Is Little Caesars truly rising again?
A snippet from an April 2003 press release on the Web site of Detroit-based Little Caesars reads as follows:
"LITTLE CAESARS LEADS THE PIZZA INDUSTRY!
Top carry-out pizza chain has experienced double-digit sales increases for 18 months--franchise interest surges more than 500 percent over last year!
DETROIT, April, 2003—Sales growth at Little Caesar Enterprises, Inc. is outpacing the pizza industry and has put the Detroit-based pizza chain in a leadership position for six straight quarters. For 2002, the chain experienced 11 percent sales increases overall (same store sales), while its primary competitors were unable to keep pace."
The news was impressive. But was it true?
Little Caesars, once the world's third-largest pizza chain, was actually leading the industry? The chain whose crumbling market share led to hundreds of store closures from 1998 to 2001? The pizza company that was humbled by an unprecedented franchisee lawsuit settlement in 2001—emerges as the industry leader in 2003?
The claim was, at the very least, a bold assertion. But in reality it was a three-part blend of P.R. spin, a genuine—though hard to verify—sales increase and, plusa standard Little Caesars ingredient: mystery.
Since Mike and Marian Ilitch founded it in 1959, the privately held company has never shared operational specifics with outsiders. The chain's true store count or gross sales numbers—much less same-store sales numbers—have never been discussed publicly except for a some rare and veiled revelations carefully doled out over the past two years.
After nearly five decades of accounting secrecy—a deserved privilege of a privately held company—could such numbers be believed?
It depends on how you look at them, observers say.
For example, Little Caesars' Web site features a graphic comparing its 2002 sales numbers to those reported by its nearest competitors: Pizza Hut (+0.3 percent); Domino's Pizza (+2.6 percent); and Papa John's (-1.3 percent). Each of those companies is mandated by the Securities and Exchange Commission to report such figures publicly, plus give some explanation of why sales are soft. Additionally, all the best industry estimates show all three companies' gross sales far outpace Little Caesars'.
All of which makes Little Caesars' comparison somewhat hard to swallow for Mike Smith, a restaurant industry stock analyst for Fahnestock, in Kansas City, Kan. If the pizza chain claims its 2002 sales were 11 percent higher than 2001, he said, it means little without knowing what 2001's comparable-store sales were.
"If their comps are up say, 10 or 12 percent, does that mean they're doing $200,000 a box or $400,000
Little Caesars' Senior Vice President of Global Operations Mike Scruggs understands people will question the chain's claims, but he said abundant proof of its reinvigoration lies in its market activity. New stores are opening all over the U.S., new price-slashing speedy pick-up promotions have spiked customer counts, and franchise information requests have exceeded the company's expectations.
"We'll probably be up about 19 percent on the whole year," said Scruggs. Nineteen percent over what, you may ask?
"We're pretty tight lipped about that stuff," said Scruggs, an affable man in a challenging job. "We don't reveal too many details. ... But as of June, sales are up 15.5 percent."
Jeff Welsh, president of the International Organization of Little Caesars Franchisees (IOLCF), said Scruggs' claims are true.
"Customers are coming back more often, the product quality is very good now and it's all translating to higher repeat business," said Welsh, a former Little Caesars franchisee who now serves as the franchisees' direct communication link to Little Caesars' corporate. "Even profitability potential for franchisees is much greater now than it was. It's a very good time for the chain and for franchisees to be in the chain."
Rise and fall
Little Caesars' founding in 1959 saw the birth of a company that would change the pizza industry for decades to come. Different from Pizza Hut and Domino's (both of which were founded within one year of Little Caesars), Little Caesars sought customers who wanted basic, carryout pizzas at sold at bargain rates.
A little more than a decade later, when pizza franchising exploded, the market potential appeared limitless as each chain grew by hundreds of stores per year.
Ten years after that, Little Caesars raised the value bar higher with its two-for-one "Pizza, Pizza" deal. Sales soared, new store openings followed—and the pizza discount wars began.
But while that event supercharged Little Caesars' sales, it may have triggered the degradation of its core product, said Scruggs.
We "tweaked the ingredients to get things cheaper, and it didn't have the taste and the quality it used to," he said. "I'll be first tell you, we weren't selling a good pie 15 years ago."
And the pizza market only got tougher. After Papa John's came on to the scene in 1984, it grew to 232 stores by 1993 and went public that same year. Two years later there were 850 Papa John's units, the chain was growing at a pace of 400 stores per year and gobbling up hunks of Little Caesars' market share in the process.
But perhaps most importantly, the 1990s saw nearly every U.S. pizza chain enter the price war, and the unexpectedly stiff competition stopped Little Caesars' growth in its tracks. The pace of store closures (one former Little Caesars executive, who asked not to be identified, said the chain's unit count neared 5,800 during that time) began as a trickle, but became a steady stream toward the middle of the decade. By 1999, a year when the company shuttered nearly 400 units on a single summer night, Harsha Agadi, its then-chief operating officer, told Pizza Today there were some 4,000 Little Caesars stores. Clearly, the company was struggling.
Then, the following year, 250 franchisees filed a lawsuit against the company, claiming it wasted their marketing royalties on unprofitable national advertising efforts, and that its foodservice supply arm, Blue Line Distribution, misappropriated food manufacturers' rebates and charged franchisees higher than average prices for their food.
The suit, according to PizzaMarketplace reports written in 2001 (see related article "A Fair Deal for All"), marked a turning point in a protracted and sometimes-bitter battle between franchisees and Little Caesar Enterprises (LCE), the corporate entity run by the Ilitch family.
Eighteen, litigation-laden months later, franchisees emerged victorious in the lawsuit, gaining unprecedented say in the operations of Little Caesars. LCE not only forgave a $14.2 million debt owed by franchisees, those operators no longer had to pay advertising co-op royalties. Committees to oversee marketing and operations (half of whose members are franchisees) were formed, and via a competitive pricing mandate, Blue Line's prices were made available for comparison to those charged by third-party distributors—and other large pizza chains' co-ops.
The settlement also paved the way for the IOLCF-led launch of the Advance Purchasing Cooperative (APC), wherein franchisees can buy their raw materials from Vistar (formerly Multifoods Distribution) rather than Blue Line. About 300 franchisees so far belong to the new cooperative, which will start in January, 2004.
Since it prefers its franchisees buy from Blue Line, Welsh said Little Caesars doesn't like the change, but that it has not resisted unduly.
"To say everything's hunky-dory wouldn't really be correct," Welsh said. "Still, when the dust settles, and everyone sees that it's a chance to make things better for both sides, I think it will work out."
Ron Cegnar is one of three men whose company, CEO Partners, Inc., helped the IOLCF form the APC. Cegnar did the same for franchisees of Burger King and Yum! Brands and saved both companies millions.
"When we put the Burger King co-op put together, they assumed they could save $40 million in the first year, but they saved $90 million," said Cegnar, whose company is in Lexington, Ky. "When we worked on Yum Brands', their internal projection was a savings of $100 million. But I believe that in 2002, $325 million in costs were taken out of its system."
Cegnar said that cost and logistical efficiencies are gained by working with distribution companies that service not only multiple sites, but multiple brands. By comparison, not only was Little Caesars' system set up to service one pizza company, but a much larger chain than it is now. The decrease in store counts, he said, increased distribution costs.
"There's no secret to distribution: it's tonnage, mileage, route density and route size," he said. "Highly efficient distributors are effective because they have multiple accounts, which means their trucks are full, and that they get higher revenues per drop. It's very difficult to do that with a single chain where you might have a lot of miles between stores."
Much like their parent company, Little Caesars' franchisees speak little to the press, and multiple calls for this story weren't returned. However, according to Scruggs and Welsh, their relationship with the company is far better than in the past, and the group is excited about growing the system again.
Scruggs equates their new attitude to sales increases; when those are up, everybody's happy.
What makes Scruggs happiest, however, is what the company did to get to this point.
After taking a long, hard look at its core product, it switched from frozen cheese to fresh cheese and tweaked the flavor profile and performance of both its sauce and dough.
It launched a massive training and certification program for all its operators, and it's about 60 percent finished with what he called a long-overdue chain-wide re-imaging campaign. Customers love the new look, he said.
"You've got to stay fresh and bright and clean, and you've got to do it in a way that's affordable for the franchisee while being presentable to consumer," said Scruggs, adding that redesigns cost anywhere from $10,000 to $50,000 per unit. "Customers then feel confident your brand is continuing to keep its business updated and well maintained."
Focusing on local-market advertising empowered franchisees to make more targeted promotional decisions, he said, though a return to national TV advertising sometime in the future may happen. "What we've found is that despite pulling out of that, people still remember our brand. So it's clear that it was at least partly effective."
The chain has perhaps generated the most attention lately for its $5 Hot and Ready promotion; near the dinner hour, participating stores parbake dozens of large pepperoni pizzas for carryout at a moment's notice. The promotion has set off price wars in many towns, and Little Caesars' store volumes are soaring, though Scruggs said some operators in higher-rent markets can't afford to run such narrow margins.
One positive sign the company is on the march again is in its return to markets it all but abandoned. In Dallas-Ft. Worth, where it closed 47 stores in 1999, a half dozen stores have reopened, according to Tom Bronson, president and CEO of Lewisville, Texas-based POS maker, Rockland Technology Group. Bronson said he's heard many more are coming.
Despite Scruggs' reticence to share the pizza chain's sales figures, outside vendors say its business must be increasing because orders for their products from Little Caesars franchisees are up. Increasing orders for POS systems has Rockland's Bronson expecting Little Caesars could become its largest customer in the future. And Rick Stanbridge, co-owner of Fidelity Communications Corp., a Novi, Mich., manufacturer of CallWorks, a call management and marketing system, said "we're working with them a lot more than in the past."
Perhaps as importantly as sales increases, Stanbridge said he's seen a new willingness among Little Caesars' franchisees to experiment with technologies like his. "It's starting to change, though slowly. They're seeing it as profitable for their stores, as opposed to an unnecessary expense."
Bronson said many of his Little Caesars clients "are very sharp operators," and that using a POS system like his company's is a given. He believes however, that the company's apparent turnaround has more to do with good food than cool gadgets.
"Sure I think things like (POS) will help them in their growth, but that growth certainly started before they began any initiative to integrate technology," Bronson said. "I think it goes back to the basics of business; they made significant improvements in what they do best, and it's paying off."
Topics: Little Caesars