Leadership Aug 4, 2014

Book Excerpt from Invent, Rein­vent, Thrive

Lar­ry Levy rein­vent­ed his real estate busi­ness as a restau­rant busi­ness, but his biggest suc­cess came when he rein­vent­ed again

Editor’s Note: This is an excerpt from Lloyd Shefsky’s Invent, Rein­vent, Thrive. It has been con­densed with per­mis­sion from the pub­lish­er. Head here for an inter­view with the author, a clin­i­cal pro­fes­sor of man­age­r­i­al eco­nom­ics and deci­sion sci­ences at the Kel­logg School.

Start­ing in the indus­tri­al real estate mar­ket, as a bro­ker and lat­er as a spec­u­la­tor, Lar­ry Levy accu­mu­lat­ed 5,500 acres of land in Chicago’s col­lar coun­ties (the coun­ties abut­ting Cook Coun­ty, where Chica­go is sit­u­at­ed). There he switched his focus from indus­tri­al real estate to office build­ings, first as part of the Hawthorne Group, where he became pres­i­dent at age 28, and then, in 1978, as founder of the Levy Organization.

Lat­er, Lar­ry acquired a valu­able piece of land at the cor­ner of Michi­gan Avenue and Oak Street in Chica­go. This prop­er­ty is at the pre­ferred end of that stretch of Michi­gan Avenue known as The Mag­nif­i­cent Mile,” which runs from the Chica­go Riv­er to Lake Michigan’s Oak Street Beach. That mile-long stretch of Michi­gan Avenue hous­es the best shop­ping in Chica­go, and the choice prop­er­ty that Lar­ry acquired became the One Mag­nif­i­cent Mile Build­ing, hous­ing offices, con­do apart­ments, retail stores, and restau­rants. It was gen­er­al­ly referred to as One Mag Mile.”

Around the same time, Lar­ry decid­ed to invite his broth­er, Mark, to join him in open­ing a restau­rant, D.B. Kaplan’s, a Jew­ish-style del­i­catessen. Restau­rant oper­a­tors almost always seek street-lev­el loca­tions. But Levy opened the restau­rant on the top retail floor — the sev­enth — of Water Tow­er Place, a unique, new ver­ti­cal mall on Michi­gan Avenue.

Lar­ry brought his moth­er to Chica­go to man­age the restau­rant and do the cook­ing. She did a great job. The deli soon became prof­itable. Even the pecu­liar sev­enth-floor loca­tion turned into an asset. It became the in thing” to ride the glass-enclosed ele­va­tor to the top floor and then ride the esca­la­tor down, floor by floor, to see what new stores had opened since the last visit.

Water Tow­er Place became Chicago’s num­ber one tourist attrac­tion. The Levy team gam­ble had paid off. The Levy Orga­ni­za­tion was reward­ed for its will­ing­ness to take risks. The firm was grant­ed the right to open four more restau­rants in the build­ing. Larry’s firm thrived.

Cycli­cal­i­ty and Vul­ner­a­bil­i­ty — Huge Dis­trac­tions

The time was 1978 – 1979. To build One Mag Mile, Lar­ry had bor­rowed $100 mil­lion at an inter­est rate of prime plus one — 1 per­cent above the prime rate. That meant that as the prime rate rose, so did the inter­est rate on Levy’s build­ing loan. Even­tu­al­ly, the prime rate went to 20 per­cent, so Larry’s rate was 21 per­cent. In addi­tion, the high rates made it dif­fi­cult for peo­ple to get mort­gages need­ed to buy con­dos and for busi­ness­es to afford new leases.

Even­tu­al­ly nor­mal­cy returned, and One Mag Mile filled up. But as the econ­o­my improved, new multi­use build­ings on Michi­gan Avenue attract­ed tourists and local folks too, all of them cran­ing their necks to see the newest iter­a­tions of retail out­lets and restau­rants. These were all com­pe­ti­tion for Larry’s Water Tow­er eater­ies. Essen­tial­ly, the restau­rant busi­ness was broke.

I tell my stu­dents that I believe in luck but don’t rely on it, pre­fer­ring to make my own luck and to be ready to pounce when luck appears. At just the per­fect time, Lar­ry was approached by Jer­ry Reins­dorf, a suc­cess­ful for­mer real estate developer.

Reins­dorf and some of Chicago’s most promi­nent peo­ple bought the Chica­go White Sox base­ball team in 1981. Reins­dorf asked the Levy Orga­ni­za­tion if its peo­ple would cater Comiskey Park’s sky box­es with food pre­pared in the group’s Water Tow­er Place restau­rants the day before each game.

To that Levy replied, No, we don’t do that. We’re not an insti­tu­tion­al food ser­vice provider.” Lar­ry felt the orga­ni­za­tion should only do what it was good at. Besides, rewarmed, day-old food wasn’t accept­able in the group’s restau­rants. There­fore, it wouldn’t be tol­er­at­ed by peo­ple pay­ing small for­tunes to rent sky box­es for what he saw as insu­lar indoor seats that deprived them of a true ball­park experience.

Reins­dorf con­tin­ued to pur­sue the Levy Orga­ni­za­tion, explain­ing that the new team own­ers were com­mit­ted to spend­ing big mon­ey on good play­ers. They would bring the World Series to Chica­go, and Lar­ry would have front-row seats. Final­ly, Lar­ry gave in. He agreed to cater the sky box­es with day-old food trans­port­ed in vans with reheaters.

At the Ball­park, Day-Old Food Is a Gourmet Treat

The fol­low­ing year, the White Sox built 17 more sky box­es, and of course Reins­dorf asked Levy to cater those too. By then, the Levy Orga­ni­za­tion real­ized that it had made a sig­nif­i­cant prof­it on the sky box cater­ing busi­ness. With 34 box­es, the prof­its were over a quar­ter mil­lion dol­lars. What’s more, the fans were rav­ing about the food. You peo­ple are genius­es. The food is great, sen­sa­tion­al,” was what they heard in the media and on the street. It was still day-old food, and the Levys knew it wasn’t up to their restau­rant stan­dards. But they came to real­ize that the rea­son for the rave reviews was the fans’ low-lev­el expec­ta­tions for ball­park food.

The Levy Orga­ni­za­tion held a man­age­ment retreat that year, at which the inter­nal finan­cial peo­ple said the cost of build­ing a restau­rant was $1.5 mil­lion. If the restau­rant worked real­ly well, it could yield a half-mil­lion dol­lars a year. And if it didn’t work well, the $1.5 mil­lion build-out, plus net oper­at­ing loss­es while open, would be lost to Levy and/​or the Levy investors.

What the man­agers real­ized was that one bad restau­rant off­set the prof­it of more than two good ones. And the restau­rant indus­try is known for hav­ing far more losers than suc­cess­es. On the oth­er hand, they not­ed that the alter­na­tive — cater­ing sports and enter­tain­ment venues — entailed very lit­tle invest­ment while yield­ing very large profits.

At the same time, still more Chica­go build­ings were erect­ed. The build­ings’ new restau­rants even more adverse­ly affect­ed the sales at Levy’s Water Tow­er Place restau­rants. Lar­ry and Mark fol­lowed their exec­u­tives’ lead and began explor­ing pos­si­bil­i­ties in the sports are­na business.

Between 1982 and 1987 in addi­tion to Comiskey Park, the Levy Orga­ni­za­tion won the cater­ing con­tracts for Wrigley Field and McCormick Place (the Chica­go con­ven­tion cen­ter), Arling­ton Race Track, the Lin­coln Park Zoo, and Ravinia, a sub­ur­ban Chica­go con­cert facility.

Levy began serv­ing Ravinia in 1982, when he bought Hillman’s, a cater­ing com­pa­ny that owned the Ravinia cater­ing con­tract at the time. Levy real­ly bought Hillman’s for its down­town Chica­go real estate, which had housed Hillman’s retail store for over 50 years. But Levy had acquired a far more valu­able asset, the Ravinia cater­ing con­tract, for $1 more.

We made a con­cert­ed effort,” Lar­ry said, to win what became a new wave of sports facil­i­ties being built around the coun­try.” They opened the first three in 1994, and then there was just an incred­i­ble wave of oth­ers,” Lar­ry said. We wound up, in a very short peri­od of time in Cleve­land, Kansas City, St. Louis, Port­land, Orlan­do, Los Ange­les, Atlanta, Den­ver, Mia­mi … We even thought about going pub­lic. We got to 20 per­cent mar­ket share very quick­ly. And we got to 50 per­cent mar­ket share before I sold the com­pa­ny. And now it’s even more.”

Coin­ci­den­tal­ly, the Dis­ney Com­pa­ny decid­ed that it could improve its food offer­ings by let­ting restau­rant com­pa­nies bid for the right to own and oper­ate their own restau­rants in Dis­ney World. The Levy Orga­ni­za­tion won the com­pe­ti­tion and even­tu­al­ly built three restau­rants there. The three were, accord­ing to Lar­ry, wild­ly suc­cess­ful and wild­ly prof­itable.” The Levys of course real­ized belat­ed­ly that they had entered a total­ly new type
of busi­ness.

It was obvi­ous to Lar­ry that the stand-alone restau­rant busi­ness was high risk. Instead of rely­ing sole­ly on their abil­i­ty to attract patrons to restau­rants they owned, they relied on oth­ers — sports teams and theme parks — to pro­vide the cus­tomers. They did so with con­sis­ten­cy and pre­dictabil­i­ty. The sports teams and theme parks increased rev­enues and decreased costs.

One of the rea­sons for the high prof­itabil­i­ty was that Dis­ney had many of the same char­ac­ter­is­tics as the sports busi­ness,” accord­ing to Levy. And anoth­er rea­son was that our ser­vice entailed Chica­go hos­pi­tal­i­ty. We real­ly care about the guests, where we win one cus­tomer at a time, and where you don’t treat the cus­tomer like a cap­tive audience.”

Giv­en the his­to­ry of oth­ers’ poor results in cater­ing hot dogs at sports venues and the result­ing low expec­ta­tions meant that Levy could real­ly change the par­a­digm of a sports team owner’s expec­ta­tions. In addi­tion to the improved finan­cial results for the Levy Orga­ni­za­tion, cus­tomers were hap­pi­er. As one might expect, each new are­na and sta­di­um ele­vat­ed expec­ta­tions. Yet, Levy was able to far exceed even those expectations.

The sports venues would have seemed daunt­ing to some — Levy was com­pet­ing against six well-estab­lished food com­pa­nies, includ­ing Ara­mark, Vol­ume Ser­vices, Ser­vice Amer­i­ca, and Delaware North. Yet, the risks were actu­al­ly low. The com­peti­tors, accord­ing to Levy, were not con­cerned with food and ser­vice qual­i­ty. Lar­ry feels they were all old busi­ness­es; they were all run by hacks at the time. They knew how to count the beer cups so that nobody would steal, and they knew how to make a warm hot dog, not a hot hot dog. And the buns were served right before they went stale. And basi­cal­ly, over the peri­od of a year we learned that this was a huge oppor­tu­ni­ty.” Around that time, the name of the com­pa­ny was changed from The Levy Orga­ni­za­tion” to Levy Restau­rants,” a clear indi­ca­tion of which side the group’s bread was but­tered on as well as a bet­ter brand for its grow­ing facil­i­ties cater­ing business.

Levy notes that as a land devel­op­er he ben­e­fit­ed from his under­stand­ing of the eco­nom­ics of real estate. And the eco­nom­ics of a new base­ball sta­di­um was about spe­cif­ic real estate — the pre­mi­um (club and sky box) seats and spe­cial restau­rants that served them. Those old cater­ing com­pa­nies, the old estab­lish­ment of the indus­try, were not capa­ble of pro­vid­ing com­pet­i­tive food and service.

We learned that the demand cre­at­ed total­ly elas­tic pric­ing. You could charge just below goug­ing. And in this sky box busi­ness, the per­son pay­ing for it is not present. The peo­ple in the box, in almost all cas­es, were the best cus­tomers of the com­pa­ny that leased the box. The most impor­tant per­son in mak­ing a sale, a pre­sale of lots of food and bev­er­age, was the sec­re­tary to the lessee’s CEO.”

Art­work by Yev­ge­nia Nayberg

Featured Faculty

Lloyd Shefsky

Clinical Professor of Family Enterprise, Co-Director of the Center for Family Enterprises

About the Writer

Lloyd Shefsky is a Clinical Professor of Managerial Economics & Decision Sciences and Co-Director of the Center for Family Enterprises at the Kellogg School.

About the Research

Shefsky, Lloyd. Invent, Reinvent, Thrive. New York, NY: McGraw-Hill, 2014.

Read the original

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