Article

A turnaround begins at Pizza Inn

The last 20 years of Pizza Inn's storied, 48-year history have been marked by boardroom battles and franchisee discontent. New CEO Tim Taft believes it's now on course for a revival.

March 30, 2006

Hanging on the conference room wall in Pizza Inn's corporate headquarters is a time continuum, essentially a visual story of the 14 years between 1991, when the chain emerged from bankruptcy, to 2005, when Tim Taft was appointed chief executive.

The piece is not standard boardroom object d'art, especially for a publicly held company. But given time, Taft believes the continuum will become a thing of beauty if he can lead a successful turnaround at the 48-year-old chain.

"If you could look at this, you'd see all the key events that have taken place since (Pizza Inn board chairman) Mark Schwarz really started making changes," said Taft, speaking by phone from the chain's headquarters in The Colony, Texas. "And you could also see what happened before then."

Things

What's Important Pizza Inn's slide from industry giant to lesser player stretches back some 20 years. But while it's 1989 bankruptcy hurt the company, many of its franchisees continue to thrive in the system. After the departure of a CEO in 2002 and another in 2004, former Whataburger COO and president, Tim Taft, was hired to heal the ailing company in 2005. One year later, Taft has substantially changed Pizza Inn's purchasing company and its procedures, formed franchisee governance committees and led the development and rollout of a new prototype buffet unit.

like plummeting profits, store losses, a bitter proxy battle, lawsuits and the voluntary or forced departures of two CEOs. The continuum tracks the worst of times for the company, whose 380 stores are less than half its all-time high of 775. But Taft, several franchisees and Schwarz believe much better times lie ahead.

"I think the best is yet to come for Pizza Inn," said H.M. Poythress, a 38-year franchisee in Greensboro, N.C. "I like the part that the corporate side is working with the franchisee side. That's a healthy sign."

Poythress and other franchisees said it's been years since they've enjoyed such interaction with Pizza Inn corporate. As CEO Jeff Rogers led the company out of bankruptcy in the '90s, dozens of corporate stores were closed or converted to franchise units. As a consequence, company revenue declined as unit royalties and sales at its supplies and distribution arm, Norco, decreased. Pizza Inn's solution, franchisees said, was to make Norco a profit center by increasing the cost of their supplies.

Franchisees say the change was the most significant of many that formed a divide between them and Pizza Inn's leadership. Years later, in documents filed with the Securities and Exchange Commission, Schwarz accused Pizza Inn's leaders of pursuing a path of self-enrichment at the expense of the company and its franchisees.

Change was needed, and in 2002, he became the self-appointed catalyst.

Storm before the calm

As president of Dallas-based Newcastle Partners, Schwarz became an aggressively involved shareholder in Pizza Inn in 2002. Already a 6 percent owner of the company, Schwarz led Newcastle to purchase a 30-percent stake from CEO Jeff Rogers, who had resigned in August of that year, when he was unable to pay off a company loan used to buy its stock.

The ownership change rattled Pizza Inn's top four officials—newly appointed CEO and president, Ronald Parker, and vice presidents Keith Clark, Ward Olgreen and Shawn Preator—who feared Schwarz would use his new power to shake up the struggling company and add board seats for Newcastle.

Days later, and with the help of Pizza Inn's outside legal counsel, the four rewrote their labor agreements to include "change of control" parachute clauses that would be triggered if Newcastle won control of the board. In their contracts, the quartet would divide $7.1 million—four times Pizza Inn's profit that year—with $5.4 million going to Parker alone.

Schwarz's outrage over the contracts set off a proxy battle that ultimately gained Newcastle the additional board seat it sought, but without triggering a change of control. Clark resigned in June of 2004, and Parker was fired the following December for breach of duties. The company has sued him for conspiring with its former general counsel to damage it via the rewritten labor agreements. The case is in arbitration.

With Parker gone, Schwarz set his sights on hiring a new CEO who could address and correct Pizza Inn's myriad problems.

"We had

Tim Taft, CEO, Pizza Inn

a very public nationwide search for a CEO here, and we interviewed a lot of big-company people," Schwarz said. "This wasn't something we limited to our backyard."

If Taft wasn't found in Pizza Inn's backyard, he was at least one block over in Corpus Christi, Texas, where he had just ended a 10-year run as the chief operating officer and president of Whataburger. While there, Taft helped the 745-unit chain repair relationships with its franchisees, develop a new marketing plan and reenergize its operations. The result was a multiyear streak of positive comparable-store sales gains, and a handsome salary of $800,000 a year.

While considering the Pizza Inn post, Taft studied its battered balance sheet and talked to franchisees about the bad blood between them and the company. Ultimately, he struck a one-year deal with Schwarz: a $1 annual salary plus stock options based on performance.

"They gave me a check in advance, grossed it up to a dollar and it's now expired," said Taft, laughing. "The reason why I did that was simple: The guys before me were making more than a million a year, and I knew that I'd never get the franchisees on my side if all I ever did was ask for the same. You can't do that when the company is losing money."

Despite volunteering for the major pay cut, not every franchisee warmed up immediately to Taft. After nearly two decades of questionable leadership, franchisees—some of whom are sizable Pizza Inn shareholders—wanted a CEO who would work to rebuild the brand, not line his own pockets.

"We'd been burned before, so we wanted to see what he'd do," said Bob Clariday, a 10-unit franchisee in Jonesboro, Ark.

"For me, it was cautious optimism," added Keith Cartagine, a franchisee in Greenville, S.C. "I wasn't willing to get too excited."

According to Schwarz, Taft quickly grasped Pizza Inn's operational woes and started formulating solutions, which began to put franchisees at ease.

"Being able to speak their language and, in effect, be one of them, is an intangible quality that has been helpful to Tim," Schwarz said.

Supply-side issues

When Pizza Inn's system was much larger, Norco was an incredible benefit, said Tim Broome, a franchisee in Johnson City, Tenn. "Norco had the cheapest prices and the best quality anywhere."

But when the company filed for bankruptcy in 1989, nearly 300 company stores closed within a year (nearly 220 of those units were in Texas), and royalties and Norco sales plummeted.

Pizza Inn's recently developed prototype buffet unit.

Rogers' move to turn it into a profit center started with increased markups on basics like flour and tomato products. Franchisees said that over time, price increases extended across the board. The company's "cost, plus 10 percent" pricing arrangement disappeared and franchisee profits began shrinking.

"You had a number of franchisees that were not making profits already, and then prices were going up," said Poythress. "People really needed some relief."

When Taft came aboard in March 2005, Norco was an early target of his attention. Franchisees said Norco staff would listen to their complaints, but do little or nothing to fix them. To hold them accountable, Taft had a complaint log developed for the company's intranet to let operators view every concern raised, as well as what Norco was doing to address them.

Taft hired a new vice president of supply chain management to focus on hauling and warehousing issues, and he developed a franchisee-driven product and purchasing committee to review every item in the Pizza Inn inventory.

"To date, the committee has reviewed 113 new items, and 67 have been changed to better products with better prices," Taft said. "We formed that committee to create transparency in that part of the business. We're now not only giving them a say in the products we use, but how those products are evaluated and brought into the system. That was never done before."

Very quickly, franchisees reported liking what they saw in the new CEO.

"When Tim came and spoke to us (last March), he laid out the things he was going to do in the next few months," said Tom Smith, a 32-year Pizza Inn franchisee. "Probably 94.8 percent of those were done when he said they'd be, and I can't honestly tell you what the other 5 percent are."

Taft also hit the road visiting Pizza Inn franchisees to tell them things were going to be different—but not just at the top.

"We started holding operators to operating standards, to physical plant standards, to uniform standards and training standards," Taft said. The company also revamped its franchisee recruitment policies. "We recognized we could not bring on franchisees that would, like they used to say in the past, 'just fog a mirror.' So we created a new targeting and selection processes to increase the quality of the operators we're getting."

Taft also initiated the development of a new Pizza Inn prototype that would get its field test as a company store. Within six months, the prototype was designed, built and operating on a site three miles from Pizza Inn's headquarters.

That

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change alone is viewed by franchisees as one of the most positive under Taft.

"Now the company is putting its money where its mouth is and building company stores," said Hap Squires, a 14-year franchisee in San Antonio. "From the franchise community's standpoint, we feel really good that the company feels strongly enough about the system to go build some stores."

Lots to do, more to come

Taft acknowledged that much work remains before Pizza Inn is officially deemed healthy and on the grow, but he expects to achieve that near the time the company turns 50. By then "we will have fixed the foundation, remodeled the interior and painted the exterior." Analogies aside, Pizza Inn simply can't be tidied up superficially, he stressed, rather change at its core has to occur or its backslide will resume.

"This company is not going to get another mulligan," said Taft, during a recent interview in Las Vegas. "We've got to try to do everything we can to make this successful again."

Taft is quick to credit Schwarz for effecting the changes that ultimately got the company and its franchisees believing in a revival. Newcastle has dedicated its money and efforts to a long-term vision that will set the course for Pizza Inn's future, not boost the bank accounts of shareholders only, he said.

"You have an entire corporate office and franchise community that has been witness to (Schwarz) doing what he said he would do," Taft said. "His motivation is clear: Do what's right for Pizza Inn."