From Tesla to Dunkin’ Donuts, One Firm’s Quest to Fine-Tune the World; Valor Equity Partners upgrades mass-market restaurant outlets with the same lean-manufacturing zeal that enabled it to help make Tesla viable

From Tesla to Dunkin’ Donuts, One Firm’s Quest to Fine-Tune the World

By Ashlee Vance February 28, 2014

At a Little Caesars in Salt Lake City, the pizza making process is executed with precision. The employees receive a worksheet each morning that breaks their day down into 30 minute chunks. From 11:30 a.m. to noon, they’re instructed to have 10 pepperoni, four cheese, two Hawaiian, and three Meat Treat pizzas ready, along with an order of Buffalo wings and 22 sticks of Crazy Bread. During the busiest time, 6:00 to 6:30 p.m., they need 67 pepperoni, 39 cheese, six Hawaiian, and eight Meat Treat pizzas along with three orders of wings and 77 sticks of crazy bread. A college-age kid stands with a headset on and barks out orders–“Two Pep!” “Four Meat!”–to frenetic workers. The goal is to have the product ready and waiting. “People still call and place orders, but it doesn’t really matter,” says Mark, the store’s coach. “We’re already making the pizza, anyway.”

Not all Little Caesars run this way. But the ones owned by Valor Equity Partners do. The Chicago-based private equity firm’s investments cover an odd range of enterprises from Little Caesars, Dunkin’ Donuts (DNKN), Red Robin (RRGB), and Sizzler restaurants to health services, beauty supplies, Tesla Motors (TSLA), and SpaceX. Valor’s approach is to find a growing, promising company that could use a hand in expanding operations. The firm pairs its own engineers and manufacturing specialists with the management of the company it has acquired or invested in. Then it applies a combination of lean manufacturing techniques, software, and attention to detail to wring the most out of these businesses.

Valor’s founder and Chief Executive Officer Antonio Gracias pitches his team as the nice guys of private equity. “We don’t want to turn around stuff and fire a bunch of people,” says Gracias. “There are a lot of guys that can do that. We’re looking for people that are product experts and want to go from growth to fast growth.” A lot of private equity types say that sort of thing, but numerous investors and employees of acquired companies contacted by Bloomberg Businessweek say that, in this case, it’s actually true: Valor really does help companies scale. The firm has produced annual returns of about 20 percent, according to limited partners.

For its next trick, Valor is going after what might be called the manifest destiny of Dunkin’ Donuts, a chain that has never cracked the California market. Valor, which bought its first Dunkin’ stores in 2012,  intends to change that. Valor closed 2013 with 202 donut shops, pizza joints, and assorted additional restaurants scattered across the western U.S. Next year, it plans to open dozens more in California and beyond—most notably in Mexico and China. It’s a cheap-food assault aimed at areas with a rising middle class of two-income families. “We’re not in Dallas or Houston, but we are in Brownsville in South Texas,” says Gracias. “There are areas with an increasing middle class of Hispanics and Asians with two or three kids and that is what we want.”

Over the past eight years, Valor’s restaurant business has grown from $60 million in sales to $250 million. According to its partners, Valor flat-out sells more stuff at higher profits than anyone is used to. “These guys just ooze operations,” says Nigel Travis, CEO of Dunkin’ Brands.

As Gracias tells it, Valor has plenty of room to grow.  “As far as we know, no one has ever done this before—putting together this many different franchises. We’re trying to build the AutoNation (AN) of the restaurant business.”

Gracias grew up in Grand Rapids, Mich., the son of immigrants. His father was  a neurosurgeon and his mother owned a lingerie store. While getting an undergraduate and then a masters degree in 1993 from Georgetown University’s School of Foreign Service, Gracias started his first business, selling condoms in bulk to Russia. That venture failed, but it gave him the entrepreneurial bug. Next, he did a two-year stint at Goldman Sachs (GS) and then went to law school at the University of Chicago in 1995, where he began skipping class to sniff around for a business opportunity.

Through contacts he had built at Goldman, Gracias found a struggling company in California that made plating for electronics. He gathered $400,000 from his family and friends, got a $4 million loan, bought the company, and spent the next couple of years alternating between classes in Chicago and jaunts to Los Angeles to run the operation. “I mean, there just wasn’t anyone else doing anything remotely like that,” says David Sacks, a former PayPal (EBAY) executive who was a law school classmate of Gracias. “I remember him closing his first deal, right when we had exams.” (Still, Gracias managed to get his law degree in 1998.)

The L.A. business—Electronic Plating Service—had fewer than 100 employees when Gracias bought it. He learned about the chemical baths that were used to put protective coatings on circuit boards and other computing equipment, and he figured out how to tune the 80-foot-long production lines. The company went from losing money to producing $1.8 million in profit in 1996 and a gain of $3.6 million a year later. By 1998, with the dot-com boom well under way, demand for computing products—and thus special coatings—soared. The company’s head count grew to 1,500, and Gracias had the funds to make acquisitions.

As he set out to build his empire, Gracias assembled an unusual crew of like-minded manufacturing wonks, who now form Valor’s executive team. Two of his top deputies are Tim Watkins and Jonathan Shulkin. Watkins, a U.K. native with degrees in industrial robotics and electrical engineering; his claim to fame is having figured out a way to automate a Swiss metal-stamping factory so it could run 24 hours a day instead of the customary 16. Shulkin is an accounting whiz who previously worked as a consultant at Bain & Co., doing projects for Ford (F), American Airlines (AAL), the Commonwealth Bank of Australia(CBA:AU), and others. It’s a tightly knit group that includes software experts, number-crunchers, and lean-manufacturing gurus. They’re the type of people who see a line of customers at a coffee chain and talk about stalled value streams. “We are manufacturing guys from the 1990s,” says Gracias.

Around 2004, Valor decided to expand beyond coatings. Gracias heard about an electric car startup named Tesla and its wealthy backer, Elon Musk. Many of the usual Silicon Valley venture capitalists were beyond skeptical about funding a car company. “It was basically four guys in a garage back then,” says Shulkin. “You would drive the car around and then have to fan it off after to cool it down.” Valor, though, saw promise in Tesla’s electric power train. Even if Tesla failed at selling its Roadster sports car, it would likely have success licensing or selling off its underlying technology. Valor became Tesla’s biggest outside investor, and it went on to invest in a second high-risk Musk venture—the rocket company SpaceX.

As Tesla’s Roadster started to come to market around 2008, production costs soared. Each vehicle cost Tesla $120,000 to build, an untenable price for a car that sold for $110,000. At Musk’s request, Watkins ran a detailed analysis and talked to individual engineers to find places to save money. He teamed with Tesla’s executives to revamp the supply chain. Much of the manufacturing had been sent off to Asia; Watkins recommended bringing it back in-house to reduce shipping costs and delays. From October 2008 to June 2009, the Roadster’s production cost fell to almost $80,000. Tesla became a viable company. “I don’t think we would have made it without Antonio’s help,” Musk told the Economic Club of Chicago during a speech.

In March, Valor will open a 15,000-square-foot factory in Salt Lake City to serve 40 Dunkin’ Donuts stores. (A number of franchisees buy frozen donuts to save time and hassle.) Valor has calculated that by making donuts in house, it can save money and deliver hotter, fresher product to the stores. The plant’s employees will make about 144,000 donuts per week, keeping them at a constant 70 degrees to 73 degrees in heated trucks aimed at reaching the stores within 15 minutes. With Dunkin selling 32 varieties of donuts, Valor’s goal is to have at least 22 on hand at each store at all times. “There are people that want that Boston Cream, and we are going to give it to them,” a store manager calls out, as Gracias nods in approval. “We look at these things exactly like someone at Toyota (TM) would look at one of their factories,” says Gracias. “There hasn’t been one place that we couldn’t improve.”

Mark Vadaro is Valor’s operations specialist. He’ll make donuts for two weeks and pizza for a month, standing alongside the regular staff. He institutes “follow the flour” programs at the pizza and donut stores, examining how much work employees have to do to make the end product.

During one of his in-store visits, Vadaro calculated that, over the course of a week at a Little Caesars, a typical worker would travel 26,852 yards making and serving the various pizzas and complementary products. He figured this out by creating a floor plan and then tracking the steps for sauce preparation, dough kneading, dish cleaning, baking, and other tasks. Vadaro then rearranged the store. He moved the flour bags to the back and out of the way. He put extra cheese in fridges below the pizza-making stations, so people didn’t have to leave the post to do more grating.

Vadaro says workers now walk a combined 18,628 yards per week, which is 31 percent fewer than they used to. “If you’re walking around, you’re not making pizzas,” he says. “We don’t want the people to have to leave their work station for any reason.” At Valor’s Little Caesars stores in Texas, Crazy Bread sales are up 156 percent over a four-month period and the average customer order in those stores has risen from $8.77 to $9.46. “We’re selling over 20 million pizzas a year, so those cents make a big difference,” says Shulkin.

In 2006, Valor acquired Sizzling Platter, a Utah-based company that had been running a number of Sizzler restaurants. Gracias’s team and Sizzling Platter’s management got to work updating the décor of the restaurants and installing inventory software developed by Valor to link them on a common system. Every night, the software uses algorithms to predict demand; every morning, store managers get instructions on how much steak to order and what promotions to run. That background work saves money, which lets Valor’s Sizzler restaurants charge $8.99 for an all-you-can-eat riblets meal, or $10.99 for the surf-and-turf.

“There are people who hear about steak and lobster but usually can’t afford it,” says Ted Morton, CEO of Sizzling Platter. “Well, here they can.” Customers walk in, look at a menu on the wall, and place their order before taking a seat. Servers carrying iPads(AAPL) work the line when it gets too long to keep the traffic moving. “You won’t see that anywhere else,” says Shulkin.

There’s a cynical take on Valor. All its executives are thin. Shulkin follows a strict low-carb diet and touches pizza only on Saturdays. Gracias abstains from the piles of donuts at Valor meetings. During a briefing at the company’s Chicago headquarters, only Juan Sabater, one of the firm’s managing directors, gives in to temptation. Sabater grabs a donut, zaps it in the microwave, and returns with a smile. As we discuss the pros and cons of mass market food, Sabater takes care to explain that a “low-end consumer” is still a “valued customer.”

Gracias acknowledges the criticism that Valor is profiting from a worldwide waist expansion. He counters, though, that Sizzler has boosted its business and been able to buy better ingredients such as higher quality steaks. Little Caesars, he adds, is the only major pizza chain to make its dough from scratch. “We make a high quality, fresh product,” he says. “People make choices, and we don’t think we should be in the eliminating choices business.”

If Valor’s plan works, it will end up as the donut and pizza king of California. “California sells the most pounds of our coffee (through grocery stores) of any state in the country, and we’re not even there with stores,” says Dunkin’s Travis. “We will be successful.” The same goes for Mexico and China, Travis hopes, where Valor has struck partnerships to expand the brand.

Valor has started eying other concepts as well. It’s been trying to work a deal with a budding Illinois Mediterranean chain that Gracias calls “the Chipotle (CMG) of falafel.” The owner wants to expand slowly—a couple of stores per year. Gracias’s two-part pitch: First, seize this opportunity to grow the falafel chain into a multi-state operation, or someone else will; second, Valor can help get you there.

“If you want to grow, you come to us,” says Gracias. “That is the brand we want to build.”

The bottom line: Partners say Valor has returned 20 percent a year by improving already fast-growing businesses.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: