Although franchising has a mountain of success stories and statistics that suggest that franchised businesses have better chances for success than independent ones, some systems - and their franchisees - don't necessarily make it -- and som are doomed. This MSNBC.com story tracks the demise of a young pizza franchise system, Pizza Magia, a system that never really got off the ground - plagued by a major lawsuit, competition, and significant buying power issues.
The chain, out of Louisville, Kentucky, was led at its inception five years ago by a team of six executives, who all previously worked for Papa John's International. Ordinarily, this type of franchise experience is a very good sign for a new system. Unfortunately, when six people starting a company worked for a major competitor, it seems difficult to believe that at least some of their experience will not guide the new venture. In this case, Papa John's, also conveniently based in Louisville, took close notice of the company's operations and within five months of the company's launch, it sued, alleging that Pizza Magia was using Papa John's operating system and recipes.
Pizza Magia's discovery tactics later lent some credibility to the claims. During the litigation, a magistrate judge found that Pizza Magia failed to turn over its original operations and training manuals, which contemplated the use of fresh dough, like Papa John's stores use, and instead the company provided only an amended 2001 manual that prescribed the use of frozen dough. The court found "troubling" Pizza Magia's efforts to conceal a critical change in its business system. The parties litigated over three years before reaching an undisclosed settlement.
Notwithstanding this system-threatening litigation from a powerhouse like Papa John's, franchisees evidently joined the system. By the time the case settled, Pizza Magia had 40 stores open - demonstrating that at least some franchisees don't take Item 3 litigation disclosures too seriously.
The defense of the lawsuit though clearly hurt the fledgling franchisor. Its growth was curtailed. Moreover, the competition within the pizza market -- Domino's, Pizza Hut and Papa John's -- was another huge stumbling block. As a newcomer, Pizza Magia tried to grow and develop a customer base by instituting incredibly low prices; these prices were later difficult to raise once the price of cheese increased. The pricing issues were further complicated by the fact that Pizza Magia was paying more for product than its large competitors because it had no buying power with manufacturers.
Pizza Magia sold off nine company-owned stores in May to Marco's Franchising and seven of its franchises were converted into Snappy Tomato locations shortly thereafter. It plans to dissolve in August.
Posted by franchiselawblog at July 19, 2005 12:22 PM