The growth of U.S. pizza franchising has slowed dramatically in the past few years. Not only is the market crowded with pizza competitors, it's choked with restaurants of every stripe.
For the last five years, the total number of U.S. pizzerias has hovered near the 63,000 unit mark. What's interesting is that about 4,500 pizzerias close each year, while an equal number opens. In the vast majority of those cases, those units closed were run by independent operators who weren't quite prepared for the rigors of such a competitive industry. They may have had good products and every intention to make customers happy, but they likely lacked the systems necessary to grab a share of the market, hold onto it and wring a few dollars out of it in the process.
It's no surprise, therefore, that pizza franchises are popular choices for entrepreneurs who have the will to work, but lack a plan for action.
for prospective pizza franchisees are just about endless; at least 125 are on the radar, plus an unknown number of local/regional franchises. That includes lots of good ones and lots that, well, are struggling to move ahead.
But the truth is, when you look at the numbers closely, even pizza franchise companies, for all their inherent advantages, are struggling to grow. Most aren't growing unit counts at all and many are losing numbers.
There are a few, however, which are expanding nicely and hold great potential for the near and long term. Here's a closer look.
1. Papa Murphy's Take 'N' Bake Pizza
This is my number-one franchise concept pick for 2005.
Yes, I know you're thinking I'm really going out on a limb with this pick, right? Aye, tis true, but I must give credit where it's due, and 800-unit Papa Murphy's deserves a lot. Here's why:
Measured growth: Few pizza companies with so much growth potential have demonstrated the patient restraint of PM's. The mantra at its headquarters is, "We'll never grow for growth's sake," and grow slowly, but surely, it has. Ever since I began watching the company five years ago, it has added an average 75 stores a year when it easily could have churned out more.
Single-store operators: Except for a 100-store deal awarded to the Burrell Group in 2001, PM's has stuck with its one-at-a-time expansion strategy. What a concept: Award new franchisees one store until they can prove themselves profitable and worthy of another. This plan is at least part of the reason why PM's total unit numbers never reverse from year to year.
The right price: On average, it costs about $180,000 to start a PM's: a fee not so expensive that serious businesspersons can't afford it, yet high enough to keep out the neophytes who might not be up to the challenge.
Fiscally picky: Minimum net worth of a potential franchisee is $250,000 (again, not cheap, but affordable for serious takers), plus they must have $80,000 in ready cash. Why so much? PM's knows their operations start off slowly, and they don't want franchisees bailing out when the liquid starts to dry up. The company figures that if one is patient enough to save that kind of cash, he's patient enough to tough out the early going. That strategy has proven correct for two decades now.
Big-time potential: The potential for take-and-bake pizza in the U.S. has yet to be tapped. My own highly optimistic and unscientific estimate of the number of take-and-bake units operating is 1,200 -- out of a total 63,000 U.S. pizzerias. Additionally, take-and-bake operators like PM's are seeking unique pizza customers who are:
1. not hooked on the immediate gratification of delivery
2. middle-of-the-road palates not insisting an artisan pizza experience
3. those who occasionally prefer the quiet surroundings of home to the clamor of a restaurant
4. willing to cook at home (even if you call baking a pre-assembled pizza "cooking").
Furthermore, PM's burgeoning relationship with Wal-Mart stores is intriguing. Of that chain's 4,800 units, 1,750 have grocery stores. To date, Papa Murphy's has fewer than a half dozen kiosks in Wal-Marts, but my money says those won't be the last of them.
PM's goal is to have 950 total units by the end of 2005 -- a growth spurt of about 130 stores over 2004. An injection of fresh capital from Charlesbank Capital Partners will fuel the growth.
New look: The chain's recent trade dress update is stylish, clean and contemporary.
Negatives: Even more conservative than its growth strategy is PM's advertising strategy. Typically, until a PM's market has 10 stores, no mass media advertising is done. Sure, that controls costs quite well, but in an industry where name recognition is key, the risk for becoming lost in the pizza crowd is at least moderate. Secondly, store revenues grow solidly, but slowly. Full-year average sales for a new PM's store is about $375,000.
Total investment: $140,000-203,000
Franchise fee: $25,000
Ongoing royalty: 5 percent
Franchisee net worth: $250,000
Franchisee cash on hand: $80,000
Territories available: California, Iowa, Illinois, Indiana, Kansas, Missouri, Nebraska, New Mexico, Nevada, South Dakota
8000 N.E. Parkway Dr., #350
Vancouver, Wash. 98662
2. CiCi's Pizza
Picking Papa Murphy's ahead of 502-unit CiCi's Pizza was not easy. This all-you-can-eat buffet concept is on a unit growth pace of at least 10 percent per year, with a goal of 2,000 total units in the next several years.
In 2003, founder Joe Croce sold what was then a 450-unit chain to his top managers and their financial backers, Levine Leichtman Capital Partners. Meantime, CiCi's has signed area development agreements ranging from 10 to 100 stores.
Not only has this all-you-can-eat buffet pizza concept proven itself a money-making machine, it's done it with a frighteningly low per-person check average of around $6. (Can you say, "Excellent systems?" I thought you could.) When a chain grows its unit count and top-line sales this much and this quickly, one can safely assume it's well run.
Product quality: While pizza buffets are nothing new, good pizza buffets are. Why? Because too many operators believe they're easy to run, when they actually require serious attention to detail, timing and freshness. In short, more fail than succeed.
The product on CiCi's buffets is not only fresh, the food flow from the kitchen to the buffet line and to the tables is well managed. While customers can get carryout, CiCi's doesn't deliver. Doing one thing very well is a great way to simplify and streamline an operation.
Families first: CiCi's knows that families want good food at a fair price, plus they get a little entertainment thrown in. A family of four can dine there for less than $25 and get all the pizza, salad, pasta and dessert they can eat. Its self-serve concept makes eating out quick, simple and affordable for families. Also, small game rooms in each unit entertain the kids (and give parents a break) and drive repeat purchases.
Long-term franchisee loyalty: By all accounts, franchisees have a favorable relationship with management, and its continued growth confirms that.
The right price: The average CiCi's costs about a half million dollars to open. But before you think that's expensive, remember these are 4,000 to 6,000 square-foot units with 180 seats with game rooms. With unit sales averages of about $815,000, opportunity for profit is real.
Big-time potential: How's this for a testament to the potential of CiCi's? In March of 2002, the company signed a 100-store, 10-year development deal with a group dubbed Pizza PALS led by Alan Huston and Pat Williamson. Huston is a former Pizza Hut president and CEO, and Williamson is a former Pizza Hut COO. Together the pair also operates 29 Applebee's restaurants. These guys could skip work for the rest of their lives, but instead they've decided to build more CiCi's than any previous franchisee. Something tells me they like the concept.
The value positioning of CiCi's will make it an attractive option to a wide audience. Americans equate a lot of food for a little money with value, and CiCi's delivers it.
Negatives: CiCi's attraction to families is a mixed blessing. As kids mature and eventually leave the house, they'll seek a wider variety of restaurant foods and depend less on pizza. Parents, who already enjoy "finer" foods, will have fewer reasons to go to an all-you-can eat pizzeria and fade away, too. Also, as demographic studies show, families are shrinking as couples are having fewer children, lessening the opportunities per family to get pizza.
To be fair, however, the U.S. population is growing, and though families are smaller, their numbers are increasing.
Total investment: $401,000-$607,000
Franchise fee: $30,000
Ongoing royalty: 4 percent
Franchisee net worth: N/A
Franchisee cash on hand: $120,000 to $182,000
Territories available: nationwide
1080 W. Bethel Rd.
Coppell, Texas 75019
3. Domino's Pizza
Before you criticize me for picking the world's second largest pizza chain as a top franchise pick, hear me out.
Domino's currently has 5,000 U.S. stores, about 12 percent of which are company owned. The company believes it can open about another 200 domestic units, about 175 of which will be franchised -- pretty slim pickings, to be certain.
However, since Domino's already has a presence in virtually every large U.S. market, you can bet that those 175 stores are gap fillers, a unit here and a unit there -- opportunities that are attractive to potential franchisees who maybe just want one or two stores, but not to someone seeking an area-development deal. The reason that's good is because some of the competition for those franchises is eliminated.
Long term success: Why Domino's remains a great opportunity is obvious. The brand is well known, its systems are solid, its products are just about bulletproof and its marketing is among the best in the industry. (If there's one thing many of the operators who closed their operations last year overlooked, it's the absolute necessity for great marketing.)
Variety of products: Over the past year Domino's has introduced three new pizzas, tested others in select markets, rolled out new side items and salads, and the company promises more are coming in 2005. Owning a franchise with such a potent R&D arm is an incredible benefit. Not only does it remove the burden of creating new items from a franchisee's shoulders, Domino's products are well tested and have a high likelihood of success.
It's a public company: Now that Domino's is beholden to millions of shareholders who bought its stock this year, the pressure to improve operations continually should drive the company to reach new levels. Public companies have deep coffers for advertising and product development, two things many smaller chains lack. As it strives to raise its public profile, it's certain is the name "Domino's" will go unnoticed by few.
Overseas connections: You needn't look any further than Pizza Hut's smash hit, the 4forALL, to see the domestic benefit of international operations. The idea was created by a franchisee in the UK (where it didn't take off), but the final product was perfected in the U.S.
As I learned on a trip to Australia this year, Domino's franchisees there have several pizza ideas they could share with their U.S. brethren. The variety of toppings combinations exceeds those offered on U.S. Domino's menus, and surely it would benefit U.S. operations to try those ideas here. You can't get that kind of proven R&D in small company.
Negatives: It's a public company. There's no question that the pressure to generate earnings on stock shares can break a company's commitment to its products, its people and ultimately customers. It's happened in the past at companies of all stripes, and it could happen again.
Will Domino's fall prey to this? Only time will tell. If you ask Pizza Hut co-founder Frank Carney if it was easier to focus on product when Pizza Hut was private, he'll tell you it was. Under the cost-cutting pressures of public ownership, Pizza Hut pies suffered, he said, and that led to his now infamous declaration, "I've found a better pizza," which he claimed upon becoming a Papa John's franchisee in 1995.
Lastly, the temptation to drive top-line sales in order to boost franchise royalties exists at any franchise company, but perhaps more so at a public company. This can be achieved with steep discount deals that drive traffic, but squeeze operator margins unmercifully.
Total investment: $118,000 to $440,000
Franchise fee: $3,250
Ongoing royalty: 5.5 percent
Net worth requirement: $75,000
Cash liquidity requirement: $75,000
30 Frank Lloyd Wright Dr., P.O. Box 997
Ann Arbor, Mich. 48106
Two others to watch in 2005
Nick-N-Willy's World Famous Take-N-Bake Pizza
Positives: Not only do I like the potential of take-and-bake pizza, I especially like the prospects of gourmet take-and-bake. The Lone Tree, Colo.-based chain is a quality-focused concept that takes direct aim at consumers with a preference for pizza with pizzazz. (Have a look at its menu -- http://www.nicknwillys.com/menu.html -- and you'll see what I mean.)
Negatives: At 45-units, the chain has some growing to do before it achieves a broad marketing presence. Those units also are a bit scattered throughout the Western U.S., which likely compounds its recognition problem.
Lone Tree, Colo.
Positives: After 15 years under absentee owners, this once-great chain is finally positioned for a rebound under new owners, the Jacmar Companies. Jacmar operates 19 of the 63 units in the chain, as well as multiple foodservice operations elsewhere. It has both the expertise and the capital to give Shakey's the lift it needs to grow. The fact that its current franchisees are champing at the bit to open new units shows a lot of faith in this family-centered concept.
Negatives: Unlike Nick-N-Willy's, Shakey's doesn't have a recognition problem, and it will have to work hard to regain the trust of customers across the U.S. who saw it rise, fall and almost disappear. Shakey's also needs new products to freshen up its menu, and it will have to rebuild its atrophied R&D arm to make that happen.
Thanks to its former owners' neglect, Shakey's currently isn't franchising because its uniform franchise offering circular isn't up to date. Expect Jacmar to have details in order by early 2005.
Los Angeles, Calif.