MOD PIZZA – Privately Held “Up & Comer”

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Fast Casual Pizza Segment

MOD Pizza

MOD Pizza, based in Bellevue, Washington was founded in 2008 by Scott and Ally Svenson, who had built two successful food service companies while living in England. The first, Seattle Coffee, was sold to Starbucks in 1998, and Scott stayed on as President of Starbucks Europe. The Svensons were also involved with the founding of Carluccio’s Ltd, a chain of Italian restaurants, which went public in the UK in 2005 and grew to 35 locations by 2008.

After returning home to Seattle with their four children, the Svensons foresaw the emergence of “fast casual” pizza, a segment which didn’t previously exist. To our knowledge, MOD was the “first mover” in this regard. The Svensons started MOD pizza with the intention of “making a difference” in terms of employees, customers and communities served. “MOD” stands for Made on Demand, referring to the customization of each pie by customers as they move through the ordering line while choosing ingredients, the pie to be rapidly baked in the 800 degree oven.

The first location opened in Union Square, Seattle in 2008. The second location opened in early 2010 and there were four Seattle locations, in a variety of settings by Late 2011. With about $7 million of expansion capital provided by the Svensons and other early stage investors, plus a further $15 million raised in March of 2014, expansion took the chain to 14 locations by yearend 2013. By yearend 2014 there were 31 stores in AZ, CO, TX, and CA, all but one (franchised in CO) company operated. During calendar 2015, MOD closed an additional funding round of $45 million and grew to a total of 92 locations, 80 company operated and 12 franchised (having signed a small group of experienced multi-unit operators). During calendar 2016,  $74 million of additional capital was raised and 100 locations were opened, bringing the total to 192.  The company operates 155 of those stores, nine franchised partners operating the other 37.  MOD is now represented in 20 states and the U.K.  During 2016 , MOD expanded into  six new states in the US, plus five locations in the UK. The states were: Kansas, Kentucky, Missouri, Ohio, South Carolina and Wisconsin. Systemwide sales were $152 million in 2016 (a YTY increase of 134%), netting MOD $131 million (a YTY increase of 116%)  in revenues from company stores plus initial  franchise fees and ongoing royalties. Same store sales at company stores were a positive 5.3% in 2016, bringing its two-year same store sales growth to over 18%. Two new multi-unit franchises were awarded, expected to open locations in Florida, Georgia, and Alabama (Roll, TIde!). MOD now has nine franchisees with 32 locations at yearend and commitments to open 247 stores.

The Company has been dedicated to building a strong corporate operating team, prepared to make the necessary investment in people to support the very rapid expansion of (primarily) company operated units. The Company expects to bring the total operating locations to approximately 292 by 12/31/2017, 80% of which will be company operated. There are currently about 160 corporate employees at headquarters to support the rapid growth and this number is expected to expand further during 2017. The Company has been dedicated to building a strong corporate operating team, prepared to make the necessary investment in people. In terms of executive talent, Bob Barton, previously CFO and VP of operations at drugstore.com, was named CFO at MOD early in 2016. While he was at drugstore. com the company went from a startup through the IPO process to more than $400 million in revenues. Additional executives added were Carole McCluskey, chief technology officer, Lisa Luebeck, vice president of legal and general counsel, and Megan Hansen, vice president of people.

The average location is 2,500-2,700 square feet, costs about $575,000 to open, and generates $1.1  million of revenues in the first year, with subsequent same store sales growth expected . The combination of Cost of Goods plus Labor Expense amounts to about 60% of sales. Franchisees pay a 5% ongoing royalty after an initial franchise fee of $30,000.

Scott Svenson has built, and inspires an operating team that is dedicated to “making a difference”, building an operating culture where every employee is working for a cause bigger than themselves. A great deal more can be said about the  “culture”, the leadership and goals of MOD Pizza,  but the best analogy might be what Howard Schultz has built at Starbucks, and Scott Svenson has first hand experience in that regard. So far so good at MOD.

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