The suitcase CEO

The suitcase CEO

Extended Stay America has its headquarters in Charlotte, but how N.C. can the company be when Jim Donald lives in Washington state?

By Spencer Campbell

Eighteen years ago, Jim Donald got his first shot at CEO when he became president and chairman of Pathmark Stores Inc., a 143-supermarket chain with $4.1 billion of annual sales. He had spent most of his career running grocery stores — known for his knack of pinpointing problems in them — so on his first day on the job he visited a few of Pathmark’s near its Woodbridge, N.J., headquarters. He started at a Newark location at 1:30 a.m. “Welcome,” a sign near the entrance read. “We’re glad you’re here.” The razor-wire fencing said otherwise. Inside, an employee was stocking cereal. Donald, often described as charming and personable, asked how he was doing. “What the eff is it to you?” came the reply.

“It was really messed up,” Donald says of Pathmark. Nearly a decade earlier, a $1.8 billion leveraged buyout had thwarted a hostile takeover but left the company with debilitating debt. The novice chief executive faced dwindling market share, neglected stores with leaky roofs and embittered employees. Frank Vitrano, then the chain’s vice president and treasurer, recalls the first meeting Donald held. “I think his opening slide was “We’re a sick, sick company.’” His remedy: grow sales, increase margins, cut costs and get better returns on capital. Nothing revolutionary, Vitrano admits. Donald also launched GREAT — an acronym, but Vitrano can’t remember for what — Service, a customer-relations program. “Initially, you’d look at this, and you’d say, ‘Is this almost too folksy?’ But Jim had a way at continuing to reiterate it and continuing to drive home the message.”

During his third month, Donald took his carousel of slides to the company’s largest creditors. Three months passed. No help came. So he arranged a breakfast meeting of top vendors, creditors and management at the Newark Hilton. “Good morning,” he told the nearly 2,000 people there. “I have bad news today.” Pulling on a pair of gloves, he yanked the lid off a box and removed an enormous, dead fish. “We are the salmon swimming upstream in the final days of its life.” Competitors, holding in the current, were laughing at Pathmark’s upstream struggle. Bankers were bears ready to pounce. “We’re that salmon, and we’re in the lake, and we’re dead. I need your help.” He thanked the audience and walked off the stage.

“It was well-received,” says Vitrano, who became chief financial officer in 1998 and is now CFO of Camp Hill, Pa.-based Rite Aid Corp. “He just has a way about himself of being able to get the message across. And the fish story was pretty good. From an investor’s standpoint, from a banker’s standpoint, they’re looking for what’s new, what’s going to change, what’s exciting, what’s creative, and clearly they saw that in Jim.”

Donald told the tale to Elon University students shortly after becoming CEO of Charlotte-based Extended Stay America Inc. in 2012. His point was that every leader needs a “fish story” to communicate his vision. The title of the lecture was “Take the Job No One Wants,” a fair summation of his career. Even before Pathmark, companies summoned him when sales slumped and morale plunged, and his energy and ability to connect with every rung of the corporate ladder earned him a reputation as a first-rate fixer. “There are certain traits you need to have in order to be a successful turnaround guy,” Vitrano says. “And I think Jim has a lot of those traits.” The problem came when he took a job every exec — well, many of them — wanted. In 2005, he became president and CEO of Seattle-based Starbucks Corp. He was fired almost three years later, after the stock plummeted. He declined to be interviewed for this story but told Fortune magazine in 2008: “First phone call was to my mom. Probably the toughest day I’ve ever faced, ever. Ever, ever, ever!”

He was relegated back to the role of corporate renovator, and Extended Stay is his latest fixer-upper, having emerged from bankruptcy in 2010. It also gives him a shot at redemption. Between 2009 and 2013, revenue per available room in midpriced extended-stay hotels, which target business travelers or displaced lodgers who need rooms for longer than a night or two, outpaced the industry. Under his leadership, the chain is renovating more than 90% of its hotels and increasing efficiency by, for example, opening call centers to handle reservations. “Others took credit for the initiatives of Jim and his team at Starbucks,” says Burt Flickinger, a New York-based retail consultant who has followed Donald’s career for decades. “He wants to leave a lasting legacy. At ESA — in terms of that turnaround and then having great success — is a great way to have that legacy.”

Of course, there’s another, less redemptive scenario: that Donald, 60, is a suitcase CEO private-equity owners hired to plump up a withered company before they cash out and he heads home to Washington state a few million dollars richer. His innate charm emboldens employees still reeling from bankruptcy’s austerity, and his ability to root out operating flaws makes the company more effective. “Someone who could do that is going to be attractive to private equity because they bought the company with the intention of making some changes, and they want a change agent,” says Steve Burd, former CEO of Safeway Inc. and Donald’s boss in the mid-1990s. “That change agent, properly picked, is going to create a lot of value for the private-equity guys.”

That’s already happened. According to Bloomberg LP, the value of the private-equity owners’ investment nearly tripled when Extended Stay went public in November. The company, which moved to Charlotte from Spartanburg, S.C., in 2011, debuts at No. 20 on this year’s Business North Carolina Top 75 list of the largest public companies based in the state (page 42), with a market value of $4.7 billion June 30. Though the move created about 170 jobs, with an average annual salary of $83,580, and the state awarded a grant that could yield up to $4.7 million, City Council member David Howard had never heard of Donald, who lives near Seattle and is in Charlotte only a few times a month. That doesn’t concern the councilman. Neither does the fact that the CEO of the state’s largest public company — Brian Moynihan of Charlotte-based Bank of America Corp. — lives in a Boston suburb. “Do we lose things we traditionally had when CEOs like [BofA’s] Hugh McColl, [First Union’s] Ed Crutchfield and [Duke Power’s] Bill Lee helped build the infrastructure of the city? Yes. But until Brian Moynihan or this gentleman from Extended Stay America says we want our headquarters where we live, I’m not going to worry about it.”

Three months before he died, Sam Walton was scheduled to give presentations to warehouse workers in Bentonville, Ark. In the morning session, when he pulled his reading glasses out of his pocket, the index cards, pens and pencils he also kept there dropped to the ground. Multiple myeloma had taken a toll on Wal-Mart Stores Inc.’s founder, who was down to about 125 pounds and kept cancer medications in a fanny pack around his waist. With shaking hands, Walton scooped up what he had spilled and went on. At lunch, Donald, the new vice president of food merchandising for the chain’s Supercenters, asked “Mr. Sam” if he was OK and offered to fill in for him. Walton declined. It happened again when he spoke to the second shift. But nothing, he told Donald afterward, was more important that this. “Do you get it?” he asked. “If you want to be successful as a leader, never, ever, ever be bigger than the front line. You’ll fail every time.”

Donald grew up in Tampa, Fla. “Even though our family was splitting up, and we had to live simply, my sister and I never knew it,” he told the St. Petersburg Times. “[My mother] always had two bucks when I asked for it. She never let on that it may have been the last two bucks in her pocket.” He started bagging groceries at 16, Forbes reported. At 19, he was an assistant manager for Albertsons LLC. It took him 15 years to earn his undergrad degree in business — from what’s now called American Century University, a distance-learning college based in Albuquerque, N.M. — because the Boise, Idaho-based grocery chain kept moving him from struggling store to struggling store in Florida, Alabama and Texas. He ran its Phoenix operations before Walton hired him in 1991.

Launched in 1988 averaging 187,000 square feet to replace its Hypermart concept — averaging about 230,000 square feet, so big stockers had to use roller skates and customers couldn’t find what they wanted — there were only a handful of Supercenters when Donald came aboard to supervise merchandising, distribution, store design and real estate. When he left less than four years later, there were about 140. “Wal-Mart and food retailing pre-Jim Donald was probably less than $100 million, probably less than $50 million,” Flickinger says. “Today, just in the U.S., the division Jim started is over $170 billion.” (Donald told the Elon students he would probably still be there if Walton hadn’t died five months into his tenure.) Wal-Mart means low prices, which means Donald had to be efficient. That appealed to Safeway’s Burd, who hired him to lead the Pleasanton, Calif.-based supermarket chain’s Eastern Division in 1994. The 130-store region did $2.5 billion of business a year. It also had a four-year trend of declining same-store sales. “I don’t think we termed it a turnaround, but Jim knew we expected a lot of improvement,” Burd says. “And he gave it to us.” Spotting a store’s strength, he would apply it across the division. “I’ve probably said this 100 times: I’ve never seen anyone better in the stores than Jim Donald.”

By then a rising star in retail, Donald moved to Pathmark, where the fish story helped secure bank refinancing. He cut costs by outsourcing distribution and closing or selling underperforming stores. He left daily voicemails to encourage managers and wrote letters to his staff’s significant others, apologizing for the long hours. If they didn’t get flowers from their mates come Valentine’s Day, he wanted to hear about it. But positive vibes proved no match for the company’s crushing debt.

In 1999, he negotiated its sale to Royal Ahold NV for $250 million and assumption of $1.5 billion of debt, but the Dutch owner of Stop & Shop stores backed out because the Federal Trade Commission thought the deal would limit competition in New York and New Jersey, Pathmark’s biggest markets. Left with few options, Donald organized a prepackaged Chapter 11 bankruptcy in 2000, Vitrano says. He persuaded equity investors to hand over the company to bondholders, who got the newly public Pathmark’s shares. It emerged from bankruptcy shorn of $1 billion of debt and with $600 million of exit financing. The restructuring enabled more promotions and discounts, which boosted sales. It renovated 34 stores in 2001, the largest annual overhaul in company history. “I was certainly disappointed when he told us he was leaving,” Vitrano says. So was Wall Street. Pathmark shares plunged by a third when the company announced his resignation in 2002.

Starbucks had lured him away by dangling its North American operations, essentially a tryout for the CEO job, an offer he couldn’t refuse. During his tenure, U.S. total net revenue nearly doubled, reaching $5.3 billion, and the number of company-owned and -licensed stores increased from about 4,200 to about 7,300. Starbucks’ board — led by Chairman Howard Schultz, chief executive from 1987 to 2000 — elevated him to CEO in 2005. He set about meeting a goal of having 40,000 stores. “I think what happened with Starbucks is the company got ahead of itself with expansion,” says Walter Todd, chief investment officer and a managing director of Greenwood Capital Associates LLC in South Carolina, which manages about $1 billion of assets. “The stores were so close together, they were cannibalizing sales.” Stabs at greater efficiency — the Wal-Mart way — backfired. According to Schultz’s Onward: How Starbucks Fought for Its Life Without Losing Its Soul, espresso machines that were more efficient were too tall. They blocked customers’ view of baristas, who, by the way, hadn’t been properly trained in the rush to open stores. Prepackaged grounds didn’t emit the “full-bodied” aroma of in-store grinding. At the same time, competition increased.

In February 2007, Schultz sent him a memo. “… We desperately need to look into the mirror,” he wrote, “and realize it’s time to get back to the core and make the changes necessary to evoke the heritage, the tradition and the passion that we all have for the true Starbucks experience.” The economy soured before Donald could right the ship, and during his last year as chief executive, shares plunged more than 40%, to around $18. In early January 2008, Schultz invited him to his house, gave him a hug and said he was replacing him.

Starbucks rebounded — its stock was around $80 in early July — while Donald’s reputation took a hit. When investor Bill Ackman nominated him for Target Corp.’s board in 2009, the Minneapolis-based retailer’s top management objected, citing Starbucks’ swooning share price and Pathmark’s bankruptcy. In 2009, he became president and CEO of Haggen Inc., a 33-store grocery chain based in Bellingham, Wash., with only a third the sales of his old Safeway division. A private company, it did not respond to a request for comment. In 2011, Comvest Partners, a private-equity firm in West Palm Beach, Fla., bought a majority stake, and Donald left, succeeded by C.J. Gabriel. Comvest turned Haggen into a hyper-local grocer, which couldn’t have been done without the foundation Donald provided, Gabriel says, adding that Comvest would have kept him for as long as he wanted to stay. “I think he was thinking about retirement or doing something larger than Haggen,” says Gabriel, who resigned in 2012. “I think Extended Stay America came up and lured him out of retirement and into a new adventure.”

In 1994, George Johnson and Wayne Huizenga agreed to merge their 3,600-store video-rental chain with New York-based Viacom Inc. for $8.4 billion. “We sold Blockbuster and were looking for something where we could take our expertise in rolling out something fast,” Johnson says. Stumbling across the extended-stay concept, he realized there was essentially a single brand — Residence Inn, part of Bethesda, Md.-based Marriott International Inc. — in the market. In 1995, they spent $3.2 million to build the first Extended Stay in Spartanburg, Johnson’s hometown. “We had people camped out in the parking lot, waiting for us to open,” says Corry Oakes, the company’s first president.

Within a year, Extended Stay went public with $1 billion and two hotels. The company used the proceeds from its public offering to build more — 100 in 1998 and 110 the following year, Johnson says. During the nine years he and Huizenga controlled the company, 475 Extended Stay hotels opened in 42 states. Typically, hospitality companies are either real-estate investment trusts, which own the property, or businesses such as McLean, Va.-based Hilton Worldwide Holdings Inc., which mostly manages or franchises brands. Extended Stay owns and manages its properties. “It allowed us to control the growth, the quality, the customer experience, the real-estate decisions, the [capital expenditures] — that allows you to move at a more rapid pace than the typical franchise/franchisee model,” Oakes says.

It was cheaper than Residence Inn, catching the glut of budget-minded business travelers such as construction workers during the building boom of the late 1990s. The niche has some of the highest margins in lodging. “You don’t need a full-time front-office operation, don’t need housekeeping for all the rooms every day,” says Bjorn Hanson, a former consultant for Extended Stay and divisional dean of New York University’s Preston Robert Tisch Center for Hospitality, Tourism and Sports Management. “It’s a great economic model.”

So great, in fact, it caught the attention of one of the world’s largest private-equity firms. In 2004, New York-based Blackstone Group LP bought the chain for $3.1 billion. “We were a public company, and the offer was, I don’t know, 24-25% above our share price,” Oakes says. Even that premium paid off. Blackstone flipped Extended Stay for $8 billion in 2007 to another private-equity investor, New York-based Lightstone Group LLC. But as the U.S. economy foundered, sending business travel into a tailspin, Lightstone couldn’t bear its debt burden and put the business into bankruptcy in 2009. It exited a year later with a familiar new owner. Blackstone — with New York-based investment companies Paulson & Co. and Centerbridge Partners LP — bought the company and its 685 properties for $3.9 billion. It hired Donald in February 2012.

It’s rare for hotel companies to hire top management from outside the industry — “I’ve never been in it. I have no idea why they hired me,” Donald told the college students. “I’m a food guy” — but the owners were undoubtedly interested in his turnaround rep. “Private-equity people love this crowd,” says Dawn Harris, a professor at Loyola University Chicago who studies executive decision-making. “Because they can come in and [increase value] and do it relatively quickly.” Through March 31, the chain had spent $365.3 million on a plan to renovate 93% of its hotels. It claims the work has boosted business, as daily revenue per available room increased 10% to $40.18 last year. That’s still not on par with rivals but better than before the renovations. How much of that can be attributed to Donald, whose compensation package totaled $8.2 million in 2012 and $1.4 million in 2013? The work began in the third quarter of 2011; he was hired the following February.

But Donald wants the renovations to make a statement. “We are a staid, dyed-in-the-wool hotel company that needs to be shaken up,” Donald said at Elon. “We’ve never had marketing at all. We renovated properties in California, New York. I wanted to hit people between the eyes.” He then showed a 30-second TV commercial set to Twisted Sister’s “We’re Not Gonna Take It”. At the time, it was playing in California, New York and Seattle to promote the refurbishments there. Properties that had been down 8-10% were seeing a 20-60% increase, he said. Extended Stay Chief Marketing Officer Tom Seddon says the renovations are now widespread enough to deserve a national campaign, which began June 16 and was scheduled to end in mid-July.

Properties weren’t the only assets that needed work. “The culture of the company was not good,” Donald said. “If you stayed at Extended Stay in the past, I apologize.” He created DANCE, an acronym covering things from “Delight guests” to “Expand revenue.” Former management had come down hard on mistakes, so Donald dispensed get-out-of-jail-free cards. Every workday, he or another executive leaves a voicemail for about 1,400 senior managers. During his first 100 days as CEO, he racked up 100,000 air miles visiting 150 properties and meeting 1,500 employees. It’s rumored that, while in Charlotte, he helped a staffer with her homework. “I’ve never worked with anybody who is so genuinely concerned with the frontline team,” Seddon says. “There’s no way to make that not sound like something you might be cynical about. Except I can tell you it’s true.” And there’s no reason, he adds, to think the suitcase CEO will be checking out of Extended Stay anytime soon.

Donald wouldn’t excel as a caretaker, Burd says. “Jim is the kind of guy who would not be comfortable unless he was in an environment where he could make changes and improve things.” He doesn’t necessarily have to leave Extended Stay to do that. Though the company has concentrated on improving existing hotels in recent years, Seddon says, expansion is a possibility. And retirement doesn’t seem to mesh with the CEO who, Vitrano says, doesn’t have much of a golf game and, at a Safeway teambuilding event, ran 50 miles in 24 hours while competing in a 3-on-3 basketball tournament. “Sometimes a lot of us wonder if all those tough turnaround assignments will ever wear him down,” Flickinger says. “But it seems to give him more energy.”

There’s still another scenario: Having revived a once-bankrupt company, he gets lured away by an iconic American brand. Flickinger, for instance, thinks he would be a good fit at Target, whose shares have fallen 16% during the last year. It would be a familiar narrative for Donald, more redemptive than even Extended Stay. It would make a hell of a fish story.