Oakland County-based fast-food chains Papa Romano’s Enterprises Inc. and Mr. Pita Franchise Corp. hope a new merger and foray into co-branding will give them a stronger foothold as the companies eye a national expansion in 2008.
Restaurant analysts say combining two brands under one roof can make marketing and economic sense and follows a model that proved successful for larger chains including Pizza Hut, KFC and Taco Bell.
But they say the two companies, whose pizza delivery and pita sandwich footprints are concentrated entirely in Michigan, could find it difficult to grow their brands and succeed beyond state lines.
The companies plan to launch their new co-brand later this year by retrofitting a number of existing Mr. Pita and Papa Romano’s stores, said Casey Askar, chairman and CEO for the two companies.
He declined to specify expansion plans but said the companies are targeting markets in the Midwest, South and East Coast and would release plans in the first quarter of 2008.
Askar said the companies identified multiple existing locations for co-branding, adding that the stores “will have a new look, new equipment and that’s all in the works.”
The chains enlisted the services of St. Louis-based Moosylvania Marketing. Both brands also have opened new prototype stores: a Papa Romano’s on West Eisenhower Parkway in Ann Arbor and a Mr. Pita on Van Dyke near 15 Mile in Sterling Heights.
“It’s a great fit because (with) Pita, the majority is daytime lunch business, and pizza in general is a nighttime-weekend business,” Askar said.
The privately held companies together employ about 1,000 and have seen combined year-to-date revenues of about $34 million, he said. Both brands have seen growth in sales, including double-digit growth at some Papa Romano’s stores for the first time in five years, he said.
“On the job level, we have hired on more field supervisors to help support a large chain now between the two brands, and we are growing. We are expanding,” Askar said.
Using the co-branding concept to expand nationally may be what each company needs to take itself to the next level in a market still dominated by large hamburger chains, said Ed Nakfoor, a Birmingham retail consultant.
“It solves the ‘What do you want to have for lunch’ dilemma,'” he said.
But expanding nationally may be a “quantum leap” for the Michigan-based chains, said Jerry McVety, a Farmington Hills restaurant consultant. A safer bet might be to target a more regional expansion into nearby states before going national, he said.
“I think franchising the wrap and the pizza concept, because there’s so much competition out there, is going to be difficult to do,” McVety said. “The wrap, in my opinion, is just another type of sub sandwich.”
The companies announced Oct. 10 they had merged to realize cost savings and economies of scale by combining purchasing, advertising, corporate staffing and other operations. The merger was made official Aug. 1 and included relocating Mr. Pita from Shelby Township to Papa Romano’s corporate headquarters in Commerce Township, Askar said. Mr. Pita founder Frank Lombardo also was named president of both companies and will oversee day-to-day operations.
The co-branding concept can help businesses “in that the issues of being able to build two restaurants for the price of one-and-a-half are real,” said Ken Batali, who runs a restaurant-consulting firm near Seattle. “You get to share bathrooms and equipment, and those are the real expensive parts of opening up a restaurant.”
The risk, said Batali, who was not familiar with either company, is that co-branded chains could cannibalize each other’s business. Both chains offer salads, while Papa Romano’s menu lists subs and Mr. Pita serves pita pizzas.
“A good location is usually a good location for anything,” Batali said. “If it takes a great location and splits a great business, they never get as much business as two separate units would.”
Askar, 38, purchased Papa Romano’s in February from founder Ronald Hancock and took over management of the chain in May. The company, which began in Southfield in 1970, has since opened three new stores and purchased five franchises to operate as the first corporate stores, he said.
Lombardo, a former Little Caesars franchisee, launched Mr. Pita in 1993 in Sterling Heights.
Papa Romano’s currently has 53 stores in Michigan while Mr. Pita operates 35.