The Mystery of The Blood Red Ledger

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Although LeFranc couldn't immediately pinpoint the source of the bleeding, the more he dug, the more he learned. One early focus was the company's commissary, which imported olive oil, cheese, and other ingredients from Italy and then made sauces, salad dressings, and pastas by hand. The commissary was Louise's central-supply operation, selling its goods to the restaurants.

At first glance, the setup looked surprisingly healthy. The restaurants paid the commissary a price for supplies that left their food costs at 28% to 29% of revenues. "Then December comes rolling around, and the food costs jump to 50%," LeFranc says. "It's like my stomach goes into a knot."

And for good reason. He discovered that the commissary was selling supplies to the restaurants below cost and accumulating losses each month. Then, in December, to erase the $150,000 in losses it had built up all year, it would dramatically raise its prices.

Once he figured out what was going on, LeFranc priced the commissary's products at their true cost. The higher prices pushed up the restaurants' food costs to 35%, and all of a sudden operations didn't look so buoyant.

In May, LeFranc traveled to Italy to meet the suppliers that were at the root of those costs. "They treated us like kings. And I was very polite. I learned a lot, and as soon as I came back I said, 'OK, we're not going to do business with them anymore," he says.

He decided to outsource basic foodstuff -- sauces, dressings, and pastas -- to less expensive American companies, and he shut the commissary down. LeFranc also reduced distributors' deliveries to the restaurants from six to three days a week. With fewer deliveries, transport costs declined, and LeFranc was able to wring out better terms for supplies. The new delivery schedule also helped the accounts- payable department, since it meant fewer invoices, down to about 3,000 a year from 20,000. Finally, LeFranc moved the company's headquarters to West L.A. to be closer to the restaurants and, not incidentally, to cut his rent almost in half.

With the reengineering of supplies, deliveries, and eventually the menu, food costs fell more than 9 percentage points, to around 25.5% of revenues. By November 1998, 11 months after it had emerged from bankruptcy, Louise's was cash-flow positive.

Stopping the bloodletting was one thing. What was less clear was whether LeFranc could create a self-monitoring organization that could survive and grow.

The map
The key to running such an organization was getting accurate information, which at the broadest level meant an income statement. But to get a really detailed plan that might guide the team forward, LeFranc and his managers would have to parse the profit-and-loss statement into hundreds of components and measure each individually. The cost of pizza dough, the wages of a new chef, the price of napkins -- all of it would need to be tallied for each restaurant, creating the detailed contours of an earnings map.

The problem with gathering that wealth of information, however, was that it could be expensive. And LeFranc's top-level staff was lean. He had cut headquarters by about 40%, down to just himself and seven administrators. He didn't like the top-down model anyway, since he felt it stifled initiative and had contributed to the company's troubles. Instead, he wanted managers to become de facto CEOs of their restaurants, using the information they collected to plan and measure their performance. LeFranc would reward the managers based on cash-flow results. For some, the bonuses would push a $55,000 annual salary up to $80,000.

To get his program running, LeFranc taught his team to not just read but also analyze an income statement, not something restaurant managers commonly do. He also put his managers through a time-management course designed by Stephen Covey, author of The Seven Habits of Highly Effective People, and had them set goals for both the company and their own careers. He trained the chefs as well, since they were responsible for food and labor costs in the kitchen. Many of them had worked their way up from entry-level dishwashing jobs. "We had to teach some of them how to use a calculator," says CFO McGehee.

Gazelle's software could find out where the customers lived and shopped and how much they earned and spent. LeFranc was blown away by the technology.

Change didn't come easy. LeFranc brought in management consultant Nancy Bross to teach the managers planning and goal setting. "All I got were blank stares," Bross recalls. In LeFranc's first year, turnover among managers hit 85%.

A few of his employees, however, welcomed the new regime. One of the bookkeepers at the former commissary was a young man named Roger Ortiz, a self-taught whiz at Excel spreadsheets. Impressed by Ortiz's work, LeFranc promoted him from his $10-an-hour job tracking food supplies and trained him as a financial analyst. With McGehee's help, Ortiz began crunching all the numbers that increasingly were letting LeFranc sleep well at night.

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