DENCIO’S And A tale of two entrepreneurs

Dennis Nakpil has just sold Dencio’s, the country’s leading bar-and-grill chain and home to the crispy sisig, for P160 million but he doesn’t look too happy.

"I have mixed feelings," says the 45-year-old entrepreneur. "I wanted to keep the company for as long as possible. With the growth we were experiencing, I believe we could double, triple the sales in three to four years. On the other hand, it’s a great deal for both parties, and at this point you can’t foretell how things will be a year from now."

Dencio’s is the pioneer of what Dennis estimates to be a P2 to 3 billion restaurant category. But the bar-and-grill category is very different from what it was in 1991, the year that Dennis, an architect by education, and his partner put up their first branch with P700,000 in capital. Before Dencio’s, customers had to go to seedy places like beer gardens to hang out with friends and enjoy comfort food like sisig, blue marlin and tortang talong. His innovation was to make the beer garden a safe and comfortable place for families and yuppies.

"We didn’t want a beer garden image," he explains. "We played jazz music, used higher-end flatware. We chose our customers. What if the jeepney crowd came in? Play jazz music and they won’t appreciate it."

The formula was a success, and today Dencio’s runs 18 stores (15 franchisees and three company-owned), has a long list of interested franchisees, and generates P400 million in revenue system-wide (this includes revenue of franchisees). But success has two sides. Since the early ’90s, Dencio’s has had to share the pie with very successful copycats like Gerry’s Grill, Congo Grill, Grilla and many others. Couple that with a stagnant economy and a middle-class customer base who won’t spend more than P200 a meal, and you know that there’s very little leeway for mistakes or inefficiency.

Enter Martin Lorenzo, president of Pancake House Inc., a local publicly-listed company with visions of growing a local restaurant empire. Sometime last year, Martin was visiting the Pancake House branch in Tagaytay and couldn’t get a seat. He went next door to Dencio’s, which to his surprise had even a longer line of people waiting to get in. He decided he wanted to meet Dennis, asked a cousin to make the introduction and offered to buy Dencio’s three months later.

Martin, 39, has a knack for turning around restaurant chains. When he bought the Pancake House chain for P120 million with his personal savings a few years back, the once-venerable chain and home to the famous taco and chocolate chip waffle had seen better days.

"I thought it was the worst mistake of my life," he says. "I had to put in an additional P90 million for a commissary."

Today, the chain does five times more in revenues and generates close to P100 million in cash flow a year. Enough cash flow, according Martin, to impress Metrobank which loaned him P150 million to buy Dencio’s and to make further improvements on his acquisition.

Martin is a very different entrepreneur from Dennis. Dennis stumbled into entrepreneurship because he just wanted a place where he could hang out with friends over a few beers and plates of sisig. He was happy to make money doing something he loved. Of course, he never realized his "beer garden for the elite" would became part of every yuppie’s after-work vocabulary.

To Martin, the Wharton MBA, who also runs the family-owned Del Monte Pacific, a P14-billion-a-year-in-sales-business, it’s almost purely a numbers game. He jokingly says he bought Pancake, "because I like to eat and for the cash flow" but from the way he speaks, the latter reason weighs more heavily.

Martin speaks in terms of brand, sustainability, growth-potential and good cash flow – his criteria for buying a business.

For these reasons, he believes he bought Dencio’s at a very fair price. "I never buy anything for more than four times current cash flow. It’s pure numbers for me." For him, what Dennis spent the past 13 years in the business has a huge upside.

"Dencio’s has a strong brand and franchise base," Martin explains. "Dennis has done a good job building it up." But Martin felt the business was not optimized. Martin gives a crash course in restaurant business franchising.

Basically, he explains, there are three revenue streams in this business. First is the franchise fee or the upfront cost the franchisee pays for using the brand name. The second is the royalties or a percentage of the franchisee’s sales that is paid to the brand name holder, in this case, Dencio’s. Third is the revenue that comes from the franchisee’s commitment to buy proprietary products from the brand name holder’s commissary. The key to success is to optimize these revenue streams.

Martin explains that Dencio’s commissary was only supplying 35 percent of its franchisees’ needs because its commissary was only built to supply five restaurants. Martin hopes that by building a commissary to supply 35 restaurants, he will be able to supply at least 90 percent of the franchisees’ needs, thereby increasing Dencio’s cash flow. Besides, building a new commissary would allow him to grow Dencio’s franchisee base from 15 to 35 (Martin, being the scientific person he is, already mapped out the 20 new locations in Metro Manila alone). Also, Martin believes he can improve cash flow by collecting royalties from some franchisees more efficiently.

Martin says, "It’s hard to do business with friends."

Martin will also apply the formula that worked for Pancake to Dencio’s. Aside from building a commissary, they will improve the service and menu and make sure their food is consistent.

Besides being a viable business on its own, Dencio’s will become the second leg in what Martin calls his "three-leg business" model. Pancake was the first and another restaurant chain (he is now talking with two groups) will be the third.

This is his rationale: "We need three strong contributors to cash flow. Pancake has excellent cash flow. It gives P90 to P100 million in excess cash a year. Dencio’s generates about P40 million. Next year, Dencio’s will generate about P90 to 100 million. Next year, we double our cash flow, pay off our debt, then have two legs both standing, both serving in a fast cash flow market, a market that I believe is growing fast."

"People are tired of fast food. People want better food. They also want to be given respect and be treated well. But they will only pay from P180 to P200 per meal. Between Dencio’s and Pancake, we will serve eight million meals next year."

"Casual to fast-casual dining restaurants like Pancake, Max’s and Teriyaki Boy are growing pretty fast and margins are very good. Franchisees of Pancake who are also franchisees of Chowking tell me that their margins are two-and-a-half times higher with Pancake.

"After I digest Dencio’s, I will look for a third contributor to cash. If I have three, I am safer. My goal is to have three revenue sources of system sales having P800 million to P1 billion in sales each. Net cash flow has to be 15 percent or it’s not worth it. My vision is to continuously have three legs. You know, five years from now, the sources may not be as good anymore. Nowadays, business cycles are very short."

Martin’s focus on numbers though belies the soul of a gambler. After all, he can just spend all his time running Del Monte Pacific. But he appears to like the balance of corporate life and entrepreneurship.

"Del Monte is a big ship and is slow to move. Dencio’s and Pancake are like speedboats and I get penalized immediately when I make a mistake. It’s exciting but tiring. Del Monte is slow and relaxed but you get inip. Dennis is doing the smart thing," he says. "Maybe I’m not. It’s a gamble."

But for Dennis, the smart thing may not necessarily be the right thing. Dennis still speaks of Dencio’s like a father whose daughter is about to marry. "It’s my name, it’s what people call me. It’s hard. I’ve been dealing with people who have been with me for many years. It’s sad to have to part ways. It’s starting to dawn on me that I have to let go. It’s something I’ve been associated with for a long time. It hasn’t hit me hard yet."

Besides, the business was still growing fast and potential franchisees were knocking on their doors, from the Philippines and outside. "But I thought about it," he says. "When will it ever stop? Guess I have to slow down a bit. This business is very stressful. I would leave home at nine in the morning and come home at 10 in the evening.

"But I know it’ll give me more time to relax," he says. "That’s my consolation. I can play golf. Before once a month was a lot. In a way, there’s a bright side. Besides getting the payment, I can spend more time with the family. My kids have been complaining. ‘What time are you coming home? Are you having dinner at home?‘ "

Dennis may have convinced himself that he’s retired. But who knows what he’ll be selling to Martin next? Will he put up another Dencio’s?

"Maybe I would have after college, but not at my age. It might be the death of me," he says with a laugh.