Noble Roman’s seeking a return to glory

Take one pizza chain with franchises in 44 states.

Mix in a low-risk expansion featuring quick-service restaurants and sub sandwiches.

Bake for three years.

Noble Roman's Inc. executives think they've found the recipe to lift their company out of its stock malaise and give it an edge in the brutally competitive restaurant business.

The Indianapolis company started franchising last year new restaurants that feature dual branding with its Tuscano's Italian Style Subs, and it plans to go from zero to 157 locations in three years.

The new venture should help Noble Roman's pull in $17 million in revenue by 2008, a figure that would more than double its 2005 total, according to company projections. Company officials also believe the strategy will swell profit, which totaled $2.85 million last year.

But this isn't the first time Noble Roman's has chased an ambitious growth plan, and some observers find the projections aggressive for a company whose over-the-counter stock lagged below $2 for years before finally topping that mark last month.

"It's just not an easy business," said Mark Foster, chief investment officer for Columbus-based Kirr Marbach & Co. "Everybody goes into it with grand plans, you know, 'It'd be great to own a restaurant.'

"Highway 31 is littered with carcasses of restaurant concepts that just don't make it."

However, Noble Roman's top executives–Chairman and CEO Paul Mobley and his son, President Scott Mobley–insist that the growth projections are both reasonable and attainable.

"I think that our concept has several advantages over the competition, and so what we're seeking to do is establish a niche that's not currently being served," Scott Mobley said.

A new approach

Noble Roman's cut its teeth on full-service restaurants, at one time operating more than 70 and bringing in $34 million in annual revenue. But the company switched to franchising outlets in convenience stores, military bases, airports and other non-traditional locations after it stumbled financially in the 1990s.

It lost more than $20 million in a four-year span and was delisted from the NASDAQ stock market in 1997, a year after the company tried–and failed–to acquire Papa Gino's Holding Corp., an 87-restaurant chain headquartered in Boston.

Today, the company still runs eight full-service restaurants, including some in Indianapolis. It also franchises 800 of those non-traditional outlets under the Noble Roman's and Tuscano's names. It created the Tuscano's concept several years ago by spinning Noble Roman's sub sandwich line into its own franchise.

The nontraditional outlets allowed the company to build a national distribution network and spend eight years refining its pizza-making process into a "foolproof system," Paul Mobley said.

Noble Roman's is putting both of those advantages to use with its new quick-service restaurants, which started opening last year in central Indiana.

"We can guarantee that we'll have a pizza out the door for delivery in under 10 minutes or across the counter in five minutes," Paul Mobley said.

The restaurants are smaller than their full-service predecessors and more efficient, and require less employee training, the Mobleys said. They are opening primarily in strip malls and offer sit-down eating, takeout or delivery, and a choice of pizza or subs.

The company will depend on franchisees to invest about $225,000 to build and equip each restaurant and then pay a franchise fee and royalties on sales. It plans to spur rapid growth by selling territories to developers who can do the building or sell franchise rights.

The result is the potential for rapid expansion that requires little investment from the corporation but yields a higher sales volume than the non-traditional outlets, which the company still plans to grow.

The Mobleys say they've seen encouraging results so far.

Quick growth

Noble Roman's has opened 12 quick-service restaurants and has several more on the drawing board. In Carmel and Westfield, alone, it sold the franchise rights for five. The company also opened some in California and has plans for North Carolina, too.

It doesn't disclose specific restaurant sales figures, but Paul Mobley said they expected $500,000 to $650,000 in annual sales per restaurant, and the stores have averaged "considerably more than that" so far.

The company's downtown restaurant on Market Street near the state Capitol buzzed with the hum of conversation from about 50 customers during a recent weekday lunch hour. Several who worked in offices nearby said they've already made themselves regulars.

"I grew up on their pizza and love their breadsticks," said one customer, Christine Kramer, as she carried a bag of subs back to her office.

Name recognition was one of the reasons Jeff Witmer decided to become a co-owner of the new Noblesville restaurant with Stephanie Wells. He said he liked the quick-service concept and the fact that he doesn't have to introduce a new name to the market.

The restaurant opened July 18 and doubled its daily order total to 200 when advertising started.

"I couldn't tell you how many people have said, 'God, I'm so glad you've opened this, we've been having to drive to 96th Street for our pizza,'" he said, referring to a Noble Roman's near the Interstate 69 interchange.

Restaurant industry observers say the concept has a reasonable chance of maintaining its success.

Carving the niche

Pizza has become the second-most-popular restaurant food in America behind the hamburger. The industry it spawned generates $32 billion in annual sales.

Pizza Hut sits on top with $7 billion in annual sales, and Pizza Today magazine ranks Noble Roman's 29th, Editor Jeremy White said. Even so, he likes the Noble Roman's expansion plan.

"I think most customers in America believe they're going to get a higher-quality pizza walking into a pizzeria, not a gas station," he said.

In addition to that, the dual branding concept with Tuscano's should draw a bigger lunch crowd to the restaurants, which generally sell more pizza at dinnertime. He noted that co-branding has proven successful with outlets of Louisville-based Yum! Brands Inc., including Taco Bell and the aforementioned Pizza Hut.

Besides, there always seems to be room for another competitor–no matter how crowded the market gets, White noted.

Indeed, analyst Roger Lipton thought the last thing the world needed was another pizza joint when Louisville-based Papa John's emerged in the late 1980s. Yet last year, the company ranked third on Pizza Today's list with $1.8 billion in revenue.

"They've never had the best pizza in the world; they certainly came in well after Pizza Hut and other big players," noted Lipton, who manages an investment portfolio that specializes in retailing and restaurants for New York-based Lipton Financial Services.

"A good small operator can always attract market share from the bigger players," he said.

The key lies in marketing, White said. He noted that most competitors offer similar pricing and some even use the same cheeses and sauces.

"It's a marketing game, really," he said. "By and large, the majority of large pizza companies differentiate themselves through their marketing."

Noble Roman's has a decent expansion plan, according to Kirr Marbach's Foster. The trick is executing it.

Potential hurdles include selling the new restaurant plan to franchisees who also can invest their money in proven, albeit more expensive, concepts like McDonald's.

Then there's Noble Roman's track record.

Annual revenue has inched up slowly from $5.8 million in 2001 to last year's total of $8.4 million. Its lightly traded stock stayed below $2 for years until it finally passed that mark in late July. It was trading late last week at $2.45.

"Candidly, the stock has been an underperformer for a long period of time, and the fundamentals of the business have not been anything exciting, either," Foster said.

"For me, I'm a firm believer that management has made all the difference, and the track record here has been mediocre."