Franchises and Noble Roman's and Retail and Real Estate & Retail

Noble Roman's rebuilds empire through franchising

August 20, 2007

Noble Roman's Inc. stock this year has been rising nearly as fast as its pizza dough, defying skeptics who'd written off the long-ailing Indianapolis company.

With a new business strategy built on franchising and dual-branded restaurants, Noble Roman's has seen quarter-to-quarter earnings increase for more than two years.

This month, it reported strong second-quarter results--with revenue climbing 35 percent, to $3.1 million, and profit surging 61 percent, to $704,000.

The company's over-the-counter stock, once delisted from NASDAQ and trading for less than $1, has risen to $6.80--up 83 percent this year. The increase has boosted Noble Roman's stock market value to $124 million.

"A lot of things have come together," said company President Scott Mobley, son of CEO Paul Mobley. "We had been building up to that."

Making a go of it in the $33 billion pizza industry has always been a risky proposition, and perhaps no one in the city knows that better than the Mobleys.

They've seen wild swings the past 15 years--from boom times, when the company operated nearly six dozen full-service restaurants with annual revenue topping $34 million--to the severe stumbles of the late 1990s, when the company lost more than $20 million in a four-year span.

"It was hard on them, no doubt about it. It wasn't a pretty time," said Jeremy White, editor of Pizza Today, an industry publication based in Louisville.

The Mobleys got back on their feet by shuttering nearly all the full-service restaurants and instead focusing on franchising outlets in non-traditional locales like convenience stores, airports and military bases.

It then moved into stand-alone restaurants branded as both Noble Roman's and Tuscano's Italian Style Subs. The pizza and sub shops operate in the same location, much as some Pizza Hut and Taco Bell outlets do.

Including all its formats, the company now has more than 1,200 outlets in 45 states and abroad. It operates just three of its own restaurants, all in the Indianapolis area.

Emboldened by its recent success, Noble Roman's now is on an unparalleled expansion binge. The Mobleys hope to grow their franchise network by as many as 665 units in the next five to seven years, boosting their roster of restaurants more than 50 percent.

What's stoking enthusiasm among investors and franchisees is the company's dual-branding strategy.

Franchises say the fixed costs of operating one location with two brands are lower than operating separate restaurants. There's savings on staffing and employee training as well.

And the franchise fee for the dual-brand concept is as low as $18,000, compared with as much as $25,000 for some pizza shops. Buildout costs for a dual-branded store can hit $200,000.

"I certainly looked at other [restaurant franchise] opportunities, but what attracted me was the dual concept," said Mike Powell, a franchisee in the Dallas-Fort Worth area.

Plus, he said, the sub and pizza product lines complement each other. About 70 percent of sub sales are around the lunch hour, while 70 percent of pizza sales are in the evening.

Rather than negotiating all the franchisee agreements itself, Noble Roman's is selling area development rights. Buyers of those rights then have the exclusive right to sign on franchisees in their territories, typically for five to seven years.

In addition to being a franchisee, Powell signed an area development agreement. Under the pact struck eight months ago, he agreed to develop 52 units in the Dallas-Fort Worth area by 2014.

He paid a development fee of $91,000, or 5 cents per capita for his area, and will get 30 percent of the initial franchise fees and two-sevenths of the royalties from the locations. Noble Roman's retains all training and supervision responsibilities, and must approve all franchisees and all locations.

"Because of the initial costs, they have strong incentives to make this work," Paul Mobley said.

Neither the Mobleys nor Powell would disclose sales per restaurant, though observers estimate they are in the $500,000 range. Powell said he tells prospective franchisees they should hire 15 to 17 people per restaurant and likely will see profit margins of 15 percent to 25 percent.

"It is an excellent way to grow the business with someone else's money," Marc Slutsky, chief operating officer of Street Fighter Marketing of Columbus, Ohio, said of the Mobleys' strategy.

"As long as Noble Roman's has structured its [training] manual [to help franchisees], it is not a problem. The key to success is how well it markets its locations out there," said Slutsky, who writes a column for Mississippi-based Pizza Marketing Quarterly.

But some question whether the expansion is too much, too fast.

"The restaurant industry is the most challenging industry in all franchising," said San Francisco franchising attorney and consultant Kevin Murphy, known to some in the industry as Mr. Franchise. Costs are high, hours are long, and annual employee turnover rate is staggering, often as high as 300 percent.

"That's a very ambitious growth rate. Basically, they are selling their territorial rights and that is not always a successful approach. It's a relatively unused [arrangement] in the franchise industry," he said. "Also, Noble Roman's is not what I would call a Blue Chip franchise company. That is also a negative."

Because Noble Roman's does not plan to expand its network of company-owned stores, Murphy also questioned whether the company will lose touch with its consumers.

"Zero company-owned is a red flag for me," Murphy said. "That is not a good sign."

But Scott Mobley said most investors have been excited that the company doesn't plan to own more units, focusing more on developing a strong support structure for franchisees.

"It will allow us to focus on product development, quality control, systems testing and training," he said.

Powell isn't worried. He believes he's working with a classy company.

"I can't see spending this kind of money to lose money," he said.

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