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With Americans more on the go than ever – an estimated 68 percent of Americans eat on the run or in their cars - it’s not surprising the fast food sector is one of the more rapidly expanding areas of the food industry. Hot Stuff Pizza, founded in 1984 in Sioux Falls, South Dakota, has taken fast food (“or quick service”) to the masses by its aggressive penetration into the convenience store market. With its presence in “c-stores” leading the charge, Hot Stuff Foods, previously Orion Foods Systems, LLC, now operates over 2,200 locations worldwide and is the fifth largest pizza operator in North America.
First Flame
Creating a previously unknown niche and then filling it takes imagination, attention and savvy. In the beginning, 20 years ago, when Hot Stuff started, it was certainly the David to the Goliaths of Pizza Hut and Domino’s.
“Management at that time made a decision to not fight the big boys,” Des recalls. Instead, he says, the management team engaged in research and discovered there are 100,000 convenience stores in the U.S. Twenty years ago very few of them offered pizza.
“The prevailing notion then was that most convenience store food is low quality,” Des explains. “The management team thought ‘How can you upgrade the food and make it simple to execute?’”
The answer of course was to place emphasis on staff training. Over the last 20 years, Hot Stuff has honed and now perfected an enviable staff-training program for new franchisees. Operators receive closely monitored service visits from Hot Stuff team members known as QUEST Business Advisors (QBA’s) including a 21-day service and support call for most locations.
During the visit, the retailer and the QBAs inspect the premises and review the total business execution. The operation’s information is entered into the system and is compared to benchmark data based on a typical successful operation. The results are then printed out into a pie chart with each slice of the pie registered in a color based on the benchmark data. The color breakdown is, green for best, yellow for caution, and red for an unacceptable situation. With one quick glance, franchisees can get a very specific indication of how their food operation is performing.
The financial arrangements behind becoming a Hot Stuff franchisee are also unique, according to Des. Where the cost of some franchises can soar into the high five figures, Hot Stuff requires a minimal investment that can actually be refunded to the franchisee.
“A franchisee can get in the Hot Stuff business for $4,000,” Des says chuckling as he notes the major players charge three times that amount.
“Also, we don’t charge royalty fees. So if you are a new prospect and you put up $4,000 you basically have a $45,000 equipment package,” Des declares. “Your return on that investment will occur in less than a month. And here’s the kicker. If you meet our sales goals, which result in your making wholesale purchases of $100,000 in your first year of operation, we issue you a food credit of $4,000. So basically, you can get in business for nothing.”
Entrepreneur Magazine was impressed enough to call Hot Stuff’s start-up capital investment the lowest in the industry. The savvy business moves have enabled Hot Stuff to make impressive financial claims to its potential franchisees - with the data to back it up.
“We make an earnings claim that our stores will make an average of $150,000 a year,” Des says, “and deliver $75,000 a year in gross profit. In a convenience store, the average up income is less than $36,000,” he points out.
“We opened 466 new stores last year but we also rejected 400,” he continues. “We’re very careful about who we become partners with and we want the partner to succeed.” To that end, he said the company provides each franchisee a quarterly marketing kit.
“This quarter we’re launching the new Breakfast Palm Pizza so we’ll provide the stores with a banner for the front,” Des says. “There’ll be window posters, tent tops on the gas island, pieces inside.”
The company is aware of the limited space available at most convenient stores. Hot Stuff has been studying what the company calls, “flexible footprint solutions.”
“You can operate our concept with four, six, or eight feet of merchandizing space.” Des declares. “If the franchisee wants to prepare fresh dough, that’s very doable. It will go through an impingement technology and they’ll have fresh piping hot dough in six and half minutes. Or we have a dough that’s fully commercialized at our Sioux plant, sauced, cheesed and topped. It’s sent to the store frozen, then refirmed, depending on what the client needs.”
On the Rise
Perhaps the overriding reason for the success of the franchise is its willingness to be aggressive. The company introduces a new dish or menu item every quarter, according to Bob Merz, executive vice-president.
“That’s right, a minimum of once a quarter. This gives you an opportunity to develop new platforms for totally new brand extension,” he explained. Recently the company rolled out ethnic dishes, like the Taquito, Asiana Creations, and a Southern Grill.
Maybe it’s working. Hot Stuff Foods President/CEO Chairman, Des Hague, elected to his post in 2003, announced an increase in same store sales of 12.75 percent in 2006 over January 2005.
“We hope this is a new chapter of success stories that we expect to write throughout 2006 and beyond, ” Des said.
Des says the same store sales increase puts Hot Stuff Foods on track to hit the aggressive goals set by the new ownership team. Also, the numbers come on the heels of other positive growth indicators such as the company’s 500-plus upgrades and/or new unit growth over the last 12 months.
Des cited several new initiatives that have contributed to the same store sales growth including the rollout of Hot Stuff’s extremely popular Palm Pizza, a single slice, grab-and-go concept which is currently being promoted nationwide on ESPN radio.
“It’s portable, priced at two bucks and there’s still profit for the franchisee,” he says. With the major players all complaining about lagging sales, Des says Hot Stuff seems to be expanding into still underserved markets using its competitive price points. The company has recently added new line extensions for customer choosing including 11 and 14-inch specialty pizzas for lunch and dinner, and the new portable Mexican Chimiz and Market Selects sandwich lines.
Picking up steam
Another innovation the company has developed through paying attention to the marketplace is in recognizing what rising fuel prices are meaning for the industry. High gas prices are not only affecting consumers, they are also troubling the retailers selling the fuel to consumers. Many of these retailers are convenience store operators who are searching for new avenues of revenue to make up for low margins on fuel and decreasing tobacco sales.
Des says Hot Stuff has responded by developing what they call the “Mac’s Market” concept. It involves a line of over a dozen frozen pizzas, subs, gourmet cinnamon rolls and breakfast items, ready for microwave and then carry out. Their slogan is “Open 24 hours a day” and it’s all housed within four linear square feet of space. Mac’s Market is designed specifically for smaller retail environments, especially c-stores. To achieve the move to restaurant-quality packaged foods, the company invested considerably in building a USDA-certified concept.
“It can be up and running for only $1,000,” Des declares. “We’ve listened,” he continues. “That’s why we’ve developed another concept called The Gripper--a hand-held pizza item. This allows franchisees to open a high-end merchandising unit at a small cost within a small space and without additional labor.”
The Mac’s Market concept is an even faster cousin of the company’s Hot Stuff on the Go platform. This concept is intended for a larger space operator who can answer higher demand. The offerings here go beyond pizza and include chicken sandwiches, burgers, breakfast burritos, multiple dayparts- all in a convenience store format. The company readily admits this concept may not be for everybody.
Bringing the heat
Constantly reviewing and revamping how it conveys its product to its consumers has helped fuel the rise of Hot Stuff Foods. The company is one of the few to not only focus on convenience stores, but it’s also a food solution provider for colleges, military bases, recreation facilities and other non-traditional locations. Des suggests that independent operators, or those looking to become a franchisee, should of course develop a business plan, but leave room for innovation. Perhaps more importantly he also suggests would-be operators develop a passion for what they’re doing.
“Other national brands sell franchises to colleges and military bases, etc.” Des points out, “but none are as committed or have the deep history in the c-store and other non-traditional channels. To sell it you have to care about it and have a burning desire to succeed.”
Hot Stuff, indeed.