Straw Hat Pizza prefers ''cooperative' to franchise system

Dec. 19, 2002

Straw Hat Pizza has 50 units operated by 44 different owners.

But don't assume it's a franchise company, because it's not.

In the mid 1980s, when the chain was 230 stores strong, the company's owner, Saga Corp., wanted to sell the San Ramon, Calif., company to Pizza Hut. When it appeared the switch to Red Roofs was inevitable, Straw Hat's franchisees -- operators of roughly half its stores -- objected.

Since its founding in 1959, the chain had established itself as a prominent West Coast pizza player, and franchisees didn't want to walk away from their hard-won brand equity.

"Most of the franchisees didn't want any part of Pizza Hut because it wasn't at all like Straw Hat," said Randy Wise, a one-store Straw Hat operator in Santa Maria, Calif., and the chairman of the board of the Straw Hat Cooperative Corporation. "We found an attorney who specialized in co-op law. He told us how to form (the cooperative) and get all the rights to trademarks and recipes."

The drive to form a co-op, Wise said, came from the store owners' desire to operate much like independents while enjoying the benefits of a chain. They also wanted more bang for the bucks they once poured into the operation of Straw Hat's corporate headquarters.

By 1987, the deal was complete: Straw Hat's corporate stores became Pizza Huts, and those franchisees who didn't convert became shareholding "members" in the newly formed Straw Hat Cooperative Corporation (SHCC).

Today it is the only restaurant chain cooperative in the U.S.

It's unique and it works

A cooperative such as Straw Hat's has multiple benefits. Since the corporation is a not-for-profit entity, royalty payments are smaller: some 5 percent less than paid by the average restaurant chain franchisee, according to Joshua Richman, president of the SHCC.

"In most franchises you see them paying a 5 percent royalty and 3 percent for the marketing," said Richman. "We're at a total of 2.75 percent: 2 percent to pay for the administrators to run the company and .75 percent for marketing. A lot of that difference would go to corporate profit" for a franchisor.

The SHCC staff is lean. In addition to Richman, there are two regional vice presidents (who divide California into north and south territories to monitor stores there and assist operators), a marketing director and an office manager.

A board of directors made up of Straw Hat operators oversees the corporate staff and approves changes to the company and its products. It meets approximately every quarter.

Like franchisees, SHCC operators are bound by a contract full of clear specifications on name brand products, store identification and designs and decor.

Beyond that, however, member operators (who own one share of the corporation for each store they own) are free to experiment with reasonable menu changes and marketing ideas. Wise said ideas that prove successful, such as new pizzas or pasta dishes, typically are brought to the board and considered for system-wide implementation.

"Big Brother's not looking at your every move if you want to try something new," said Wise. "This is much more of a family atmosphere. People will generally try things that others might be able to use."

Open minded as the board may be, marketing director Kevyn Johnston said not every new menu item wins approval. One dish was clearly beyond the Straw Hat pale. "I believe it was an Indian dish. I think they saw that as a bit much."

Just as franchise groups enjoy product purchasing power, SHCC members benefit from volume deals, too, through two distributors. All products are specified by the SHCC staff and products and prices are monitored by its northern regional vice president.

Co-op members enjoy some flexibility with marketing as well. In larger pizza franchise systems, franchisees often complain about paying into advertising funds spent on mass media buys that don't benefit everyone.

SHCC, on the other hand, uses its money only to prepare marketing materials for member use. What those operators do with those pieces -- which include everything from print materials to professionally crafted TV commercials -- is up to them.

"We will negotiate media buys for them, and if (an operator) is in a market where TV will work for them, we've got commercials for that," said Richman. "But for advertising, our major thrust is at the store level. We encourage community involvement to put a face behind our business. That creates awareness and builds important relationships."

But it's not perfect

The co-op system works very well, Wise said, but he admits it's not perfect. Rapid growth experienced by larger chains can't happen with a corporate staff as small as Staw Hat's. Operators, rather than a staff person, are responsible for scouting out new sites and markets.

Straw Hat Pizza
(a.k.a. Straw Hat Cooperative Corporation)

Founded: 1959
HQ: San Ramon, Calif.
Stores: 50
Locations: California (48), Nevada (2)
Annual sales in 2001: $19 million
Menu: thin and pan-style pizzas, salads, sandwiches and wings
Co-op membership fee: $15,000 (includes training)
Average cost to open one unit: $128 per square foot
Average check: $19 per transaction, $7.75 per person
Information: Kevyn Johnston, dir. of marketing, 925-362-9730

In fact, over Straw Hat's history, attrition has outpaced growth and halved the company's numbers since the 1987 birth of the co-op. (Nearly every Straw Hat store converted to Pizza Huts that same year also have closed.)

"A lot of those (closures) were due to people just exiting the system, operators who'd been in a long time," said Wise, who started as a corporate employee in 1982. At one time Wise owned two stores, but when a landlord wouldn't renegotiate his lease, he shuttered one.

Richman said the chain's small marketing budget -- while cost-friendly to franchisees -- limits the reach of the Straw Hat message.

And Wise said that the very "family-like" system that makes the SHCC friendly and attractive to potential operators can just as easily create some challenges.

"Unlike a franchise situation, we have no hammer to hold over somebody's head if they're not cooperating," said Wise. "A franchisor would tell them to do this or that and could pull the plug if they didn't. Luckily, we rarely have those kinds of problems."

Growing quickly, however, has never been the company's focus, according to Richman.

"We've never really endeavored to be that kind of a company," said Richman, SHCC's president for seven years. The company wants hands-on owner-operators, not just investors he said. "We don't go out and push franchises like a Papa John's might. Our growth is steady. We generally shoot for four to six new stores a year."

Since its blend of 44 dine-in and delivery-carryout stores posted $19 million in revenue in 2001, revenues have risen 10 percent through the first three quarters of 2002, when six new units opened. Currently another four are scheduled to open next year.

Johnston said supporting new members is crucial to revenue and unit growth.

"When we get a new owner in we put all hands on deck to support him," said Johnston. "We help members who are struggling, too, but we don't have the vast amount of resources to be too worried about whether our seasoned members are doing well in their businesses. They're profitable (operators who) know the system well already."

Now that the Straw Hat chain is just one-fourth the size it was during its heyday, many Californians (there are two Straw Hat stores in Carson City, Nev.) are surprised to see the brand still exists, Johnston said. But their excitement about finding a Straw Hat store, he added, demonstrates the chain's current rebound is welcomed.

"So many people say, 'I can't believe you're still around!' " he said. "When a store left their neighborhood, they just thought it went away. But when we tell them we're still here and we get that reaction, it's positive."

Topics: Marketing

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