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Southern California Spotlight; Foodmaker Inc. Isn't Clowning Around

Restaurants: Written Off After 1993's E. coli Outbreak, Jack In The Box is Back.

Rather than withering - as many had predicted - Foodmaker has revived itself through a combination of crisis-management moves, new food-safety standards and savvy marketing.

In fact, Jack In the Box is now the fifth biggest burger chain in the nation, with 1996 sales of $ 1.2 billion, up 8 percent from 1995, according to Chicago-based consultant Technomic Inc. Anaheim-based CKE Restaurants Inc. is No. 4.

Foodmaker has more than 1,250 Jack In the Box restaurants in 12 states, mostly in California and Texas. Some 70 percent of them are owned by the company, rather than franchisees. Next year, it plans to add 100 more restaurants.

This month, Foodmaker reported fiscal third-quarter earnings of $ 10 million, up 82 percent from a year earlier. Even more impressive, Foodmaker's same-store sales at its company-owned restaurants (a key retail benchmark measuring the performance of stores open for more than a year) grew a sizzling 7.7 percent, the 10th consecutive rise amid a rather sluggish restaurant environment.

Wall Street has noticed, too, bidding up Foodmaker stock to close at 17.5625 per share Friday, from a 52-week low of 7.75 on Dec. 20. The only real weak spot, analysts say: $ 350 million in long-term debt, related to management's 1988 buyout of Foodmaker from Ralston Purina Co.

To be sure, Foodmaker's turnaround from butt of jokes to fast-food phoenix wasn't ordered up overnight.

"We believed that we could recover from it in a relatively quick time, but we miscalculated," says Robert Nugent, Foodmaker's president and chief executive. The impact "was greater and longer than anyone had expected. "

Indeed, the company just settled the case of a 9-year-old Everett, Wash., girl sickened during the outbreak, right before it was set to go to a jury this month. Terms weren't disclosed. In addition, Foodmaker is scheduled to go to trial in San Diego County Superior Court next month in its suit against Safeway Inc.'s Vons Co. unit, asserting that Vons' wholesale division sold it the contaminated meat that set off the E. coli crisis. Vons has countersued Foodmaker over allegedly harmful statements made by Foodmaker.

But in the vast majority of cases, Foodmaker has acted to put the crisis quickly behind it. In July 1993, the company settled a class-action suit by its franchisees over the bacteria outbreak for about $ 44.5 million, most of which was charged against earnings in the year ended Oct. 1, 1993. Foodmaker also settled a shareholder class action for $ 8 million early in fiscal 1995.

Most important, it immediately accepted blame for most of the deaths and illnesses linked to its tainted food, settling with about 500 victims to date for amounts ranging from thousands of dollars to $ 15.6 million.

"We remain very sorry for what happened," Nugent says.

William Marler, a Seattle lawyer who represented many of the victims and their families, gives Nugent (who was then chief operating officer) and then-Chairman and Chief Executive Jack Goodall high marks for limiting the fallout from bad publicity.

"They did the right thing," says Marler, who is now representing people who are suing Half Moon Bay-based Odwalla Inc. over illnesses allegedly related to a bacteria outbreak in its fruit juices last year. He notes that Goodall and Nugent often attended mediation hearings in person.

Of course, expressing remorse wasn't enough; the company also had to get back on track. But rather than shaking up the executive suite, as often happens after a corporate crisis, Foodmaker turned again to Goodall and Nugent. With more than 40 years at Foodmaker between them, they were seen as the key to a comeback.

They started at square one. When you run a restaurant chain whose customers died from eating the food, "you re-examine the way you do everything," Nugent says.

Enter Dr. David Theno, then an independent food-safety consultant from Modesto and now vice president of quality assurance and product safety for Foodmaker. A week after the crisis, Theno began investigating where Foodmaker bought its food, how it was distributed and how it was prepared.

"In tragedies, the natural tendency is to hide out," Theno says. But "from minute one, we determined that we wanted to recover our business. "

Most noteworthy was Theno's adoption of a food-handling program developed by NASA in the 1960s to ensure sterile food for astronauts. The system _ known as "hazard analysis critical control points" _ tracks food from the supplier to the restaurant by monitoring temperatures in delivery trucks and providing restaurant employees with priority checklists for everything from scrubbing equipment to handling food. Timers are used to determine how long food is cooked on each side. And for burgers, chefs now also are required to pierce the center of any patty to check the color before taking it off the grill.

For years, other restaurant operators and meat suppliers had considered such a strict protocol too time-consuming and costly to be used by quick-service chains, Theno says. But after Foodmaker's success, the system has been endorsed by the U.S. Department of Agriculture and the Food and Drug Administration.

In addition to setting new standards for food safety that are now being copied by other restaurant chains with cooperation from meat suppliers, industry experts also credit Foodmaker for not fixing what wasn't broken: its eclectic menu, which includes such varied items as Philly cheese-steak sandwiches, egg rolls and tacos that appeal to adult fast-food junkies. And then there's Jack, the ambulatory ping pong ball that's the anchor of the company's masterful marketing.

About 17 years ago, Foodmaker discarded its original Jack in TV ads to illustrate a point: It wasn't a kids' chain, like its larger rivals. But without Jack, the ads fell flat, concedes Brad Haley, Foodmaker's vice president of marketing.

Now, though, Jack is definitely back.

"It really is catching the consumer's attention _ the heavy fast-food eater in particular," says Robertson Stephens analyst Andrew Barish, who credits the mascot with lifting sales of the company's costlier fare.

(CHART) FOODMAKER INC. Business: Parent company of the Jack In the Box chain of fast-food restaurants. Foodmaker owns or franchises more than 1,250 restaurants throughout the West.

Employees: 24,800 Leadership: Robert Nugent, president and chief executive; Charles Duddles, chief financial officer.

Stock: $ 17.56, up 90% in a year Finances: Earned $ 20.1 million in fiscal 1996 on revenue of $ 1.05 billion compared with a loss of $ 69 million in 1995 on revenue of $ 1.01 billion.

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