Fast Casual Pizza Segment
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. The MOD experience provides customers the opportunity to create and customize their own pie for one price as they move through the ordering line choosing their ingredients. The pies are rapidly cooked in a 700 degree oven, and served super-fast in about 8 minutes (including both preparation and cook time).
The first location opened in Union Square, Seattle in 2008. The second location opened in early 2010 and there were five 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 over the 2012 and 2013 fiscal years, expansion took the chain to 14 locations by yearend 2013. MOD raised an additional $15 million in March of 2014, and by yearend 2014 there were 31 stores in AZ, CA, CO, OR, TX, and WA, all but one (franchised in CO) are 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. During calendar 2017, $33 million additional equity was raised, led by previous investors, and a $40 million credit facility was established, bringing the total equity raised to $185 million. Openings in 2017 totaled 110 systemwide, building on its prior year base by an impressive 57%.
Within the 302 total units, the Company operated 225 locations with franchised partners operating 72 and their UK JV partner operating 5. MOD is now represented in 27 states and the U.K., after entering 7 new states (IN, MT, UT, DE, FLA, NEV and GA) during 2017. Systemwide sales were $275 million in 2017 (a YTY increase of 81%), netting MOD $219 million (a YTY increase of 68%) from company store revenues plus initial franchise fees and ongoing royalties. Same store sales at company stores were a positive 5.2% in 2017, bringing its two-year same store sales growth to almost 11% and the three year “stack” to over 23%. Two new multi-unit franchises were awarded, and recently opened locations in Florida, Georgia, and Alabama (Roll, TIde!).
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 continue it’s strong store growth in 2018, consisting of mostly company operated locations. There are currently about 215 corporate employees at headquarters to support the rapid growth and this number is expected to expand further during 2018. 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 Lisa Luebeck, senior vice president of legal and general counsel, and Megan Hansen, senior vice president of people. During 2017, Paul Twohig (COO), Tracy Cioffi (CMO), Robin Hamm (VP Culinary), Robert Notte (VP Technology) were added, all with outstanding credentials, and Kate Jaspon (CFO of Dunkin Brands) was appointed to the Board of Directors.
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. “Spreading MODness”, the idea of using the business as a platform for positive social change, was demonstrated in 2017 by, among other things, a contribution over $1M to support local communities and Squad members in need, and franchisees’ donation of over $364,000 to Generosity Feeds, which helps create half a million meals for hungry children. MOD’s strong connection and social impact with Squad members, consumers, and the community at large were reflected by various awards during the year. MOD continues to be the largest and most rapidly growing – primarily company operated – chain within the fast casual pizza segment. This dynamic leadership team, supported by deep pocketed financial backers, has built an admirable company to this point, and provides every indication of continued success.
FAST CASUAL PIZZA SEGMENT
Blaze Pizza LLC
Blaze Pizza, based in Pasadena, California, was founded in 2011 by Elise and Rick Wetzel of Wetzel’s Pretzels. As others within this segment have done, Blaze provides a made to order approach to the pizza segment. Blaze attracted a prominent sponsorship group early, including LeBron James, Maria Shriver, American film producer John Davis and Tom Werner, co-owner of the Boston Red Sox. Most recently, as LeBron’s contract with McDonald’s expired in 2016, he became a spokesperson for Blaze Pizza. Jim Mizes was recruited in July of 2013, as President and COO, after being in leadership positions at several successful foodservice chains. Promoted to CEO in May, 2017, he leads a team of seasoned executives. Executive Chef, Brad Kent, a CIA graduate with outstanding credentials was recruited early, created the recipes and cooking procedures, and his Blaze pizzas were lauded by the Zagat Guide, among others, in 2013. Since Blaze is 99% franchised, expansion capital beyond the initial raise has not been necessary to fund the growth. The Company has been profitable and cash flow positive since 2015.
In terms of differentiating their concept, Blaze offers fresh made dough that is proofed for 24 hours, while some competitors use frozen dough. For Millennials and those with dietary preferences, Blaze also offers fresh made in house gluten free dough as an option, as well as vegan cheese, and emphasizes the uniquely “clean” ingredients that have no artificial colors, flavors, additives or preservatives. After choosing their type of dough, customers move down the assembly line as the staff add ingredients, and the completed pizza is cooked in the stone-hearth oven in only three minutes. Blaze’s oven is “oversized”, and combined with their “back line”, should have the necessary capacity to build delivery and on-line ordering as customers increasingly choose these options. Salads, S’more pies and blood orange lemonade are among other products offered. Blaze offers 8 signature pizzas, designed by Chef Brad Kent, or guests can “build their own” pizza all for one price. Therefore customers can choose any or all toppings, purchasing a pizza that could sell elsewhere for $12 to $15, for about $8.00.
Expansion has been rapid for this predominantly franchised chain, and volumes have been among the highest in this segment. Over 50 franchise groups have been signed up within the U.S. and Canada. Blaze is now also focused on selling franchises in smaller cities through the country, while also starting its international expansion. Blaze finished 2017 with 237 total restaurants, including 5 company operated units, in the US and Canada. The footprint is about 2500 square feet, the total startup investment is about $700,000/location, cost of goods runs around 28% and fully loaded labor approximates 30%. Newest restaurants are projected to open at approximately $1.2 million, usually building to about a $1.4 million rate in the second year. The 117 restaurants in the system that were 18 months or older generated an average unit volume of $1.424 million. The 5 corporate owned restaurants over 18 months old averaged $2.063 million. The ongoing royalty is 5% and the creative fund is 2%. The initial franchise fee is $30,000. The operating model for franchisees projects to a 35-40% cash on cash (EBITDA at store level) return by the third year, after royalties. The average check is $14.00 and the average price/pizza with attachment is $9.00. Lunch (46%) and dinner (54%) provide a fairly balanced daypart appeal. 75% of the customers dine in the restaurant, 25% off premises and 7% is ordered online. Blaze is leveraging technology and connecting to Millennials, as seen by their followers on Facebook, over 1 million email subscribers, app downloads and more. The company sees additional sales opportunities with 3rd party delivery, drive-thrus, new products and line extensions and leveraging technology.
During 2017, 64 stores opened, and the Company projects that about 85 new stores will open this year, which would bring the 12/31/18 total to 325. In 2016 “Flagship” locations were opened at DisneyWorld in Florida and Universal CItyWalk in Los Angeles as well as Houston International Airport. Similar high profile locations will have opened during 2018 in Kuwait, Bahrain, Saudi Arabia and over 10 in Canada. The Company expects that over 100 locations will open annually in 2019 and beyond. In addition, the Company has begun development of non-traditional locations, an area with obviously very large incremental potential, having signed agreements with HMS for airports and Sodexho for schools/universities.
Clearly, with the franchising experience of the Wetzels, the culinary skills of Brad Kent, and the seasoned executive team, Blaze is equipped to capably lead their franchised expansion. Once a franchised chain reaches the critical mass necessary to support its franchise system, well positioned franchise companies most often prove to be excellent long term investment due to the free cash flow characteristics. From what we see, Blaze is one of the highest quality companies serving fast, artisanal pizza, and the unchallenged leader in terms of a franchised model within this segment.
MOD Pizza – One of Roger’s privately held “Up & Comers”
Tuesday night, March 15th, Jim Cramer interviewed Scott Svenson, co-founder of MOD Pizza on his widely watched “Mad Money” show. I’m happy to say that we were four months ahead of Jim with our “Up and Comer” focus on MOD Pizza back in November. Rather than restate the facts from our last story, I prefer to provide the following short update, and refer you to our original piece below.
MOD has recently raised an additional $32 million of equity in a round led by previous investor, Perella Weinberg Partners. They had previous led a $45 million raise in March 2015, so are obviously pleased with the progress. A total of $106 million has now been raised by MOD to support their ongoing growth.
There are currently 110 locations operating in 16 states. During 2016 the first locations will open in Kansas, Kentucky, Missouri, Ohio, Wisconsin, and the U.K., which is the first international store. The total store base, which now includes 5 experienced multi-unit franchise operators will have doubled from the end of 2015 until yearend 2016.
The “people first” culture, which Scott and Ally Svenson has already been recognized by prominent news organizations. Fortune Magazine ranked MOD seventh on its annual “20 best Workplaces in Retail” list, and the Puget Sound Business Journal has ranked MOD as one of “Washington’s Best Work Places”. The rapid growth has of course attracted lots of additional media coverage and “fastest growing” rankings.
Lastly, my comment at the end of the article below that “Harvard Business School should do a case study on this one” turned out to be after the fact. HBS had just completed such a study just a couple of months earlier. Clearly, MOD Pizza, with Scott Svenson leading a uniquely “enlightened” management team, will be prominent in business news for many years to come.
For more information on MOD Pizza, refer to our “Homepage” and click through on MOD under Privately Held “Up and Comers”
Re-Printed from November 12, 2015
I returned last night from the Restaurant Finance and Development Conference in Las Vegas, with 2600 restaurant related professionals, the must-attend Conference of the year, IMHO.