Please make sure to address the following questions in your written essay:
Briefly summarize the case. (1 paragraph)
What strikes you as distinctive about how MOD operates and its employment practices? (2-3 paragraphs)
What challenges does MOD Pizza face? If you were the Svensons, how would you categorize those challenges from the most-important and most-pressing, to the least? (2-3 paragraphs)
3 pages double spaced, Times New Roman 11.
MOD Pizza: A Winning Recipe? 9-416-004 R E V : F E B R U A R Y 2 4 , 2 0 1 7 Professor Boris Groysberg, independent researcher John D. Vaughan (President, Vaughan Partners, Inc., and President's Program in Leadership (PPL) 2012), and Case Researcher Matthew G. Preble (Case Research & Writing Group) prepared this case. This case is part of the YPO/OPM research project. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2015, 2017 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. B O R I S G R O Y S B E R G J O H N D . V A U G H A N M A T T H E W G . P R E B L E MOD Pizza: A Winning Recipe? Competitors can copy our store design and our pizza, but not our culture. — Ally Svenson, co-founder and head of brand Scott and Ally Svenson, founders of the Bellevue,a Washington-based MOD Pizza (MOD), sat in their living room one evening in May 2015 preparing for an upcoming board meeting. The young company already had 46 stores, and had recently raised $45 million to fund its ambitious growth strategy of 100 stores by the end of 2015,1 and 200 stores by the end of 2016. The Svensons were successful serial entrepreneurs who wanted MOD to not only become a solid business, but to have a meaningful impact on the lives of its employees and in the communities in which it operated. To this end, MOD paid its employees well, provided advancement opportunities, and worked hard to foster a strong company culture that was welcoming and supportive, and gave employees—known as “MOD Squaders” or “MODsters”—considerable autonomy while still expecting strong performance. MOD’s leaders worked hard to nurture the culture that had organically formed at MOD over its seven-year history, and the Svensons discussed how to retain and sustain its core elements as the company expanded. Did MOD need safeguards, and if so what should they be? Or could the culture be successfully spread by hiring the right people at the store-, district-, and market-manager level, inculcating them in the MOD culture, and trusting them to train frontline staff? The option to go public at some point in the future was also on the table. Would MOD be able to stay true to its founding values and principles as a public company, or would shareholder demands ultimately change its ethos? Pizza Restaurants Pizza was a popular food in the U.S. One market research firm found that 84% of adults had eaten pizza made outside the home within the preceding month2 (see Exhibit 1 for pizza consumption data). a Bellevue was a city of 130,000 people located near Seattle. Source: City of Bellevue, “City Profile,” http://www.ci. bellevue.wa.us/profile-intro.htm, accessed August 2015. For the exclusive use of S. Eaton, 2023. This document is authorized for use only by Steve Eaton in MGMT 6100 HRM - Fall 2023 taught by Jiatian Chen, California State University - Bakersfield from Aug 2023 to Dec 2023. http://www.ci.bellevue.wa.us/profile-intro.htm http://www.ci.bellevue.wa.us/profile-intro.htm 416-004 MOD Pizza: A Winning Recipe? 2 Consumers either ate pizza in restaurants or purchased it for delivery or pickup from restaurants ranging in size from single-location proprietors to national chains such as Domino’s Inc. One market research firm estimated that the U.S. pizza industry was composed of over 38,600 restaurants projected to earn $39.3 billion in 2015.3 An emerging category of pizza restaurants were fast-casualb concepts, and the U.S. might have as many as 2,000 such stores by the late 2010s.4 The concept was particularly popular with young customers. “This new generation, Millennials [those born between 1980 and 19995], they’re used to getting everything their way . . . . It’s just a customized world they’ve grown up in; they haven’t known anything different,” explained the CEO of one such restaurant.6 Scott felt that the true fast-casual pizza sector comprised a small grouping of restaurants that included MOD, Blaze Pizza, Pie Five Pizza Company, Pieology, PizzaRev, Pizzeria Locale (backed by the fast-casual chain Chipotle), Project Pie, and Uncle Maddio’s, among others.7 “The fast-casual restaurant category has gotten a lot of press because of the successful initial public offerings [IPOs] of companies like Shake Shack, Potbelly, and a number of other concepts that have been very well received by the public markets,” Scott explained of this category’s emergence. “So it is not only the hottest category within the restaurant space [see Exhibit 2 for a comparison of sales for a fast-casual and a quick-service restaurant]; it may well be the hottest category with growth equity right now. But the fast-casual pizza niche that we’re in is a niche that just didn’t exist a few years ago.” Ally elaborated on Scott’s latter point: “Raising four boys, we were always out driving them to and from activities in the evening. We’d look for quick meals but we didn’t want fast food. One of the only things everyone would agree on was pizza, but we didn’t have time to sit down at a restaurant. Instead, we’d always end up at Chipotle because the food was good and it had a cool atmosphere. It surprised us that no one had done anything similar for pizza.” Customers’ ability to order a meal to their specifications was a key aspect of these fast-casual pizza restaurants,8 and they shared a number of other similarities. “Their executives all toss around the words artisan, choice, and control and regularly reference other fast-casual categories, like Mexican, sandwich, and burgers, in conversation. The stores all boast a wide range of crusts, toppings, sauces, and cheeses. They all bake their pizzas in specialized ovens in just a few short minutes. Most are focusing on a personal-sized [pizza] . . . and offering a laid-back, modern dining room and beer and wine services. And they all want to be the Chipotle of pizza,” one observer said.9 Prices were relatively uniform between the restaurants MOD competed with—typically around $7 or $8 for an individual- size pizza—and these prices included customers’ ability to add as many toppings as they wanted. Many of the major fast-casual pizza restaurants had locations across the U.S., but California was a particularly intense area of competition for such chains as Blaze Pizza, Pieology, and PizzaRev.10 The East Coast, by comparison—particularly the Northeast—had a smaller number of restaurants. Blaze Pizza had four locations near New York City (two in New Jersey and two on Long Island) and three near Washington, DC, but none near Boston or Philadelphia.11 Neither Pieology nor PizzaRev had any East Coast stores.12 Pie Five had no stores open north of Maryland.13 Blaze Pizza’s greatest concentration of its stores was in Southern California.14 The company recorded $33 million in system-wide sales in 2014,15 and anticipated over 100 locations operating in 2015.16 Pieology’s 42 stores (in 2014) earned $44.6 million in system-wide revenue.17 Most of Pieology’s b Fast-casual restaurants were “a hybrid segment of fast food and casual dining, combining the convenience of limited service with the ambiance and quality of full service. Defining features include check averages of $6-9; decor that is more sophisticated than a QSR (quick service restaurant); and food prepared to order, with customization of ingredients by patron being the norm.” Katrina Fajardo, “Scope and Themes,” Pizza Restaurants—US, November 2014, Mintel, accessed April 2015. For the exclusive use of S. Eaton, 2023. This document is authorized for use only by Steve Eaton in MGMT 6100 HRM - Fall 2023 taught by Jiatian Chen, California State University - Bakersfield from Aug 2023 to Dec 2023. MOD Pizza: A Winning Recipe? 416-004 3 stores were in California and clustered around Los Angeles, San Diego, and San Francisco, though it had stores as far east as Alabama and Kentucky.18 Project Pie had 20 locations;19 nine stores were in the U.S. (six in California), but it had a strong international presence with one store in Scotland and 10 in the Philippines.20 PizzaRev had 28 stores, of which 21 were in California and the remainder in Utah, Minnesota, South Dakota, and Texas.21 Uncle Maddio’s had 37 stores,22 and one observer noted that the company and its franchisees were “on track to have 300 restaurants open in five years with 1,000 units in development and [were] opening units every 10 days.”23 The fast-casual pizza sector attracted interest from professional restauranteurs: the founder of the Smashburger chain started Live Basil Pizza,24 Blaze Pizza was started by a founder of Wetzel’s Pretzels, Buffalo Wild Wings had invested in PizzaRev, and the former CEO of Applebee’s was a Pie Five franchisee.25 As the head of one chain noted, “It’s a land grab . . . . The stakes are huge. Who gets to own fast-casual pizza?”26 Founding and Growing MOD Scott and Ally were raised in Bellevue27 and moved east in the mid-1980s (a year apart) to attend college (Scott at Harvard and Ally at Wellesley). The couple married and moved to London, England, after graduation, where Scott worked in finance28 and Ally in publishing.29 The two started their own business, Seattle Coffee Company, in 1995.30 Ally worked at the company full-time while Scott initially continued working as deputy CEO of a healthcare company.31 “Setting the business up was a lifestyle thing. It wasn’t something we did, thinking, ‘Here’s a great business opportunity, we’re going to make a lot of money.’ It was more, ‘Here’s something we miss in our daily lives.’ That’s probably why it was so successful—it was a labour of love,” Scott said.32 The two grew the company to 65 locations in the U.K., and had 12 licensed locations across South Africa, the Middle East, and Southeast Asia. The Svensons sold the company to Starbucks in 1998 for some $85 million.33 Scott stayed on through 1999 as the president of Starbucks U.K. and then of Starbucks Europe.34 The Svensons then helped launch and build the Carluccio’s restaurant chain, which also proved to be a financially lucrative venture. The company went public in 2005,35 and had 34 U.K. locations by early 2008.36 The Svensons had returned home to Bellevue in 2000 to raise their four children. Scott established an investment firm, the Sienna Group, but neither he nor Ally were actively looking for a restaurant start-up when the idea for MOD came to them. The Svensons were approached in the late 2000s by an entrepreneur who had previously opened restaurants to sell pizza by the slice, and he was now looking to sell personal-sized pizzas. The idea was rough, but the Svensons were intrigued. The Svensons recruited some experienced restaurant entrepreneurs, and together they worked to refine this idea into a restaurant concept. The Svensons chose to name the company after Britain’s “mod” youth culture of the 1950s and 1960s, which Scott said was to “evoke the attitude, energy, and spirit of the mod era,” characterized by Ally as a time of “playful and innocent rebellion.” This fed into the company’s personality and branding (see Exhibit 3 for in-store advertising). The name also stood for the company’s mission to “MODernize” consumers’ pizza restaurant experiences and for customers’ freedom to “MODify” pizzas to their liking. Lastly, MOD could also stand as an acronym for “made on demand.” MOD Launches The first store opened in November 2008 in the midst of the global economic recession, and the founders used this opportunity to stress-test the concept. “We wanted to see how inexpensive we could make our food and how much we could pay our people,” Scott said. MOD’s leaders decided to let For the exclusive use of S. Eaton, 2023. This document is authorized for use only by Steve Eaton in MGMT 6100 HRM - Fall 2023 taught by Jiatian Chen, California State University - Bakersfield from Aug 2023 to Dec 2023. 416-004 MOD Pizza: A Winning Recipe? 4 customers add as many toppings as they wanted to their pizzas,