Running head: THE LUBYS FINANCIAL ROLLER COASTER

The Lubys Financial Rollercoaster

An Analysis of the External and Internal Factors at Play
Daniel P. Spencer
University of Texas at Dallas

Executive Summary
The financial performance of Lubys, Inc. (formerly Lubys Cafeterias, Inc.)
appears to be struggling to make ends meet. The financial health of the company shows upward
progression, but at the cost of high expenses leaving a narrow profit margin (Exhibit A). Stock
performance also indicates a drop in value closer to the levels it experienced during its financial
recession (Exhibit B). Despite a recovering economy, the firms output has barely exceeded its
inputs and the most recent financial data records a profit loss. The external and internal factors at
play are analyzed at length to give some insight into plausible explanations with possible
strategies to turnaround the firms performance.

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Introduction
If you use your imagination while looking at the financial lines plotted on Exhibit A, you
might possibly visualize what looks like a rollercoaster track. The 1990s escalates up to a peak
and then the coaster is released down the early 2000s drop before climbing back up and then
dropping again around the economic meltdown at the end of the decade. The coaster once again
picks up to a climb, but where it ends gives mystery to its next move. Will the coaster continue
the climb or is another drop in sight for the Lubys financial rollercoaster?
The firm, Lubys, Inc. (formerly Lubys Cafeteria, Inc.), opened its first doors in 1947 in
the San Antonio market. It was the post-World War II era, and there was skepticism as to
whether a cafeteria layout would appeal to veterans who vowed never to stand in lines again
once back in a civilian life. But through the efforts of founder Bob Luby and his cousin Carl
Johnston, and the support of family members, the firms performance and popularity proved the
skeptics wrong (Dawson, 2006).
For the first fifty years, Lubys grew slowly and steadily with each new operation fully
funded with internal resources. Managers were trained internally with many who had worked
their way up and knew what efforts it took from each person. Board member majority consisted
of food people, and decisions made were focused on operations and customer satisfaction. The
financials (Exhibit A) and stock trends (Exhibit B) confirm the success of the original value
chain priorities, but all of that melted away in the mid 1990s when leadership drastically
changed (Dawson, 2006).
By the mid 1990s, board members began to trend towards supporting value chain
activities like accounting, and the focus began to change from operations to financial greed. In
addition to the changes in board structure, the last of the original founding family retired from

THE LUBYS FINANCIAL ROLLER COASTER

the board and the company fell into the hands of outsiders. Priorities shifted from internally
funding expansion, to taking out large amounts of debt and massively increasing the number of
operating locations. Amidst declining stock, in 1997 the firm suffered a private loss when the
current CEO committed suicide on the premises that the company was headed towards disaster.
The news shocked both stakeholders and shareholders, but the worst was still yet to come
(Dawson, 2006).
Lubys board continued to fail its shareholders when it appointed the next CEO, an
outsider from the retail industry, who had played a role in steering a previous company into
bankruptcy. Under new leadership, changes were made to the value chain primary activities that
severely compromised quality. A shift from prepared-from-scratch food to pre-packaged, frozen
items, cuts to building maintenance funding, and a move from a 40% store performance
reimbursement to a slashed, set salary for managers, sent many of the legacy team to jump ship
leaving unskilled personnel to take over local management (Dawson, 2006).
Within a three-year period from 1997 to 2000, stock value dropped so low that retirement
plans shrunk 74%. Under pressure, an outside consulting firm was retained for evaluation and in
September 2000, under their advice, the CEO was asked to resign. Despite horrible financials
and swiftly dropping stock, he was offered a golden parachute severance package of $473,540
(his previous years salary) and a debt retirement of $127,000 (Dawson, 2006).
By 2001, a majority of stock had been purchased up by the Pappas brothers, and in March
of 2001 they announced acceptance of stock options as their compensation for their positions as
CEO and COO. The challenge was now on with a turnaround strategy to bring back up the
performance of the firm. Realizing the impact of the 1990s expansion, the Pappases knew that
damage control was going to be needed. More stores had to close and more employees had to be

THE LUBYS FINANCIAL ROLLER COASTER

let go before the company could repair itself from the financial damages. The struggle continued
through 2003 when stock hit its all-time low (Exhibit B), but by the third quarter of 2004, the
company saw a 4.8% earned increase for the first time in years (Dawson, 2006).
The recovery had been hard and the losses had been drastic, but finally the company was
on an upward trend. Slowly and steadily, the next few years came with added concepts, such as
self-serve and buffet layouts and the reception seemed positive (Dawson, 2006). Unfortunately
the good times were cut short with the economic recession that hit hard at the end of 2007
(NBER, 2012). Once again the firm performance began to drop again with the lowest
performance hitting in 2010. In that same year, Lubys announced its intent to acquire
Fuddruckers (Dealbook, 2010) which gained them horizontal integration into the fast-food
markets. The new expansion provided an instant increase in sales and expenses, however profit
margins were slim and continued to be so until 2014, when another year of loss was reported
(Exhibit A) and stocks began to drop again (Exhibit B). Analysis of the factors at play show that
the economic environment, the political environment, the industry rivalry intensity, and
limitations on competitive advantage have the biggest impacts on the firms performance.
External Analysis
General Assessment of Environment
Review of the general environment is a helpful way to gain insight into key factors that
have an influence on the performance of any firm operating within it. One of the most notable
factors to affect many industries is the overall economic performance, which in recent past
displayed a major recession beginning December 2007 and hitting its lowest point in June 2009
(NBER, 2012). During this time the economy suffered high levels of unemployment, large scalebacks, and Lubys was not immune. According to their annual filings with the U. S. Securities

THE LUBYS FINANCIAL ROLLER COASTER

and Exchange Commission (n.d.), store location counts dropped from 128 in 2007 to 119 by
2009. The 19-month recession required Lubys to close down 9 locations and lay off the
employees associated with them. Graphical representation of the economic effects confirm the
influence in a very steep and uncharacteristic drop in sales, expenses, assets, and store locations
(Exhibit A).
The political influence on the general environment has also left a mark on Lubys. As
they claim in their 2014 annual report, [w]e are subject to the risks related to the provision of
employee health care benefits (p. 11). The most notable political involvement with health care
related issues involves the passing of the Patient Protection and Affordable Care Act and Health
Care Education and Affordability Reconciliation Act. Signed into law March 2010, the act calls
for phases of implementation that have impacts on U. S. businesses. The law imposes mandates,
requirements, and penalties for both individuals and employers that, over time, feature increased
expenses/penalties. While Lubys (2014) claims their anticipated peak of expenses will occur in
the second quarter of 2015, review of Exhibit A financials shows a very small gap between sales
and expenses beginning in the year of the law passing. While Lubys experienced hardships in
the late 1990s and early 2000s, those hardships were internally based. In review of their data
during other growth periods, there has been a more significant gap between sales and expenses,
making their struggle to break-even evident on the net income line.
Porters 5 Forces Analysis
The Threat of New Entrants. As a firm in the casual dining industry, Lubys faces a
high level of threat from new entrants. Miller (2007) explains that a lot of food
establishments open and close each year because of the low barriers to entry and exit
from the industry. With such great ease entering the industry, existing firms experience a

THE LUBYS FINANCIAL ROLLER COASTER

constant bombardment of new establishments to compete with, however brand awareness

would provide the existing firms an edge if they have built up a good reputation.
The Bargaining Power of Buyers. The plethora of available dining options contributes
to a high level of bargaining power from buyers. The risk factors associated with these
choices are depicted by Lubys (2014) as significant from family-style and fast-casual
restaurants, as well as buffets and fast food. With so many choices available to the casual
consumer, participants in the industry face intense pressure to appeal to the buyers as best
they can in order to win their patronage. The buyers or consumers ultimately have a huge
pull in the direction these establishments must go in order to stay competitive. In addition
to individual buyers, Lubys is also engaged in contractual services with other firms to
provide food services. According to the Lubys Culinary Services, business sectors they
engage with include health care (hospitals), higher education institutions, and business
office buildings. In order to secure these high-yield contracts, they must compete at a
high level of customer satisfaction to win and retain these business opportunities.
The Bargaining Power of Suppliers. The power a supplier has on an industry cannot be
overlooked. While it may be easy to disregard the firms that provide the basic supplies
for a casual dining establishment, without napkins, straws, restroom supplies, food
packaging, etc., a dining establishment stands a chance to hurt basic customer service that
is extremely vital to the industry rivalry as a whole. According to advice from the
Houston Chronicle, a supplier with many customers can weather the loss of one buyers
account without being financially crippled (Sullivan, n.d.). The casual dining industry is
filled with buyers in need of supplies. With this large pool of available buyers, a supplier
to this industry poses a medium-to-high threat. Firms in the industry should take into

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consideration this power and be prepared to adjust financials as needed to accommodate

any pricing changes. A short shift in revenue may be less perilous to the firm than a loss
of these essential items altogether.
The Threat of Substitute Products and Services. According to Lubys (2014),
Changing customer preferences, tastes, and dietary habits can adversely affect our
business and financial performance (p. 12). This statement very accurately depicts a
high threat of substitutes for the casual dining industry. Current trends are pushing
customers to seek healthier food options, which puts a strain on Lubys due to their
cuisine focusing on cafeteria-style dining. Additional concern lies in the substitution of a
dining experience altogether with emerging trends in supermarkets offering a more
convenient method of quality, prepared food from their deli section (Lubys, 2014).
The Intensity of Rivalry among Competitors in an Industry. It comes as no surprise
that the intensity of rivalry in the casual dining industry is high. With the previous four
forces being rated in the high category, overall the rivalry would be intense among its
competitors. A firm wishing to compete in this industry is faced with low barriers to entry
for others, high bargaining power from both buyers and suppliers, as well as a high threat
of products and services substitution.
Internal Analysis
The history of Lubys internal affairs shines light on several key decisions and activities
that have direct relevance to the overall performance of the firm. Shifts in the type of board
members, decisions made by top management, and massive changes to the value chain led to the
most notable, non-economic drop in company stock, operating locations, and overall financial
success (Dawson, 2006). In response to the first downward slope, corrective changes allowed for

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a delayed recovery until economic conditions forced another downward slope. With the help of a
strategic move to horizontally integrate, the acquisition of Fuddruckers and Cheeseburger in
Paradise have helped broaden the Lubys target audiences by having a foot in the fast-food
business sector. The financials graphed in Exhibit A display an upward trend since the
acquisition of these entities indicating a wise move toward overall increased profitability. The
introduction of some buffet and self-serve style operations have also helped them combat against
another risk factor they identify as a threat (Dawson, 2006).
SWOT Analysis
Strengths. The current ownership by Chris and Harris Pappas has added great strength to
the Lubys firm. Their success in the restaurant industry through their own chains
provides leadership that has already proven to succeed. Brand awareness is also a
strength held by Lubys, at least within its demographic operating area, because of the
length of time the organization has been in business. The lack of cafeteria-style firms in
the industry yields a strength to Lubys as a niche dining experience that allows families
and group diners to enjoy a vast array of options with limited time to dine.
Weaknesses. Lubys has faced a lot of tragedies in the past that has left a scar on the
name. While brand awareness is considered a strength, for those that have associated
negative value to the name, the awareness becomes a weakness. Additionally, the firm
faces a higher competitive industry than it did for many decades. With the ease of starting
up a restaurant, many new firms enter the market every year. Increased cuisine
opportunities from other cultures contribute to the weakness of a firm structured around
traditional American dishes. As their native region becomes more ethnically diverse,
the less applicable, once-popular dishes have become a weakness to the organization.

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Opportunities. A great opportunity has yielded itself to Lubys in the form of culinary
contracts with organizations in need of a cafeteria-style eating establishment. The shift to
contracts in hospitals, large commercial buildings, and higher-education campuses
enabled a huge opportunity to capitalize on a market in need of the talents a firm with a
great history can provide. Lubys has an opportunity to expand this even further in the
form of new regions previously not served by their traditional restaurants, and increased
setting opportunities that may be created in the future. Additionally, with their known
history of coming to the aid of communities victimized by natural disaster, the
opportunity exists to expand on that framework on a national or international basis, with
a potential for greater name and brand awareness.
Threats. The largest apparent threat to Lubys is the overall state of the general
economy. As discussed at great length, an economic recession has spelled out very harsh
times for Lubys. The targeted customer of the firm needs disposable income to make a
choice to dine out rather than the cheaper alternative of eating at home. Another threat is
the changes in legally required health care coverage for employees. Increased costs to be
compliant, or the alternative penalty fines, pose a threat to widening the profit margin of
the firm.
VRIS Analysis
Overall assessment of the criteria for a sustainable competitive advantage put Lubys
with a temporary competitive advantage at best, and more likely with just competitive parity.
Since food is of value, they offer a service that gives them some competitive parity. Depending
on whether or not the rarity of the cafeteria-style restaurant is observed, Lubys either gains a

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10

temporary competitive advantage or confirms its max at competitive parity. With the ease of
being imitated and substituted, Lubys does not hold a sustainable competitive advantage.
Is the Resource Valuable? The operations of Lubys does provide a valuable service.
The food commodity holds value in society and consumers are willing to spend money to
obtain it.
Is the Resource Rare? Food service itself is definitely not rare; however the cafeteriastyle dining experience holds its own rarity. The only known direct competitor with a
cafeteria-style organization was Wyatts Cafeteria, and that was acquired by Lubys
decades ago. Most other cafeteria-style restaurants are single-location establishments.
Can the Resource be Imitated Easily? The cafeteria-style restaurant is not difficult to
replicate, in fact every public school already replicates the style. While public schools are
not a direct competitor to Lubys, the concept of a cafeteria is not a secret. The resource
can be imitated easily, however the quality and success may vary depending on its
management.
Are Substitutes Readily Available? As previously discussed in the Porters analysis,
substitutes are a huge threat and readily available. From an industry view, dining out is a
commodity that can be replaced with other activities depending on what the consumer
wishes to spend their money on. Since eating at home is a viable option, eating out is
more of a form of entertainment that must compete with movie theaters, bowling alleys,
shopping outlets, sporting events, and much more. From a firm view, the cafeteria-style
layout does not necessitate a unique need to the consumer. With many dining options
available, it is simple for a consumer willing to spend money on dining out to pick a
substitute option for the experience.

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11

Strategy Identification
Lubys competitive strategy appears to coincide with a differentiation-focused approach.
The cafeteria-style atmosphere differentiates it from a more traditional-style restaurant and gives
consumers the opportunity to mix and match sides with entrees, salads, desserts, and type of
bread with their tastes rather than a predefined menu item. The speed and ease associated with
getting food as you walk by and then sitting immediately to dine sets it apart from its casual
dining competition that requires wait staff to seat you, take your order, and then bring it to you
after it is put together.
Additionally, their claim is that all food is made from scratch daily with as much local
produce as possible (Lubys, 2014). Their focus is to appeal to the local consumer with choices,
friendly environment, but with little hassle. This is ideal for workers on limited lunch breaks and
families with small children that might otherwise be difficult to traditionally dine with. Their
historic approach is to provide a quality meal at an affordable price, however they do not strive
for the lowest cost experience overall. This target at affordability but with quality has a focus in
mind at a more middle-class demographic that desires to eat well within a budget.
Recommendations
In consideration of the external and internal environment analysis, it appears as if the
current leadership of Lubys is aware of what it needs to do to improve performance. Under the
sound leadership of the Pappases, Lubys has been able to recover from the disaster it was placed
in under previous leadership. Its expansion into the fast-food industry has shown financially to
improve the overall performance of the firm and give it a wider range of customers to serve.
Continual horizontal expansion efforts may want to consider embracing the healthy eating trend
being pushed. Introduction of healthier choices in Lubys and Fuddruckers restaurants may help

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12

to attract additional customers. Additionally, opening related venues focused on healthy eating
either through joint ventures, acquisitions, or new operating entities may help the firm expand its
presence through the industry and strengthen its competitive pull.
Lubys strategy to provide culinary services was a genius move, especially in the hospital
sector. Solidifying a contract with a hospital or chain of hospitals provides a stable flow of
customers. In a hospital setting, the overall satisfaction of a patient and their family often
includes the degree to which they enjoyed the food. By providing quality cafeteria and food
service to the hospital, Lubys has created a symbiotic benefit to the hospital and itself. Lubys
can use this to their advantage by convincing the hospital they can help raise patient satisfaction,
while the hospital provides a steady flow of hungry patrons. It also provides much-needed brand
awareness while capitalizing on a vulnerable opportunity. When family is at the hospital,
emotions and stress are already high. At this delicate moment, seizing the opportunity to provide
culinary comfort to family members helps imprint a sense of home that will last even after they
leave the hospital. With that positive food experience in mind at such a crucial time, patrons may
be more likely to return to their restaurant establishments. Additional resource, efforts, and
marketing should be focused on this endeavor to secure more contracts of this nature.
With a history of caring for the community, Lubys may want to consider a strategic
alliance with a disaster-relief or charitable organization. Giving back to the community and
having the public eye see it strengthens overall firm credibility. Lubys past experiences after the
Killeen, TX massacre and natural hurricane disaster to the coast, their community involvement
proved to be positive to the business success (Dawson, 2006). Strengthening ties to the local
communities, or going more national could really benefit the organization and give them a more
trusted name.

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13

The recognized competition with grocery store delis premade entrees and sides may
warrant expansion into the prepackaged food market (Lubys, 2014). Other restaurant chains,
like Marie Calenders, have expanded their brand awareness by providing grocery store items
based on their products served in dining establishments. In order to combat the competition with
these substitutes and alternatives, Lubys might want to consider what it would take to enter the
game with their own brand of competitive easy solutions for the grocery shopper.
Juggling cost and quality is not always easy, but a successful and competitive firm finds
ways to accomplish this goal. If Lubys can continue to focus on its strengths addressed, and find
innovative ways to expand their profit margin, it is not unlikely for us to see their financial
performance continue in its upward trend. With its dedicated leadership, the future of Lubys can
be quite promising.

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References
Dawson, C., Johnston, Carol, & Ebrary, Inc. (2006). House of plenty the rise, fall, and revival of
Lubys Cafeterias (1st ed.). Austin: University of Texas Press.
Dealbook. (2010, June 24). Court Approves Lubys Bid to Buy Fuddruckers. The New York
Times. Retrieved from http://dealbook.nytimes.com/2010/06/24/court-approves-lubysbid-to-buy-fuddruckers/
Lubys Culinary Services. (n.d.). Retrieved from http://www.lubyscs.com/
Lubys, Inc. (2014). Annual Report. Retrieved from
http://www.lubysinc.com/investors/filings/files/lubys2014annualreport.pdf
Miller, K. (2007, April 16). The Restaurant-Failure Myth. Bloomberg Businessweek. Retrieved
from http://www.bloomberg.com/bw/stories/2007-04-16/the-restaurant-failuremythbusinessweek-business-news-stock-market-and-financial-advice
Sullivan, D. (n.d.). Fast Food Industry: The Bargaining Power of Suppliers. Houston Chronicle.
Retrieved from http://smallbusiness.chron.com/fast-food-industry-bargaining-powersuppliers-78188.html
The National Bureau of Economic Research. (2012, April 23). US Business Cycle Expansions
and Contractions [20120423]. Retrieved from
http://www.nber.org/cycles/US_Business_Cycle_Expansions_and_Contractions_201204
23.pdf
U. S. Securities and Exchange Commission. (n.d.) 10-K Filings. Retrieved from
http://www.sec.gov/cgi-bin/browse-edgar

Nov-92
Jul-93
Mar-94
Nov-94
Jul-95
Mar-96
Nov-96
Jul-97
Mar-98
Nov-98
Jul-99
Mar-00
Nov-00
Jul-01
Mar-02
Nov-02
Jul-03
Mar-04
Nov-04
Jul-05
Mar-06
Nov-06
Jul-07
Mar-08
Nov-08
Jul-09
Mar-10
Nov-10
Jul-11
Mar-12
Nov-12
Jul-13
Mar-14
Sales
Expenses

High

Net Income

Low
Total Assets

Dividends
Long Term Debt

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

Monetary Values
Millions
525
505
485
465
445
425
405
385
365
345
325
305
285
265
245
225
205
185
165
145
125
105
85
65
45
25
5
(15)
(35)
150

100

Number of Locations

THE LUBYS FINANCIAL ROLLER COASTER

15

Exhibit A

Annual Trend
250

200

50

Fiscal Year

Locations

Exhibit B

Stock Trend

30

25

20

15

10