Silver Diner Inc. built a business around 1950s nostalgia, with pink-lipsticked waitresses carrying steaming plates of meatloaf in an old-time diner atmosphere.
But Silver Diner's current troubles are all too modern.
Flush with cash from an initial offering of stock, the Washington area chain bungled a 1997 expansion by dotting the Northern Virginia landscape with so many restaurants that it cannibalized its own business.
After two years of retrenching and investor resentment, Silver Diner executives--who 10 years ago helped pioneer the modern "theme" restaurant concept--plan to serve up a new expansion plan and finally prove they can create a viable restaurant chain.
"There's no question that people love the diner concept," said Robert T. Giaimo, chief executive and co-founder of Silver Diner. "Diners are eternal. The issue is, how do you replicate them as a chain? No one has done a full-service, successful national diner chain in America yet."
After halting new construction for two years, a diner is scheduled to open in Virginia Beach next spring. Later that year, Giaimo wants to open a restaurant in Richmond and another in a yet-to-be-disclosed spot in the Washington area.
Over the next several years, Silver Diner wants to fill in the Hampton Roads area of Southeastern Virginia with diners in Chesapeake and Newport News, and move into the North Carolina market with restaurants in Raleigh, Charlotte and Greensboro. Giaimo has raised the possibility of opening franchised diners.
To help finance the expansion, Rockville-based Silver Diner recently secured a $3 million loan commitment from North Carolina banker BB&T Corp.
Despite Giaimo's excitement, the investment community remains cautious, foreseeing little improvement in Silver Diner's finances in the near future. In 1998, the chain lost $1.9 million on $28.6 million in sales, and continued to lose money through June of this year. Its stock now trades at less than a dollar per share on the Nasdaq market, down from a high of $7.87 1/2 in April 1996.
Hoping to prop up the shares, a group organized by Giaimo bought approximately $1 million of Silver Diner's stock in June. The gambit worked at first, but the share price has slumped once again. Giaimo has taken his hits with the stock's collapse; he and his wife, Catherine Britton, own about one-third of the company.
Some in the investment community think the stock belongs where it is.
"I can't at this point call it undervalued," said Mitchell Pinheiro, an analyst with the investment firm Janney Montgomery Scott in Philadelphia. "Shareholders certainly have the right to be frustrated."
There is some good news. Same-store sales--an industry barometer that compares year-to-year sales of stores open at least two years--have steadily risen as the diners have grown in popularity. In the second quarter ended July 18, same-store sales grew 6 percent.
Yet Giaimo and his management team have not proven they can build diners that provide an attractive return on investment.
Not only must Silver Diner prove that it can grow sales, it also must show that it can consistently pick out good locations--perhaps the single most-important element of any chain's success--establish training programs and develop efficient restaurants, industry observers said. Otherwise, people considering opening a franchise will look past Silver Diner, they said.
"There are over 200 food concepts they will be competing with--everything from fast foods to quality dining," said Don DeBolt, president of the International Franchise Association. "Ultimately, they've got to show that these businesses can make a profit."
However, DeBolt is more optimistic about Silver Diner's future. In one of the toughest industries around, both upstart and established restaurant chains have managed to resuscitate themselves after making nearly fatal errors.
Silver Diners are designed to look as if they were built in 1955, but it wasn't until 1989 that founders Giaimo and Ype Von Hengst, now the company's vice president and executive chef, created the first Silver Diner on Rockville Pike. The corporate offices are still tucked away in the cramped basement of the restaurant.
After going public in 1996, Silver Diner embarked on an expansion that turned out to be a setback. The growth included four new locations in the Washington area and one in Cherry Hill, N.J., in 1996 and 1997.
Overexcited about its new diner design, the company spent lavishly on extras like custom-made mahogany paneling and curved Formica ceilings in pastels. Today, executives acknowledge that the restaurant's "prototype"--a larger and more costly diner--should have been left on the drawing board. Each new diner accommodated about 230 people, but the extra seats were never filled. The company also paid an average of $1.8 million to build each restaurant, spending comparable to family-style chains like Applebee's Inc. and T.G.I. Friday's.
"It was art for art's sake," Giaimo said. "We're not making that mistake anymore."
Giaimo says executives have managed to lower the cost of building a Silver Diner to $1.4 million by designing smaller restaurants and having decor mass produced instead of custom made. The company also streamlined its menu to make the kitchens operate more efficiently in a bid to boost margins.
Business: Operates 11 restaurants; 10 in the Washington-Baltimore area and one in Cherry Hill, N.J.
Origins: First Silver Diner opened for business in 1989 at the Mid-Pike Plaza in Rockville
Chairman and chief executive: Robert Giaimo
1998 sales: $28.6 million
1998 net loss: $1.9 million
Ticker symbol: SLVR on the Nasdaq
Web address: www.silverdiner.com
SOURCES: Hoover's, Bloomberg News