Value Added: Making Money From Fast Food

Here's Tom Heath's latest column on Washington's successful business people:

I can't get enough of the fast food business, so I recently phoned Bob Phillips, president of California Tortilla Group, one of the fastest growing chains in the Washington region.

Cal-Tort, as the employees and regulars fondly refer to it, has 37 stores up and down the East Coast, starting with its flagship in downtown Bethesda.

I am not a regular, but I have eaten at the Bethesda Cal-Tort on dozens of occasions over the last 10 years. I live in Chevy Chase, Md., and my wife, Polly and I love the cheese quesadillas with jalapeno peppers. I also order the crispy beef taco, upon which I amply sprinkle some spicy Texas Pete's hot sauce. That last sentence construction sounds like Yoda talking.

Anyway. Yum.

Bob Phillips, president of California Tortilla Group, chats with regulars Socorro Rojas, left, and Briana Tavernier, at the Arlington franchise. (By James A. Parcell For The Washington Post)

Bob lives in Potomac and is an accountant by profession. He is an avowed entrepeneur and the fast-food business is in his blood. He is a Wharton grad, so he has some business chops. He is easygoing. He owns a Broadway Pizza in Potomac, Md., and a Ranch 1 at National Airport. I wrote about him and Cal-Tort's ambitious expansion efforts in the Washington Post business pages just a few months ago.

So Bob, how is the Mexican fast-food business?

"It's good. People are trading down from more expensive meals, so our segment is going to be okay," said Bob.

(Readers take note: Coca-Cola, of which I own a little more than 100 shares, said its U.S. restaurant sales had dropped 3 percent because cash-strapped consumers were eating out less.)

I asked Bob what he would tell a budding, fast-food entrepreneur.

"I would certainly tell them to make sure they have sufficient capital. That seems to be the biggest reason restaurants fail. They don't give them enough time to succeed. Some locations take off immediately, some locations you have to nurture for a while. What you don't want to do is be undercapitalized."

Bob had some more advice, which reminds me of what my wife and I say to each other when we visit a restaurant or fast-food joint where the service is great, people treat you well and the food is pretty good. "Owner on premises!"

"You don't want to be an absentee owner. You don't want to make an investment in a fast-food business and then rely on a hired managment team to run it for you. It's best when you are actively involved. Nobody will care like the owner. Our motto is to never lose a customer. Your employees need to see it and understand it. The restaurant business is a thousand details," Bob said.

I caught him on his cell phone as he was tooling around the Beltway in his Acura, looking for a gas station. He had just got off the train at New Carrollton, having returned from Philly where he was checking out some Cal-Tort franchise locations.

Bob said the chain is going fine, and he hopes to increase the number to 50 stores by the end of the year. Like I said, they have 37 now. And they are opening one soon in Oakton in Fairfax County. I used to live in a garden apartment in Oakton, and I remember driving down Route 123 to Vienna, where there was a delicious Mexican restaurant whose name I don't recall.

"I'm staying focused," said Bob.

"Focus" is one of my favorite words. Brains, money, talent are great but overrated. Persistence is everything. And focus is part of persistence.

Bob has made lots of money from his franchises. He has made money for his partners, too. Like Hyman Roth's henchman in The Godfather Part II said, "Hyman Roth always made money for his partners."

Not that Bob is a mobster. But he is a good businessman.

"I set up the deal with the anticipation of a 20 percent return annually. That is on track. The key to having a good partnership with investors is to make sure expectations are aligned. A 20 percent return to someone expecting 50 percent is horrible. A 20 percent to someone expecting 10 percent is fabulous. I have had investors with me since 1986. In particular, two school teachers who have been with me since then have done very well. They are retired. I would like to take credit for their success, but it's due more to the New York City School System. They are fabulous investors."

Bob said they originally invested around $30,000 to $40,000 with him. They have rolled most of the money into 10 or 12 "deals" with him. Wow. Think of what 20 percent a year would bring you if you compounded it over 20 years!

Let's do the math. If the guy or woman invested $30,000 in 1986, 20 years later at 20 percent they would have around $1.1 million. That's assuming all the profits and earnings were reinvested and they paid any taxes out of other money.

So any investment advice Bob?

"I love Apple. It's probably overvalued but it's such a great company. I believe in the Peter Lynch school of investing (Lynch is the legendary former head of Fidelity's Magellan Fund.) Lynch said see what's busy in the mall. You go to a mall and everything is dead and there are 50 people in the Apple Store."

"I would tell people to invest in what they know. Every time I sway from that sentiment, I tend to get burned."

"I used to play the market. Now I buy mutual funds and I try not to look too often and I would rather not sell. I buy it and ignore it. That's the only way to stay in the game. I am trying to teach my daughter the value of investing and it's a hard sell. She thinks it's gambling."

So what funds are you in?

"I have the Legg Mason Value Trust," which is run by another legendary investor, said Bob.

The Legg Mason Value Trust is run by Bill Miller. Miller is the guy who beat the S&P 500 for 15 years straight. Quite an accomplishment. His streak ended in 2006 and he didn't beat the S&P 500 last year either. He could have an uphill battle this year, with the market in turmoil and with Bear Stearns, one of his holdings, all but disappearing in the last few days. Miller, though, could have a big day if Microsoft buys Yahoo for a big premium. Andy Serwer wrote a pretty cool profile of Miller in last November's Fortune Magazine. For all you casual investors - or even serious ones - who love devour stuff on Buffet, Rainwater and the other Money Masters, it's a fascinating look at how Miller thinks. He goes "against the crowd," to say the least. He reads wonky texts about how people and groups make decisions and all sorts of behavioral stuff like that.

Bob said he has been in the Legg Mason Value Trust, which searches for undervalued and unnoticed stocks that will blossom with time, for about eight or nine years. "I also have some of the large cap American funds. Very few foreign funds. Foreign funds require taking time to analyze it and I haven't really have the time."

Bob is spending much of his time building his business.

Any last nuggets of investor wisdom?

"I try to live beneath my means."

By Dan Beyers  |  March 18, 2008; 12:00 PM ET  | Category:  Value Added
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Best of luck to Bob! Tom, you should try Z Pizza, a new-to-DC franchise to the DC area as well -- doing great, won Washingtonian Best Pizza award, etc. GOOD STUFF!!

Posted by: ALD | March 18, 2008 3:30 PM

Dear ALD.
I LOVE pizza. It may be my favorite food. I have not heard of Z Pizza. I live in Bethesda and am a big fan of Pines of Rome's pizza. I also tried some Mama Lucia last week and that was good too. Anybody out there know where there is a Z Pizza shop? I heard Comet Pizza is good too. I saw a store on Connecticut Avenue near the intersection with Nebraska, I think.

Posted by: tom heath | March 18, 2008 4:04 PM

5 out of 10 of the wealthiest people I know made their money in fast food franchises. But you'd think that the market would be so oversaturated by now (no pun intended). How do they all survive? Someone must be losing marketshare.

Posted by: elf | March 18, 2008 5:04 PM

Tom, I also live in Bethesda and love Pizza (too much). Love Pines of Rome and Mama Lucia also and I eat at Z pizza near my office in Falls Church. It is thin like Pines and they have interesting toppings while mostly being a carryout. Its OK and way better than the delivery pizza's but I am told by friends that the best pizza in the area is Vace Italian Delicatessen on Miller Ave in Bethesda. I will go there soon after I have another Cal Tort Burrito.

Posted by: Kenny F | March 18, 2008 5:10 PM

Thanks, Tom. It is refreshing to see someone in the restaurant business who has had a long run of successes but still cares about quality, not just rolling out new franchises. Forget Philadelphia, Bob -- Please come to Centreville!

Posted by: Chris | March 18, 2008 5:23 PM

Comet Pizza on Connecticut at Nebraska is great - and has the added benefit of being a ping-pong parlor. What's not to like?

Interesting blog; I wonder how he'll keep his focus in this period of rapid expansion??

Posted by: Ann | March 19, 2008 10:01 AM

hey kenny. i have had vace and you are right. it is very good pizza. problem is, i never get it fresh. its always warmed up after sitting on the counter. pepperoni. yum. i am not sure that i will go all the way to falls church for Z Pizza. need something closer like pines, which i love and had wednesday night, which is PIZZA NIGHT in heath household. my yellow lab, Babe, best darn dog in the world, loves Pines too.

Posted by: tom heath | March 21, 2008 7:35 PM

elf. good point about the fast food expansion. i think the market share comes at the expense of home cooking. as more husbands and wives both head into workplace, they are less likely to want to cook when they get home. so they eat out. there is also the fact that the population is expanding. more people, more meals. and look at those prices at the grocery stores. expensivo. sometimes its cheaper to buy a restaurant steak than buy some of those cuts at whole foods and balducci's, both of which i love.

Posted by: tom heath | March 21, 2008 7:39 PM

chris. you mean you don't have good pizza or fast food in centreville? by the way, anybody know what happened to black eyed pea? i ate there all the time when it was on Route 123 in downtown fairfax. did they all close? i loved their chicken fried chicken and, what else, their black eyed peas.

Posted by: tom heath | March 21, 2008 7:43 PM

one other thing. norman dreyfuss called me today. he is a washington area real estate investor/businessman who is also the main producer of Under the Same Moon (La Misma Luna) which got rave review in today's Wall Street Journal. Joe Morgenstern loved it. I saw this film last week at a premiere in DC because I wrote about it and Norm a year ago at the Sundance Film Festival, where it premiered. Norm has a real tiger by the tail here. this movie is hot and going places. I bet he makes a ton of money. He told me he already has doubled his investment. My guess is he $1 million ahead, but that's just a guess. Nice guy too. I recommend the film, not just because of Norm. It has a nice story and great acting by the little kid in the film. Norm's son is an agent and helped put the film together. Norm and his son have another movie coming out later this year, called Red, about a guy whose dog gets killed by some neighborhood wise guys. The dog's owner is played by Brian Cox, a wonderful actor who was in The Bourne Identity and sequel. Cox was also excellent in Troy. Norm said Red is good but not as feel-good as Las Misma Luna. We will see. I love dogs and don't want to see a movie about one getting hurt. Any Brian Cox fans out there? The Bourne movies are some of my favorite action films.

Posted by: tom heath | March 21, 2008 7:53 PM

Great article! If you're looking for good restaurants in the area check out Great selection of places to eat and great site. Available also in 8 languages.

Posted by: Leo | March 26, 2008 4:46 PM

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