slight build beats the heart of a former U.S. Marine and blue-collar boy who hasn’t forgotten his working-class roots. His response wasn’t just “bring it on.” In a move that would make Marine Corps hero Chesty Puller proud, Bailey promptly counterattacked.

He sued McDonald’s for breaching its fiduciary duties in connection with the new franchises and for lying to Bailey about it. According to Bailey’s attorney, Don Godwin, the suit also asked the court to declare that Bailey’s ownership of Patrizio was not in violation of his franchise agreements with McDonald’s.

“Never sit back,” Bailey, 61, explains simply. “Always take the initiative.”

HUMBLE BEGINNINGS
Bailey couldn’t have foreseen a day he’d be suing the very corporation that made him a multimillionaire—especially back in the 1980s in Cincinnati, when he was working hard to scrape together the money to buy his first hamburger franchise. Of course, he also couldn’t have foreseen the empire he’s built since then, becoming as influential a force in Dallas-area restaurant ownership as Gene Street, Phil Romano, or Norman Brinker, if lesser known.

Bailey’s offices in the Galleria Towers—home to his ELB Enterprises and BaiMac (which own his McDonald’s franchises) and Bailey & Bailey Restaurants (which own other of his eateries)—seem to marry the worlds of luxury and the McDonald’s brand. The ubiquitous Golden Arches are set off by bold, gold-framed oil paintings. Rich mahogany wood and Ralph Lauren fabrics give a warm, elegant feeling to the offices he runs with calculating efficiency. Portrait-style photos of various landmark franchise locations adorn the walls, each testifying to the innovative risk-taking that has made him a standout in an assembly-line business.

The son of a coal miner, Bailey worked while studying psychology at the University of Cincinnati, then served a six-year stint in the Marine Corps and the Marine Reserves. In 1972, with $10,000 he’d saved and a substantial small-business loan, the 25-year-old opened his own men’s designer clothing store just north of Cincinnati. While his dandy personal style and taste for fine materials and design found a home and blossomed, it wasn’t enough.

“I wasn’t satisfied with myself. I wanted to be more than in a retail store for the rest of my life,” Bailey says. One of his best customers was a McDonald’s owner/operator, and he envied the growth the man was seeing. Bailey wrote to McDonald’s, which told him his chances of getting a franchise were slim. If anything did come up, the suits said, it would probably be in some remote town 100 miles away from anywhere.

Bailey’s response: “OK, let me try.”

He undertook the “registered applicant” program, which includes 18 months of grueling work at a McDonald’s store 20 hours a week for no pay. He’d work at his clothing store every day and at McDonald’s every night, coming home after midnight reeking of French fries. After a year and a half, by luck of the draw and a quirk of underperformance, a location came available in Dallas, inside Valley View Mall. Bailey didn’t hesitate. He sold his clothing store, paid $180,000 to McDonald’s, packed up his family, and headed to Texas.

Bailey followed the McDonald’s playbook and began busting his tail—“Hard work works,” he’s fond of saying. Just over a year later, the corporation was impressed enough with his numbers to offer him a second location in The Colony. By this time, he was already starting to think outside the Happy Meal box, wanting to do things a little differently. He didn’t exactly upset the apple cart, but he brought his taste for elegant design to the second store, experimenting with upscaling the interior. It seemed to work, as proved by his sales and profit numbers.

“It was a radical concept, I guess,” Bailey says wryly. “People like to eat and come back to a place that’s nice.”

ENHANCING THE EATERIES

Bailey was successful with the first two restaurants, but he and his family lived modestly. Where some might be content with that level of success, he had higher ambitions. Every penny he could save was reinvested into the business. When Bailey bought his third franchise at Midway and Spring Valley roads, he went wheels-off, in a complete departure from the Formica formula. The location catered primarily to nearby office workers—the only Happy Meals sold were on weekends—so he made it an adult destination.

“I had an Austrian crystal chandelier in there; I had porcelain floor tile; I had a lot of wood and granite and, at that point, McDonald’s only had the typical fiberglass, strata-tile, mansard roof beams,” he says. “If you look at that store today, it’s about 20 years old … and it is (still) one of the best-looking McDonald’s around.”

The McDonald’s corporate folks thought Bailey foolish and advised against such extravagant investment. But when sales started coming in 20 to 25 percent higher than projected, they changed their tune. The number of Bailey’s stores continued to grow, as did his sales figures, even as, nationally, the McDonald’s brand began to lose its luster. Bailey beat that trend by always looking for new ways to enhance the diner’s experience, all without touching the basics of the menu or the pricing. It was, Bailey says, all about keeping the brand “relevant.”

He started upscaling his restaurants in ways no one could have imagined, using Terrazzo, slate, granite, Ralph Lauren fabrics, unique artwork. He broke the mold inside and out, tailoring locations to the demographic of the traffic. In some cases, he created traffic. In 1999, he bought a rundown McDonald’s at Montfort Drive and I-635 and demolished it. In its place—inspired by the results of his traffic studies—he built a store in the shape of a Happy Meal box. Let any parent try to drive past without having to stop. His acquisitions picked up pace through the ensuing years. Now it’s a safe bet that pretty much any McDonald’s you step into in North Texas featuring fine dining decor, wraparound drive-through windows, and cobblestone drive-through lanes is one of Bailey’s.

“One of my principles has always been that there’s nothing more vulnerable than intrinsic success, and McDonald’s was very, very successful back then. They had great locations, they had very poor competition, and they had a lot of money,” Bailey says.  “They subscribed to the ‘If it ain’t broke, don’t fix it’ kind of approach, and they had a very difficult time shifting their paradigms. I will give them credit: When they realized what I was doing was unique and different, they looked at the numbers first and they came to visit and they were impressed with both. That’s when they kind of took their hands off.  That’s kind of the short story as to how I got to 64 restaurants.”

McDonald’s Corp. also seems to have gone to school on Bailey’s success. Over the last five years, it has set out to remodel thousands of its restaurants worldwide.

While McDonald’s declines to disclose individual store sales, estimates are that its average annual store sales nationwide are a little more than $2 million. Bailey will only say his average store sales figures are “much higher” than that.

GREASE ON HIS FINGERS
Bailey is a real part of his store sales figures, by the way. Belying his fit build, he eats at a McDonald’s almost every day of the week—take that, Morgan Spurlock!—primarily at the one in the Galleria near his office or the one on Willow Bend Drive near his home in West Plano.

“I keep my sticky fingers in everyone’s business,” he says. “I think when you try to manage from the ivory tower or by cellphone or e-mail, you don’t really know the business. Somebody once said this business would be easy if it weren’t for the people. I think you have to understand what your people deal with, day in and day out.”

A leader’s role, he says, is to remove any barrier facing the management team. If there’s a piece of equipment that’s not functioning correctly, say, or if a store needs remodeling, it’s the chief executive’s responsibility to make it happen.

But success isn’t just about decor and design or even hands-on leadership, Bailey believes. Nor is it only about the universal standard of the McDonald’s menu or its smart, corporate-backed identity marketing. It is, he says, also about the people and their training. And that’s another playbook Bailey threw out the window long ago.

“We’ve kind of rewritten it,” he says. “We started doing what we call a ‘31-day book’—that’s how long the training program lasts. The book is basically a road map from the time you walk into the restaurant, from when the manager opens until they turn the alarm on and leave.”

Indeed, ELB Enterprises has its own training department and developed procedures Bailey taught himself early on. It also took into account changes Bailey saw coming in his labor base long before immigration became a hot-button issue. In 1996, about 15 percent of Bailey’s employee base was Spanish-speaking, but that percentage was growing. Something like 70 percent of the management team comes from those who start as line employees.

“We realized that as our Hispanic base was increasing in the restaurant, if we didn’t bridge the gap with this language barrier that we were going to … be unable to draw from our employees in-house … to go into management,” he says. “They could understand and speak enough English, what we call ‘kitchen English,’ but they could not communicate with a guest. So I decided to come up with an English as a Second Language program.”

Again, it was an investment not often seen in the frugal world of the restaurant industry, where margins can sometimes be as thin as a schmear of special sauce. Bailey persuaded McDonald’s to create training materials in Spanish—but only for Bailey, he says.

“Our strategy was, we will teach them how to run the restaurant in Spanish and, in the meantime, we will send them to an educational program that will teach them how to speak English. Not only did we pay for the tuition, we paid them their hourly wage while they were there taking the class,” he says. “We gave them a day off. We had them work four days in the restaurant, and on the fifth day they took a full day of class to learn to speak English.”

Since 1996, he has put about 400 people through the English as a Second Language program. The program’s success has been super-sized. In a typical fast-food company, management turnover is about 40 percent per restaurant per year. Bailey’s management turnover is about 13 percent. Among his Hispanic management, turnover is 2 percent. Crew turnover is 200 percent in the restaurant business; for Bailey it’s half that. Something like 80 percent of his restaurant employees are Hispanic.

“One of the ancillary benefits, which frankly I didn’t anticipate, was that it really helped our employees become more part of our culture. And I don’t mean business culture, I mean our American culture,” he says. “One of the young ladies [who went through the program] said, ‘My kids, when they bring their friends over, 90 percent of them speak English. I couldn’t communicate with my son’s friends. When a teacher called for a parent-teacher meeting, I couldn’t communicate. When I went to a doctor, I couldn’t communicate. Now I can. Now I have health insurance.’”

For managers, Bailey provides full health and dental insurance and a 401(k) plan, and salary ranges are significantly higher than average at both the line and management levels. The lower turnover rates—management replacement is a huge cost—more than cover the investment.

THREE GUYS WALK INTO A BAR
In 2006, Bailey went beyond burgers and started concepting Bailey’s Prime Plus—a high-end steakhouse geared toward women and couples. That is to say, smaller portions, some lighter fare and sides, and less of a “stuffy old boys’ club” feel. The focus would be on prime beef, Bailey figured, but also on an ambience that’s more welcoming to women. That’s when yet another high-end dining opportunity came his way.

Over drinks at the bar at The Mansion in February of that year, Bailey and his attorney, Don Godwin, and their wives bumped into Jack Knox, owner of Patrizio and Cafe Pacific. Knox said, “Don, call my attorney, Ray Williams; let’s have lunch at Al Biernat’s next week, the four of us, and we’ll talk.”

Two and a half months later, Bailey took the keys to Patrizio. The change of ownership wasn’t smooth right off the bat. Saying he wanted to make Patrizio “relevant” didn’t sit well with some of the loyal eatery’s clientele. But Bailey pressed on.

“People are averse to change, but the motivator of progress is change. You have to differentiate yourself, and that’s been my whole strategy,” he says. “I felt there was an opportunity to make Patrizio more relevant to today’s market. But I was criticized roundly for making some changes. One of the first changes I made was I started adding some fine wine to the menu. … For some of the menu changes, we were actually going back to the original, handwritten recipes they’d moved away from.

“I have strategically, incrementally, made changes,” Bailey says, “from the color of the restaurant, all new tables, all new chairs, all new outside seating tables and chairs, new canopy, new umbrellas, a whole new bar.”

His investment in Patrizio so far: $400,000.

Since acquiring the restaurant, Bailey says, sales have increased each month. Sales at the Highland Park Village location average $5.5 million a year, up 12 percent since June 2006; the figure is $4 million at the Plano location, up 8 percent since Bailey took the reins. He opened a third location in Highland Village in October 2007 and plans three more—one in Allen, one in Cedar Hill, and one in Fort Worth.

Says Knox: “The fact is, Ed is a better operator than me. He has an energy you can’t beat.”

Does Bailey fear the high-end dining market is growing too rapidly, though, or that he’ll dilute the brand? “I have absolutely no fear. I’ve always looked at what I call the Darwinism economics theory, survival of the fittest,” he says. “Somebody asked me not too long ago about the steakhouse and said, ‘Ed, all these steakhouses are opening up here, how many steakhouses can Dallas deal with?’ Survival of the fittest. The good ones will do extremely well, and the ones that aren’t so good won’t make it. That’s the way business is.” 

EAGER TO DO BATTLE
Meantime, Bailey’s lawsuit against McDonald’s was pending as D CEO went to press, so neither side would comment much. A mediation meeting was scheduled on Feb. 5, and a trial was set for May 14.

Bruce Steinhilper, head of franchising for McDonald’s West Division, said in a written statement that the company continues to believe that operators are prohibited from owning any restaurant similar to McDonald’s, and that they’re required to devote their full attention to the operations of their McDonald’s businesses.

In addition, McDonald’s denied the claim that Bailey has any “territorial rights” to new franchises.

Bailey, for his part, was eager at presstime to go to court with the giant corporation. He didn’t plan on losing—and he didn’t plan on giving in. In fact, “I don’t plan on retiring. They’ll probably haul me out of one of the restaurants on a gurney someday,” the irrepressible ex-Marine says. “But I’ll be smiling.”

CEO SNAPSHOT
Ed Bailey

Personal History: Born in 1946 in Ohio, the son of a coal miner. Daughter is an attorney at Godwin Pappas Ronquillo LLP; his son studied at SMU.
Education: Studied psychology at the University of Cincinnati.
Work History: Worked in a grocery store from age 15, putting himself through college. Spent six years in the U.S. Marine Corps and Marine Reserves after college. In 1984, invested $180,000 in a McDonald’s location at Dallas’ Valley View Mall.
Key Work Achievements: First to invest in high-end decor for his McDonald’s stores, which Bailey says then experienced increased sales. Pioneered an English-language program that slashed management and employee turnover and positioned the stores to succeed in the growing Hispanic market.
Key Non-Work Achievement: His collection of luxury cars, which includes two Rolls Royces, a Maybach, and a Lamborghini Murcielago, among many others.
Defining Success: “I think success is being able to do what you want to do, when you want to do it. I’m a humble guy; I don’t need a lot. I enjoy my life, but my needs aren’t as great as a lot of people. Frankly, right now, if I decided I wanted to take a month off to go the south of France and just relax, the fact is I could do that. My company runs itself. But after two days I’d be looking at my calendar and saying, ‘I need to get back and see what’s going on.’ Being able to do that, though, even if I don’t want to, is what I mean by success.”