Freddy’s owner ‘bullish on growth;’ SD Holdings adds Fuzzy’s Taco Shop
Illustration by Jonathan Hankin
I often ask multi-unit franchisees why they chose a particular brand. Sometimes people have to dig deeply into their memory banks, which, more often than not, results in a fond reminisce.
Consider Ron Oberg, who operates Freddy’s Frozen Custard & Steakburgers restaurants in Kansas, Oklahoma, Nebraska and Texas. The year was 2003 and after his oldest son took him to a new burger and ice cream restaurant, Oberg got hooked. “I became intrigued with the concept. I’d go in and watch how they were operating,” he recalled. Most impressive was the quality of the food: Freddy’s cooked burgers to order and served Vienna brand hot dogs.
“Another thing that sold me was the exceptional hospitality,” he said. Managers and crew visited tables in the family friendly restaurants, something Oberg didn’t witness at garden-variety fast-food joints in Wichita, Kansas, his hometown.
Oberg wasn’t new to foodservice. He was familiar with operations at Perkins restaurants, a part of his father-in-law’s hotel business. Oberg and a partner also franchised two area Quiznos. While on the board of the Kansas Restaurant Association, he met Freddy’s co-founder and restaurateur Scott Redler.
Oberg eventually became the brand’s inaugural franchisee, opening his first Freddy’s (part of a four-store agreement) in late 2004.
Growth, however, plodded along until 2016, mainly due to Oberg’s desire to tighten operations, build a team and own land instead of rent.
“That was the best thing we ever did,” he said. “The first couple stores we opened have cash-flowed our growth for our last five or six locations as far as the equity we’ve had to put into those locations.” (He and his partner had meanwhile sold their Quiznos.)
Oberg later sent an email, noting “building and equipment costs range from $850,000 for an end-cap to $1,700,000 for a standalone building. These numbers exclude any land cost.” The building’s footprint ranges from 3,400 to 3,600 square feet with from 108 to 120 seats, he added.
When we spoke in mid-December, Oberg’s 13-unit empire included six Freddy’s in Kansas, five in Nebraska, one in Oklahoma and one in Texas. In 2020, he said, the group will add six more restaurants throughout Kansas, Nebraska and Texas.
“I am very bullish on growth right now,” he added.
Financing growth, always through banks, hasn’t been an issue. Indeed, according to Oberg, a bank president in Hutchinson, Kansas, volunteered to finance his first restaurant because he loved eating at Freddy’s.
Oberg likes to purchase the land under his restaurants and build ground up. Nonetheless, he will convert existing restaurants when opportunity arises. He recently gutted an eight-year-old Taco Bueno in Topeka, which will be his smallest unit with just 80 seats. Still, he said, “the building was sound and we didn’t find any ghosts.”
New to tacos
“We believe in the franchising model,” emphasized Merrick McKinnie, president of SD Holdings, a Charlotte, North Carolina-based franchisee of McAlister’s Deli, MOD Pizza, Sonic Drive-In, Oxi Fresh and Fuzzy’s Taco Shop. Together, the brands comprise about 100 units across seven states.
Fuzzy’s is SD Holdings latest gambit. The company (No. 93 on The Monitor 200, sister publication The Restaurant Finance Monitor’s list of the largest restaurant franchisees in the U.S.) opened its first unit in May 2018. Number two debuted seven months later; the third opened in February 2019. All are in Charlotte suburbs.
According to Fuzzy’s franchise disclosure document, a single unit costs from $597,000 to $1,262,000, including $25,000 to $35,000 in franchise fees. The royalty fee is 3.5 percent for the first year, 5 percent thereafter.
“We ran numbers based off of the FDD,” McKinnie recalled, “and we felt we could lean on our above-store structure that works across all brands.” For the record, the FDD shows the median unit volume for the 114 franchised Fuzzy’s that reported sales was $1,372,662 versus average unit volume of $1,499,220.
The restaurants, which also offer a breakfast menu, are value-oriented—a point of differentiation. McKinnie said tacos in full-service restaurants can cost $8. “At Fuzzy’s, you are looking at $3 for a taco. And we still have opportunity to improve our margins because we are cooking from scratch for the most part,” he added.
McKinnie admitted that scratch kitchens do raise back-of-the-house costs. “There is a labor presence as far as prep goes that can be improved. We are working on that, because we want to have fresh food and good prices,” he noted.
The bar component was also appealing. “We have the TVs, so you can come on Sunday and watch football games. It can be a bar experience, or it can be a fun, family experience,” McKinnie said.
McKinnie and SD Holdings CEO Yaron Goldman tapped an outsider, Derrick Smith, as director of operations for Fuzzy’s. McKinnie explained that Smith, who was working for a regional restaurant group, was someone he has wanted to work with for years. “I was always looking for the right opportunity to bring him on board. But the timing was never right,” McKinnie said.
When I talked to McKinnie late last year, he was uncertain about location strategy given the company had opened three restaurants within nine months. “We jumped on the scene real quick,” he said, “and we want to get our legs underneath us and get things right.”
To accomplish that, he is trying to “dial in” the demographics in North Carolina. Will Fuzzy’s customers be similar to McAlister Deli’s or will they more closely resemble tavern customers?
“That is what we are trying to do,” he said, “to make sure our teams get off to a strong start.”
David Farkas has covered the restaurant business for 25 years as a reporter and food writer, and writes about development deals in The Pipeline in each issue. Send your franchise’s development agreements to him at firstname.lastname@example.org.