In 2009, Naked Pizza was poised to become the fastest growing franchise in America. Founded in New Orleans a few years earlier, they were sweeping the nation with a product that the competition could not copy. Can you imagine Dominos or Papa John's coming up with a "premium" pizza without the hormones, antibiotics or preservatives, and putting it on the menu next to their regular pizza? It would have a negative synergy.
So Naked Pizza had a promising future. They had taken on Mark Cuban as an investor, and he introduced other big name investors to the business. The first franchise location, in Miami, had broken ground, with a long range plan to have 1,000 stores someday. By August 2010, the company had awarded franchises in 16 markets totaling more than 300 stores. In South Florida, for example, the franchise contract called for 50 stores. By the end of 2010, there were 12 stores open, and 450 stores under contract. Their corporate strategy was to saturate the market in 3 years - what the other chains spent 25 years doing.
By the end of 2011, they had 2 dozen franchise stores operating in North America and five others in the UAE, but they were already well off the pace of 60 stores. Then stores started closing faster than new ones could open. Their flagship franchise in Miami shut down along with all of their other stores in Florida. In the restaurant bellwether city of Louisville, they closed in about a year, as did locations in Denver, Boulder, Las Vegas, Salt Lake City, Phoenix, and Rochester. No stores ever opened in Texas, Mark Cuban's franchise territory. Further contributing to the ghost town feel, Livnaked.com, the company blog, has been stripped down to just a splash page.
Rumor has it that Naked is in the process of a makeover. Whether that's just an advertising tweak or a rethinking of the way they interact with franchises has yet to be seen, but the stigma of having gone out of business is a high hurdle to overcome in the markets where they have already tried and failed. A store did open in Nairobi at the end of 2012; only time will tell if it was the last remnant of a heyday expansion or the beginning of a resurgence. It's hard to imagine how Naked can make Kenya the epicenter of its resurgence. Inquiring eyes will be watching whether they ever open the other stores planned there.
"A social media company that sells pizza"
Naked Pizza began in 2006 as "World's Healthiest Pizza" when an archaeologist named Jeff Leach teamed up with a mortgage banker named Randy Crochet and decided to open a pizza restaurant which advocated a healthy diet and lifestyle. After a couple of years they brought on Robbie Vitrano, the founder of the Trumpet branding agency, who suggested a name change to "Naked Pizza." At this point the corporate strategy shifted away from pizza, and towards selling pizzaz.
From my experience, there are two key ingredients needed for a successful restaurant. #1 is a wholesome product, and #2 is a positive attitude which comes from a strong belief in the product. Naked Pizza's original pilot store in New Orleans followed that recipe. Owned and operated by the principals, it generated half a million dollars in annual sales. But that success did not translate to the franchise concept. To their credit, the founders did their best to make sure franchisees were true believers. They whittled 6,000 inquiries down to 40 prospective partners, and shaved those down to just 16 contracts. But their mistake was skipping over the "mom and pop" restaurant owners who wanted to start on the ground floor, insisting instead to partner with operators of large, multi-unit franchise territories.
I have an axiom which I apply to restaurants: Success is a leading cause of failure. Countless times I've seen expansion lead to a deterioration in quality and service. Some fast food places can get away with a deteriorated product because the price point is cheap enough to keep people coming back. Naked's elevated food and labor costs means they can't afford to deliver a soggy pizza - it takes more repeat business for them to recoup refunds and store credits.
From the beginning of the franchise expansion, the corporate vision was to eventually have each store making its own dough, in the meantime making it in a central commissary and freezing it before shipping it out with their own brand of pepperoni, hamburger, sausage and chicken. The long range vision would keep the commissary providing the frozen meats, with the dough made fresh at every store.
But that long range vision relied on outgrowing the commissary model. For a franchise with central operations in Louisiana, with only 14 stores spread out from Seattle to Boston, a switch toward making dough in-store has to be seen as an end of life triage. Naked Pizza is at the stage in its corporate lifespan where it needs to monetize its assets and get out of the perishable inventories business. Without the volume to support a transcontinental supply chain they must close the commissary and release the stores from the obligation of buying name brand ingredients. Naked needs to alter its formula so it can wind down central operations but still allow stores to press on.
On the other hand, what looks like Naked's downfall nationally could explain its success internationally, where distances make it necessary to buy local perishables and dry mix dough. It's possible that the company has refined itself to be thin and agile to make due with a wide footprint.
One curious clue to the future lies in the recent decision to switch their online ordering to Ethor, the fledgeling system that took on Mark Cuban as its newest investor. My guess is Cuban is getting ready to move on. He parlayed his investment in a sputtering pizza business into a bigger opportunity in the online-to-offline retail sector. The only value Naked Pizza holds as an asset is as a proving ground for testing his new software project.