Pizza Experts
It was September 1989, and Joe Hillier and Harold Baker, prospective franchisees, were excited about their upcoming interview with Rob and Wayne Moore. The brothers were coowners of Pizza Experts, the most popular pizza company in Newfoundland, and they were about to Select a suitable franchisee for St. John's, Newfoundland. Despite previous success in selecting franchise owners, Rob and Wayne wondered if the existing franchise agreement offered the right benefits to attract the "best" franchisees. Conversely, Joe and Harold were interested in owning a Pizza Experts franchise only if it provided sufficient returns. The interview would allow the two groups of men to evaluate the franchise arrangement and each other.
Company and Market History
In 1985, Rob Moore left Rob's Pizza Palace, a St. John's restaurant owned by himself and three others, to create Pizza Experts. On December 10, 1985, Pizza Experts opened its doors on Torbay Road (Exhibit 5). This was a popular location for family and fast food restaurants, as it was adjacent to a heavy residential area in the East end of the city. Without formal market research studies on the area, Rob had reactedto his business instincts in selecting Torbay Road as the site. His instincts proved accurate; in the 1986 business year, sales exceeded the expected $300,000 level. In August 1986, less than a year after opening the Torbay Road Store, Wayne Moore opened Pizza Experts' second store in Churchill Square. This was a very successful retail area, housing specialty shops and services near Memorial University of Newfoundland (student population of approximately 16,000). In February 1988, the brothers opened a third store on Kenmount Road, a prime commercial area of the city. According to Rob, sales continued to increase at the Churchill Square and
This case was prepared by Professor Lynn Morrissey and Steve Christie (MBA 1991) of Memorial University of Newfoundland for the Atlantic Entrepreneurial Institute as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management.
Copyright © 1991, die Atlantic Entrepreneurial Institute, an Atlantic Canada Opportunities Agency funded organization. Reproduction of this case is allowed without permission for educational purposes, but all such reproduction must acknowledge the copyright. This permission does not include publication.
Torbay Road outlets due to a new marketing concept, i.e., pizza delivery to your doorstep within 35 minutes. He also believed high frequency advertising and positive wordofmouth advertising led to increased patronage at all stores.
In the late 1980s the pizza market was booming across Canada. According to Food Service and Hospitality magazine, more than $400 million profit was earned in 1988 by Canada's top 100 pizza establishments, and every pizza company ranked in their Top 100 list experienced sales growth. A major portion of this growth was in the takeout and delivery part of the business. According to the Canadian Restaurant and Food Services Association, the takeout and delivery market grew by 16%, outpacing all other food sectors in 1988. This market was expected to be the largest future growth leader, due in part to the VCR revolution. Consequently, the number of people interested in entering this booming market was growing, making it easier to attract potential franchisee owners for expanding pizza companies.
Rob and Wayne perceived these growth opportunities in the pizza market and decided to set up Pizza Experts franchises. As Rob noted, "Franchising is the fastest way our company can expand; major capital requirements are covered by the franchisees. In addition, having franchisees to operate individual outlets provides more time for Wayne and me to develop future strategies for Pizza Experts."
After the Kenmount Road outlet was operational, the Torbay and Churchill outlets were placed on the market as franchise opportunities. The two stores sold quickly because of the good reputation built by the established Pizza Experts restaurants. 'Me Kenmount Road store remained owner operated. The first franchise outside St. John's was opened in Mount Pearl in August 1988. Much to Rob's delight, the new owner had previously been employed by Pizza Experts. As Rob said, "We like to build from within, since these are the people most familiar with our operations." A month later, a franchise was opened in Comer Brook, about 700 km from St. John's on the West coast of Newfoundland. The most recent franchise opened on Water Street, in the downtown district of St. John's, in June 1989.
After four years, Rob and Wayne's company had expanded rapidly from a single outlet to a $5 million operation comprised of six restaurants. Rob believed Pizza Experts had become the most popular pizza company in Newfoundland. On an average Friday night, the St. John's outlets alone handled more than 1,000 telephone requests for pizza delivery.
The Franchise Arrangement
As part of the franchise application process, potential owners of Pizza Experts outlets had to submit a Pizza Experts franchise application to Rob and Wayne
Moore (Exhibit 1); they were also required to agree to credit and personal reference checks. Furthermore, potential franchise owners were usually required to have $150,000 dollars personal net worth in order to merit an interview. Potential franchisees were permitted to evaluate an income projection and Pizza Experts Proven Recipe of Success (Exhibits 2 and 3). The income projection was not an income guarantee; it did, however, give the future owner an idea of expected revenue and costs. It was also imperative that the franchisee put many hours and a lot of additional resources into creating a successful restaurant.
The Pizza Experts initial franchise fee of $25,000, and royalty fee of 4% of annual gross earnings were somewhat less expensive than those of competitors (Exhibit 4). Rob felt it was necessary for the franchisee to have a minimum of $50,000 cash to cover equipment purchases and leasehold improvements. Previous experience had shown that a $ 10,000 operating line of credit would be necessary to cover working capital needs. The initial franchise term was ten years, with an option to renew for another ten years. Franchise fees would be renegotiated upon renewal.
As part of the franchise agreement, ingredients for all outlets were ordered from one supplier to standardize quality. They were packaged with the Pizza Experts logo and sold to the franchise outlets. "Dough is the pizza; anyone can sprinkle on the toppings," claimed Rob. The Moore brothers had spent years experimenting to develop the best possible crust and did not want franchisees to use anything else. Rob substantiated his belief in the importance of the dough/crust by citing a 1987 study conducted by M5 Advertising. The St. John's market research company identified taste as a positive factor for 42% of those who had eaten at Pizza Experts.
A close, friendly atmosphere in an efficiently run business was encouraged at all locations, and closely monitored by Rob and Wayne. In fact, franchise owners adhered to a regular reporting schedule. Wayne, who was in charge of finance, received daily, weekly, and monthly sales data from each franchisee. In addition, each franchisee had to produce audited annual financial statements. If there were any problems with operations, the franchise owners had to answer to the Moore brothers directly. One franchisee had already been replaced because of poor management skills and his refusal to take the brothers' management advice to improve performance. The Moore brothers did this reluctantly; they believed in providing management advice to franchisees not only in startup, but for the duration of the franchise agreement. Having exhausted all options to improve performance in the affected outlet, Rob and Wayne had no choice but to end the franchise relationship because of its potential negative impact on the Pizza Experts family.
As further support and protection for franchisees, Rob and Wayne provided territory protection. To accomplish this, the city was divided into five zones with population blocks of 25,000 people (Exhibit 5). Zone protection guaranteed that only one store would be built in each zone. Therefore, future restaurants would be situated properly around the city thus reducing "cannibalisation" of established outlets' markets. This zoning also ensured quick pizza delivery during the busy weekend nights. Each outlet was allotted a particular zone so that delivery service would be efficient and the possibility of one store becoming swamped with orders would be minimized. To emphasize this concept, a new marketing slogan was also introduced: "You are now entering the Pizza Experts Zone." The Moores knew the zoning had proven successful, since 80% of Pizza Experts takeout customers stated location as their main reason for selecting the company when surveyed in the 1987 study by M5 Advertising. Pizza Experts also used a centralized computer system for takeout orders. The orders were sent to the appropriate zone and the franchises were billed for their proportional use of the telephone and computer system used in delivery operations.
Once a Pizza Experts franchise was operational, the outlet had to take part in a cooperative advertising program supported by 3% of annual gross sales. This program helped ensure growth of the company, positive exposure for new outlets, and continuation of the existing consumer advertising program. To give the restaurants continued visibility, the cooperative advertising program ufilized four media: radio, television, newspaper, and direct mail. The franchise owners met monthly with Rob and Wayne to discuss the merits of proposed advertising programs. No new sales promotional activities were adopted unless a majority of the franchisees agreed to the new concept.
Since Pizza Experts catered to pizza lovers between the ages of 18 and 40, a theme of fun and entertainment was emphasized. Charlie Chaplin, used on the Pizza Experts logo to symbolize relaxation and enjoyment, reinforced this theme. As well, one unique advertising medium, a St. John's Transportation Commission bus, used the Charlie Chaplin symbol, and reminded pizza lovers of the delivery guarantee and Pizza Experts phone number ("double onedouble011).
The Franchisees
All Pizza Experts established franchise owners had many of the qualities the Moores looked for in a franchisee. From experience, Rob knew the importance of a franchisee's reputation. "If an owner is not well liked, that owner is not going to be supported by the community." Since Rob viewed St. John's as a conservative centre, with thirtythree pizza shops in the greater metropolitan area, hebelieved the importance of a favourable public image and an outgoing personality could not be minimized.
Rob also stressed the importance of dedication. Owners had to focus all their efforts on the restaurant. Ambition and quality were not enough. Other desirable characteristics were sound financial backing, business sense, experience, and education. Although there was no ranking system for these characteristics, all applications were measured using a plus/minus rating. The financial background and favourable exposure in the community were weighted fairly heavily. The Moores preferred "business marriages," where individuals with experience in the restaurant business would team up with people having sufficient capital to start a franchise.
Rob and Wayne were impressed by the number of individuals interested in learning more about the Pizza Experts franchise concept. Applications arrived regularly from potential franchisees. In the most recent screening, Rob and Wayne identified Joe Hillier and Harold Baker as the best candidates for further consideration.
Potential Franchisees' Background
Having completed the application form, Joe and Harold believed they had many of the qualities the Moore brothers seemed to be looking for in their franchisees. Joe had a Master of Business Administration (MBA) from Dalhousie University in Halifax, Nova Scotia. During his academic studies he had been employed as an assistant manager for an independent pizza outlet, and for the past twentythree years he had owned and operated an income tax service in Comer Brook. Joe had a lot of practical experience but his references indicated that he was not receptive to new ideas and change. He came from a wellrespected, wealthy family in the Comer Brook area. Over the years Joe had managed to save $100,000 for a new business venture, and his family was prepared to provide another $20,000 if required.
Harold had received his high school diploma from Brother Rice High School in St. John's and a business diploma from the Newfoundland Career Academy, a private college. While at the Academy, Harold studied Business Administration, a oneyear course with a primary focus on accounting and computer training. Course work, however, also included entrepreneurship, different forms of Canadian business, communication, and supervisory skills. Harold was an enthusiastic individual with a wellrounded business background, despite having declared bankruptcy in his previous venture. Undaunted by the bankruptcy, Harold had no difficulty quickly finding employment. In fact, he was immediately employed as a marketing manager with a major oil company in St. John's.
His references highlighted his ability to produce excellent marketing promotions, but commented negatively on his brash mannerisms. With their combined skills, Joe and Harold were confident they could open and successfully run Pizza Experts' next franchise in St. John's. The men were looking forward to meeting Rob and Wayne and finding out more about the franchise agreement.
Case Questions
- Identify the factors Rob and Wayne considered important in evaluating potential franchisees. Evaluate Joe and Harold against each of these criteria. Make a recommendation to the Moores on granting a franchise to Joe and Harold.
- What, if any, elements of the franchise arrangement should be altered to enhance the benefits each party would receive?
- Given the information provided in the case, would you buy a Pizza Experts franchise rather than purchase another pizza franchise. Would there be advantages to starting a business from scratch rather than purchasing the franchise? Evaluate the options.
- What advice would you give an entrepreneur evaluating a Pizza Experts agreement?
Exhibit 1
Pizza Experts Franchise Application
Potential Franchisee Data Sheet
Source: Company files.
Exhibit 2
Projected Operating Statements1
1 For illustrative purposes only.
Exhibit 3
Proven Recipe of Success
Source: Company files.
Exhibit 4
Comparison of Franchise Financial Requirements
Source: Telephone survey.
Exhibit 5
Pizza Experts Zones, St. John’s/Mount Pearl Area
Source: Original drawing, Stu Moss.