MOD Pizza might have escaped bankruptcy with its sale last week to Elite Restaurant Group.
That doesn’t mean it is out of the woods yet.
We spoke with several people who looked at the Seattle-based MOD or were familiar with the brand’s circumstances. Many of them described the situation as “a mess” and one person called it “a house of cards.” Several said they believe the company may have to close more restaurants to make the brand work.
The key problem for MOD is simple: It grew rapidly, getting tons of investment cash along the way, despite a model that was not profitable enough at the unit level. But rather than cut back on growth, the company tried growing out of its financial problems. As they usually do, those financial problems ultimately caught up with the company.
MOD was by far the biggest fast-casual pizza chain in the U.S. It generated hundreds of millions from investors and grew to more than 500 locations. While a lot of brands grow quickly, MOD did so with mostly company units (it’s about 85% company-owned).
But as we’ve noted before, its average unit volumes are much smaller than they should be, and they haven’t grown for years. The $1.2 million AUVs are less than half those at the fast-casual Mediterranean brand Cava, which operates smaller units.
Some of that could certainly be blamed on all kinds of external factors. The demand for fast-casual pizza certainly hasn’t materialized like many expected. And the shift to takeout-focused brands clearly kept some people from dining there. Some also wondered whether the brand’s customizable pies led people to request extra sausage or pepperoni, driving up food costs. Its pizzas are all priced the same.
And in recent years, the cost of food and labor took off and profitability was harder even for otherwise strong-performing companies.
(Read more about the new owner of MOD Pizza here.)
MOD kept building, however, despite the lack of real demand growth. And it apparently built anywhere, with locations spread far and wide. The chain’s locations are in 25 states, 13 of which have 10 or fewer restaurants. There are eight locations each in South Carolina, Florida, and Idaho, seven in Ohio, four each in Indiana and Kentucky, three in Oklahoma, two each in Kansas and Alabama, and one each in Nevada and Delaware.
The spread-out nature of the company’s locations has a two-fold problem. For one thing, servicing those locations is expensive. Food and paper costs more because distributors must drive further out to deliver the goods. And support staff travels further to get to a smaller number of restaurants.
But it’s also difficult to get market penetration. Brands that grow quickly on such a large scale without much name recognition work harder to generate interest. Many brands that grow that quickly, and that far out from where they’re best known, often struggle in their more distant locations. (See Papa Murphy’s.)
And, as we’ve said before, the demand for growth likely also necessitated the brand accept costly leases that made it difficult to profit from individual locations.
And indeed, sources said MOD has a lot of unprofitable locations.
Still, all this growth required a lot of corporate overhead. General and Administrative costs reached nearly $72 million in 2022, according to sources. They dropped to nearly $54 million last year, but even that was considered excessive.
MOD burned through a lot of cash. The company raised more than $300 million in investment cash before the pandemic. It also took on debt. And it burned through all of it because not enough of its restaurants were making money.
The company dramatically increased spending on marketing over the past couple of years, but sources suggested that the marketing efforts never quite took hold.
The IPO planned in 2021 could have helped MOD raise some cash and pave the way for an exit for some of its investors, but the market froze. Financing also became more difficult.
By early this year, MOD changed leadership and began running a sale process.
MOD attracted some potential buyers, mostly in the form of budget acquirers like those that are eyeing brands like Red Lobster, BurgerFi or Rubio’s. But its finances were challenging enough that it also had to explore a bankruptcy process, which is when the extent of its financial issues became public.
The new owner, Elite Restaurant Group, could cut dramatically from corporate overhead.
But many people we’ve talked with expect it will have to close a lot more than the 44 restaurants it has closed to date. If it does have to close a lot of restaurants, MOD could be forced into Chapter 11 bankruptcy to get out of those leases.
All that could put MOD into better footing. But it will ultimately need to get people interested in fast-casual pizza. And that remains an open question.