Marco's Pizza shifts its focus to holding the fort

7/30/2001

After a period of explosive growth in which Toledo-based Marco's Pizza, Inc., became a dominant player not only in its hometown but in Cleveland as well, founder Pasquale “Pat” Giammarco said, “It's a time to build from within.”

“There are times to go out and conquer,” he added. “But now, with the economy down and the labor market tight, it is time to hold down the fort.”

Starting with a single pizza shop in suburban Oregon in 1978, the 47-year-old entrepreneur cooked up a multimillion-dollar regional pizza empire with 127 outlets. Over the past year, however, the company's rapid growth has ebbed.

Pizza sales have slowed, plans to expand into Pennsylvania were abandoned, and new store openings were trimmed.

Yet the $26 million-a-year firm is doing better than many pizza chains, audited financial statements show. Revenue and income were up in 2000. The company has had no mass store closings. And the chain is debt-free.

Compare that with what has happened at privately held Little Caesars, the Detroit chain owned by professional baseball and hockey team titans Mike and Marian Illich. The firm closed 41 percent of its 2,625 traditional carryout and delivery stores since 1998 in an effort to boost profitability, Crain's Detroit Business reported last month.

Papa Johns International, Inc., considered the industry's rising star, reported July 12 that sales at stores open longer than a year fell nearly 2 percent in the three months ended July 1. And Pizza Hut, the industry leader, said business declined 3 percent between mid-June and mid-July.

“The pizza business has been tough for the last year,” the Marco's chief executive said in an interview at corporate headquarters in the Franklin Park area along Toledo's busy Monroe Street commercial corridor.

The firm doesn't report quarterly results because it is not publicly traded. But Mr. Giammarco conceded that “sales have been basically flat” in recent months.

That follows a strong year in 2000.

An offering circular, which the Federal Trade Commission requires the firm to provide to potential franchisees, shows that Marco's had a profit of $2.8 million last year, up 29 percent from $2.2 million in 1999.

Sales at the firm's 40 company-owned stores were $23.9 million in 2000, up from $22.1 million the year before. Payments from franchisees and other revenue sources brought in an additional $2.1 million, unchanged from the year before.

The average store had $518,000 in sales last year, up 15 percent since 1996. The increase last year was 2 percent, half the rate of 1999.

Average store operating profit - a figure that doesn't include taxes, interest, and certain other payments -was about $91,000, according to the offering circular.

Marco's is a potent force in its hometown. Company officials say the firm controls 47 percent of the market for carry-out and delivery pizza through a web of 24 stores. The chain also says it is No. 1 or 2 in the Cleveland market.

Bob Tonkel, co-owner of Toledo's Bambino's Pizza chain, said Marco's success locally is largely attributable to market penetration: “It seems like every block there is a Marco's.”

The Toledo market, said Mr. Tonkel, is “incredibly competitive.” Still, he said average annual store sales reported by Marco's are “very good.”

Some local pizza shops bring in more money, however. Three outlets of Toledo's Original Gino's Pizza have annual sales of $4 million, according to the industry publication Pizza Today. The magazine named Original Gino's to its 2001 list of the nation's top 100 independent pizza shops.

Marco's franchisee Justin Cornell, who two years ago took over a shop in suburban Columbus, has no complaints. The 32-year-old began working at Marco's as a delivery driver in the Toledo area after graduating from Genoa High School in the 1980s. He rose through the ranks. And when a store in Hilliard went up for sale about two years ago, he jumped at the chance to buy it.

Although he puts in up to 75 hours a week, he hopes to acquire additional shops. He is pleased with the support and training provided by officials in Toledo. Competition is intense in the Columbus market. “We have our ups and downs,” he conceded. “Overall, we're definitely seeing a good pattern.”

Franchisees invest an average of $171,000 to open a new store, according to the offering circular.

Mr. Giammarco oversees Marco's from an opulent West Toledo office with black leather furniture, where a souvenir cap from an Oscar de la Hoya fight shares space with a Salvador Dali print signed by the artist.

Despite slower sales, he has no plans to depart from a winning strategy emphasizing quality, value, measured growth, and careful selection of franchisees.

“If we took everyone with money who was interested, we would probably have 1,000 stores,” he said. “But 900 of them would be failures.” The firm wants to stay within a 200-mile radius of Toledo. Distance from headquarters was one reason for the closure of the firm's only Pennsylvania store, in Erie, last year.

This year Marco's introduced Hot2Go, in which franchisees will sell limited selections from the Marco's menu from kiosks in locations requiring quick service. One outlet is in place at Toledo Express Airport, two others will open soon at Ohio Turnpike plazas, and negotiations are under way with a number of universities.

Mr. Giammarco is less interested in invitations from gas stations to twin up in an arrangement that has become increasingly common in the fast food industry. “I'm not 100 percent comfortable with that,” said the executive who came to the United States from Italy with his parents at age 10.

The key to sales growth, he is convinced, lies not in new products and novel concepts but in attention to service and food quality. He downplays the impact of increased competition from the major chains, small independent outfits, and pricey frozen-food-section pizza.

The biggest problem facing Marco's, the owner said, is tight labor markets in Toledo, Cleveland, Columbus, Dayton, Ann Arbor, Mich., Fort Wayne, Ind., and other areas of Ohio, Michigan, and Indiana where the firm has stores.

That has been a major factor in the chain's decision to reduce store openings. A few new sites opened last year. But with closings factored in, the chain ended 2000 down two stores from the prior year, with 124 company-owned and franchised units, according to Marco's current franchise offering circular.

To attract workers, Marco's has had to raise wages in some areas.

As a result, wages, benefits, and employment taxes rose 25 percent at company-owned stores between 1998 and 2000, according to the offering circular. Meanwhile, the cost of cheese, sauce, and other supplies increased 11 percent.

Mr. Giammarco said he won't open outlets in areas without a sufficient pool of workers. “I don't want to hire people no one else wants,” he said.

The firm and its franchisees have 2,800 employees.

Rising energy costs also have hurt, increasing the cost of operating stores and payments to delivery drivers.

Although a recession would hurt, it wouldn't be disastrous, said the Marco's founder. Families tend to buy pizza even in tough times because they see it as an affordable luxury as they cut back on vacations, new autos, and other expenses, Mr. Giammarco said.

The firm has opened four stores so far this year, including in Fort Wayne, Ind. A new shop will open in South Bend, Ind., at the end of August. For now, Marco's is uninterested in entering new markets. “We've got our hands full in Ohio, Michigan, and Indiana,” Mr. Giammarco said.