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

Failing Noble Roman's franchisees say chain doesn't deliver on promises

December 24, 2007

Noble Roman's Inc. wrote an impressive comeback story by selling its home-grown pizza and subs concepts to hundreds of gas stations, bowling alleys and food courts.

But the Indianapolis company's push to add stand-alone restaurants across the country isn't going as smoothly.

Former franchisees in Ohio, Florida and California told IBJ they lost everything after opening dual-branded Noble Roman's/ Tuscano's Italian Style Subs stores that failed after just a few months in business. They say the chain misled them about how much they would make, failed to provide the promised support, and abandoned them once their checks cleared.

Noble Roman's executives place the blame squarely on the shoulders of the failed franchisees. In an interview, Chairman Paul Mobley called their accusations lies and vowed to sue at least one for defamation of character.

"Occasionally, you sell a franchise to people who are not what you expect them to be," Mobley said. "Somebody that doesn't operate their business correctly or fails always looks for somebody to blame, not themselves."

Yet there are plenty who believe at least some of the blame rests with Mobley and his son, Scott Mobley, the president of Noble Roman's. The company began selling stand-alone franchises for the co-branded concept late in 2006. The roughly 45 restaurants account for only a small portion of the chain's 1,033 locations; most of the rest are nontraditional outlets inside other businesses.

One of the top potential problems when a pizza chain grows as fast as Noble Roman's is a lack of attention to franchisees, said Jeremy White, editor-in-chief of Louisville-based Pizza Today magazine.

"It's certainly a common pitfall when you grow in this manner, at this speed," White said.

Franchising spree

In 2007, Noble Roman's seemed to announce a new franchising deal every other week. The company, which has 45 employees, has sold rights to 24 territories. The deals call for 868 stores over the next three to eight years.

Amid all the announcements, shares in the publicly traded company jumped to around $7 apiece. In June, Paul Mobley sold about 168,800 shares--a small chunk of more than 3 million he owns--at $7.02 per share, pocketing $1.2 million. A few months later, Scott Mobley sold shares worth $830,000.

Since then, the stock has lost about 75 percent of its value. It now trades for around $1.70 a share.

In November, the chain announced a series of steps to improve the performance of stand-alone stores: a more rigorous franchisee-selection process; a longer training period for franchisees; more direct franchisee involvement in construction and marketing; and closer enforcement of operating standards.

All are prudent moves since any failure has a ripple effect on the company's ability to attract future franchisees, said Steve Delaney, a local real estate broker who once owned seven Noble Roman's locations.

"They have a vested interest in seeing their franchisees succeed," Delaney said. "No. 1, it's a revenue source, and No. 2, it leads to more franchisees in the future."

Noble Roman's still plans to add about 100 stores per year, a pace that has some former franchisees questioning the chain's motivations.

"It's real apparent now what these people are all about," said Mike Brunswick, who had to close his store in New Tampa, an affluent suburb of Tampa, after just four months. "They tell you whatever it is you want to hear. It's not even close to being true. And it's not like they're making mistakes. It's a failed business plan."

Brunswick lost $40,000 in cash, owes $300,000 on a loan, and still has a five-year lease. He expects to declare bankruptcy.

Among the problems: Brunswick said Noble Roman's misled him about how much revenue he should expect and how much overhead it would take to operate the store; and direct-mail advertising was ineffective, since coupons were delivered to a neighborhood outside the store's delivery area but never to a neighborhood across the street.

"Noble Roman's is doing this to people throughout the country," Brunswick said.

Corey Sullivan closed his store in Rancho Cucamonga, Calif., this month, after opening in June. He had to declare bankruptcy to save his home.

Sullivan said Noble Roman's sold him "a bill of goods." He said the store cost him more than $400,000 to open, well above the estimated range of $212,600 to $338,000. And after the store opened, marketing mailings went out with a map that incorrectly identified the store's location.

"From the beginning, they were very aggressive on the sales side," Sullivan said. "The other areas I talked to were so slow. They'd e-mail you, but wouldn't bother to call you."

Of course, trouble with some locations doesn't mean others aren't doing well.

The Noble Roman's in Republic, Ohio, is thriving, said owner Steve Aichholz, who opened the pizza-only store in 2005.

"They've been very good to us," he said.

Selling new franchises and ensuring existing stores stay open and successful is essential for the company's bottom line. To open a Noble Roman's/Tuscano's, franchisees must pay an initial franchise fee of $18,000 and weekly royalties of 7 percent of gross sales. Revenue for Noble Roman's increased from $2.4 million to $3 million for the quarter ending in September 2007, thanks in large part to royalties and fees.

No promises

Paul Mobley said Noble Roman's makes no promises, formally or informally, about expected revenue. He said costs for all new restaurants have fallen within the estimated initial investment range. And he said the chain leaves direct-mail and advertising contracts up to individual franchisees.

The company owns only two stores. One is downtown on Market Street and another is in Fishers.

Mobley said same-store sales results for the stand-alone stores won't be available until the end of 2008. He said roughly half the restaurants are profitable, but he would not provide specifics. According to Mobley, just three stand-alone restaurants have closed since September 2006.

"A lot of franchisees fail," Mobley said. "Some people you just can't make successful."

But it's not just former franchisees who are frustrated.

Aaron Bowen and his wife, Kim Neal, opened a store in San Bernardino, Calif., three months ago. Bowen said sales are slow, and the restaurant isn't getting much support from Noble Roman's, particularly in marketing the brand to an unfamiliar customer base.

"I get no kind of support, looking at the market," Bowen said. "We are doing everything they said to do. I'm doing all I can, believe me. But I can't do it alone."

Mike Powell was so enthusiastic about the dual-branding concept that he bought area development rights for a chunk of Texas. He now owns rights to build 32 locations.

Powell has opened three Noble Roman's/Tuscano's stores since June, and they're not doing well. Not one is profitable.

"So far, I'm not pleased," Powell said. "The numbers are below where they should be. Noble Roman's is good in terms of general logistics and operational support. But I haven't found the marketing aspect to be that great."

Powell supports the chain's plan to more carefully scrutinize potential franchisees. He believes the $50,000 in working capital that Noble Roman's suggests for new franchisees is about half what they actually need.

The bottom line: It's a tough business, he said, and a lot of people "come in with their eyes bigger than their pocketbooks."

He said food, labor and other overhead costs are pricier than he expected. And some of the instructions from Noble Roman's headquarters are unrealistic and cost-prohibitive: For example, they want each of his stores to pepper their neighborhoods with coupons on a daily basis to boost sales.

The chain also wants its stores to have pre-made pizzas in a warmer from 11 a.m. to 1 p.m., said Jessica Smith, who opened a restaurant in Westchester, Ohio, with her husband, Randy Smith. Their store didn't follow the mandate since their customers prefer freshly made pizza and the owners tired of throwing away unsold pies.

Their store closed in November after opening last December. The chain said one of the reasons for its failure was the franchisee's disregard for the Noble Roman's rules.

"There's a multitude of franchisees who are disgusted, disappointed and disheartened," Jessica Smith said. "It's all 'happy happy joy joy' in the beginning, then when the store isn't going well, you're not doing anything right."

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