The Rise & Fall of MOD Pizza

The fast-casual dining segment, once the shining light of innovation and growth in the restaurant industry, is navigating a period of introspection. While the sector continues to expand, the recent acquisition of MOD Pizza by Elite Restaurant Group after facing potential bankruptcy serves as a stark reminder of the challenges facing brands in this increasingly competitive landscape.

As someone with a professional connection to MOD Pizza, its struggles hit close to home. I wouldn't be where I am today without them, and I sincerely hope they find success in this new chapter.

The Cautionary Tale

MOD Pizza's journey from a fast-casual favorite to a distressed asset underscores the perils of unchecked growth and a misaligned business model. Jonathan Maze, editor of Restaurant Business and the insightful "Fast Food Minute" briefs, succinctly summarized MOD Pizza's downfall:

• Rapid Expansion Fueled by Investor Expectations: The pressure to meet investor demands for aggressive growth led to potentially unsustainable expansion and operational challenges.
• High Real Estate Costs: In their relentless pursuit of growth, MOD signed high priced leases, overestimating demand for fast-casual pizza despite their stagnant Average Unit Volume (AUV) over the past decade
• Inability to Adapt: MOD Pizza's model struggled to keep pace with the shift towards takeout and delivery, exacerbated by the COVID-19 pandemic
• Funding Freeze: As the company's financial situation deteriorated, coupled with a weak macroeconomic outlook and reticent investors, they were unable to secure additional funding

Ultimately, MOD Pizza avoided bankruptcy by selling to Elite Restaurant Group. [Source: Jonathan Maze's LinkedIn post “Fast Food Minute” on MOD Pizza's bankruptcy]. Hopefully, I didn't butcher Jonathan's pitch too badly-- I would highly encourage you to follow Jonathan Maze .

A Strategic Miscalculation

A critical factor in MOD Pizza's downfall was their oversized real estate footprint, a challenge that aligns with Jonathan Maze's observations about the high cost of their leases. The typical new MOD restaurant is approximately 2,400 to 2,800 square feet and seats approximately 70 to 80 customers. [Source: MOD Pizza Franchise Disclosure Document (FDD) 2023]. In contrast, chains like Little Caesars, primarily focused on carryout and delivery, typically operate in spaces as small as 1,000 square feet or even less in non-traditional locations. [Source: Little Caesars Franchise Information].

With an average unit volume (AUV) of $1.2 million, MOD Pizza's model does not scale lacking sufficient demand to justify the larger footprint and associated costs.

What's Next?

While I do not claim to own the coveted “crystal ball,” based on Elite Restaurant Group's track record with previous acquisitions, a likely strategy for MOD Pizza will involve:

• Closure of Underperforming Stores: Elite has a history of closing down underperforming locations to cut losses and improve overall profitability. [Source: Restaurant Business Online - "Elite Restaurant Group acquires Daphne's, Noon Mediterranean"]
• Focus on Franchising: Elite Restaurant Group has also shown a propensity for leveraging the franchise model to drive growth and/or reduce their capital expenditure. They might look to expand MOD Pizza's franchise network, capitalizing on the brand's remaining strength while minimizing their own financial risk. [Source: Franchise Times - "Elite Restaurant Group Acquires Project Pie"]

In essence, the new ownership will likely adopt a leaner, more efficient approach, focusing on profitable locations and leveraging the franchise model to fuel future growth.

Navigating Growth & Challenges in Fast Casual

The fast-casual dining segment continues its dynamic evolution. While the recent struggles of MOD Pizza serve as a cautionary tale, the overall outlook for the segment remains promising.

Echoes of 1995: A Rising Tide

Wells Fargo analysts suggest that once the Federal Reserve begins cutting interest rates, investors could experience a market scenario similar to 1995. This period was characterized by a thriving economy and a booming stock market, which created a favorable environment for growth across various sectors, including the burgeoning fast-casual restaurant industry. [Source: CNBC - "Why Wells Fargo says investors may face a rerun of 1995 once the Fed cuts rates"]

The "rising tide lifts all ships" philosophy resonates here. A strong economy and positive investor sentiment can buoy the entire fast-casual segment, providing opportunities for both established players and newcomers.

Growth Amidst Saturation

This optimism is further supported by venerable industry reports that cite continued growth of the fast-casual market. According to Allied Market Research, the global fast-casual restaurant market is projected to grow from $124.5 billion in 2022 to $337.8 billion by 2032, representing a compound annual growth rate (CAGR) of 10.4%. [Source: Allied Market Research - "Fast Casual Restaurant Market"]

However, this growth also brings increased competition and potential market saturation. As more brands enter the space, each player's share of the market inevitably shrinks, making it crucial for brands to differentiate themselves and offer unique value propositions.

Resilience & Success Stories

Despite recent headwinds, the fast-casual segment has historically demonstrated resilience, often exhibiting lower failure rates compared to other restaurant categories. While precise figures can vary depending on the methodology and data source, studies suggest that the fast-casual segment's failure rate tends to be lower than the overall restaurant industry average, particularly in the early years of operation

There’s also numerous success stories of brands like Shake Shack, Chipotle, and Cava Grill which continue to delight their customers and have minted many millionaires.

Aspiring Franchise Owners

For prospective franchisees considering entering the fast-casual market, the landscape offers both opportunities and challenges. The stories of both MOD Pizza and successful brands offer valuable lessons:

• Strategic Growth: Careful planning and analysis are crucial for expansion decisions. Avoid the temptation of rapid growth at the expense of profitability and operational excellence.
• Adaptability: Embrace technology, optimize off-premise capabilities, and continuously innovate to stay relevant.
• Operational Efficiency: Streamlining operations, controlling costs, and maximizing efficiency are vital for maintaining profitability.
• Differentiation: Find your unique niche and offer a compelling value proposition.

Conclusion

The fast-casual segment remains ripe with opportunity for brands that can navigate its complexities. By learning from both the successes and failures of others, aspiring franchisees can increase their chances of building a sustainable and thriving business in this dynamic segment.

I would love to hear your comments below!