NPC International, Inc.

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NPC International, Inc.

720 West 20th Street
Pittsburg, Kansas 66762
U.S.A.
Telephone: (316) 231-3390
Fax: (316) 231-5115
Web site: http://www.npcinternational.com

Public Company
Incorporated: 1974 as Southeast Pizza Huts, Inc.
Employees: 15,200
Sales: $455.62 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: NPCI
NAIC: 72211 Full-Service Restaurants

NPC International, Inc. is the largest franchisee of Pizza Hut restaurants, operating roughly 12 percent of all of the Pizza Hut restaurants in existence. NPC International controls approximately 850 Pizza Hut restaurants in 27 states, but the company has reached an agreement with its franchisor, Pizza Hut, Inc., to operate as many as 1,300 Pizza Hut units. Formerly the owner of the Skipper’s seafood chain and the Tony Roma’s barbecue rib chain, NPC International is focused exclusively on maintaining and expanding its network of Pizza Hut restaurants.

Origins

When two brothers from Wichita, Kansas, opened a pizza parlor in 1958, the concept that drove NPC International’s growth was born. Frank and Dan Carney borrowed $600 from their mother to open their first restaurant, a small, brick pizza parlor they named Pizza Hut. A year later, the first Pizza Hut franchise opened in Topeka, Kansas, marking the birth of a franchise system that 12 years later would help make Pizza Hut the largest pizza restaurant chain in the world. Not long after this period of frenetic growth began, O. Gene Bicknell joined the Pizza Hut franchise network, opening his first Pizza Hut in Pittsburg, Kansas, in 1962. Bicknell’s restaurant, for which he paid $75 per month in rent, represented the first unit of what would become the largest Pizza Hut franchise in the system, Bicknell’s NPC International, Inc.

The Carneys’ Pizza Hut, Inc. (PHI) expanded at a dizzying pace during the 1960s. Bicknell shared in the chain’s success by aggressively expanding his own fiefdom of Pizza Hut franchises, which primarily included rural areas in the southeastern United States. Bicknell succeeded by keeping close attention to costs and maximizing the profit margins recorded by his string of restaurants. In 1974, he incorporated his Pizza Hut operations as Southeast Pizza Huts, Inc. and continued to expand. Bicknell acquired Pizza Hut franchises that were performing poorly and applied his cost-cutting measures to transform the underper-forming units into profit-generating outlets. In 1977, the year the 3,000th Pizza Hut unit opened, PHI was acquired by soft drink conglomerate PepsiCo, Inc., whose vast financial resources fueled the expansion of the Pizza Hut chain. Bicknell, who paid a franchising fee to his new franchisor, PepsiCo, expanded his portfolio of Pizza Hut properties as well, but to fulfill his ambitious growth plans he needed capital. In 1984, he took his company public, renaming it National Pizza Company, the direct predecessor to NPC International.

By the time of National’s debut as a publicly traded company, Bicknell had 94 Pizza Huts in operation and was collecting more than $35 million in annual sales. His territory of operation covered nine states, but as the name of his new company suggested, Bicknell aimed for a broader geographic presence. National’s initial public offering (IPO) of stock provided the capital to finance a greatly accelerated expansion program. By the end of the decade, less than six years after its IPO, National ranked as the largest Pizza Hut franchisee, presiding over more than 320 units and collecting more than $113 million in sales. The enormous growth had been achieved through the development of franchise territories and the acquisition of units from other franchisees, a mode of expansion that Bicknell wanted to continue to employ. His policy of targeting underperforming Pizza Hut franchises and reversing their fortunes was fueling rapid growth, but during the late 1980s his growth strategy collided against a formidable obstacle. Bicknell found himself butting heads against the power and might of PepsiCo.

As Bicknell rapidly expanded the size of National, PepsiCo, through PHI, pursued a similar plan of attack. Both PHI and National were pushing forward with growth-through-acquisition strategies, but in their respective races to capture a larger portion of the country’s pizza market, PHI enjoyed considerable advantages over National. Pizza Hut franchisees were bound by their licensing agreements to offer their businesses to PHI before selling to another party. Bicknell was intent on maintaining his rapid expansion pace into the 1990s, but PHI possessed the right of first refusal. Bicknell could only obtain a Pizza Hut franchise after PHI had decided against acquiring the property for itself, leaving Bicknell to pick over the least desirable acquisition candidates. With increasing frequency during the late 1980s, PHI was exercising its right of first refusal, which forced Bicknell to look outside the Pizza Hut system for the vehicle to satisfy his desire for growth.“National wasn’t going to sit back and let Pepsi steal all their deals,” a restaurant analyst was quoted as saying in the February 13, 1989 issue of Nation’s Restaurant News.

1989 Acquisition of Skipper’s

Forced to look elsewhere, Bicknell set his sights on Skipper’s, a quick-service, fish-and-chips chain based in Bellevue, Washington. The process of acquiring Skipper’s proved difficult. Initially, PepsiCo disapproved of Bicknell’s foray outside the Pizza Hut system, citing another right of the franchisor to preclude a franchisee from owning any businesses other than Pizza Hut franchises. After nearly a year, officials at PepsiCo relented to the arguments presented on behalf of National, but the struggle to acquire Skipper’s did not end there. In 1988, Bicknell offered Skipper’s management $24.5 million in cash for the 214-unit chain, but Skipper’s officials said the price was too low. Eventually, in November 1989, Bicknell prevailed, paying $31.2 million for the $120-million-in-sales company.

At the time, Skipper’s was losing money, but National’s management had its growth vehicle in its possession. Officials stated that it would likely require a 12- to 18-month period before Skipper’s could achieve profitability, but after that hurdle was cleared, the company’s plans were bold. Bicknell was aiming to take the 214-unit regional chain concentrated in the Pacific Northwest and turn it into a 700-unit national fast-food chain. Not long after Skipper’s became part of the National fold, the euphoria pervading the company’s headquarters evaporated. Disappointment set in, and the dark mood would endure for years.

By mid-1991, National had reached the point at which Skipper’s was projected to begin delivering profits. The profits had not materialized. Expectations for profitability had been quashed by a 40 percent increase in the price of pollock, the primary fish used by Skipper’s, which severely eroded the chain’s profit margins. Frustrated National managers announced it would be another 18 months before Skipper’s could begin delivering its expected results. Meanwhile, the company’s chain of Pizza Huts continued to expand, albeit at a slower pace than Bicknell and his colleagues desired. National controlled 366 Pizza Hut restaurants by mid-1991, but their performance was being diluted by the lackluster Skipper’s chain. Considerable attention was devoted to injecting Skipper’s with the vitality that would enable Bicknell to actualize his expansion plans. By the end of 1991, company executives believed they had found an answer.

In January 1992, a new breed of Skipper’s restaurants made its debut. Instead of trying to resurrect the fish-and-chips chain as a volume producer, the company created a more upscale version called Skipper’s Seafood Broiler. Offering a new menu that eschewed Skipper’s traditional fried food items, the new restaurants featured higher-priced, broiled seafood items. Nearly twice the size of traditional Skipper’s units, the Seafood Broiler restaurants replaced the chain’s nautical-themed interior design with a more modern design, and included drive-through service and banquet rooms. Concurrently, as preparations were made to establish 30 Seafood Broilers by April 1992, National began shuttering unprofitable stores, hoping the elimination of poorly performing units coupled with a new higher-priced, higher-profit-margin approach to its seafood business would at last cure the chain’s ills. Another year passed, and, to Bicknell’s chagrin, there were no great signs of improvement.

The move toward a more upscale concept failed to deliver expected results. Customers balked at the high prices of a Seafood Broiler meal, and the company was forced to spend mid-1992 trying to recapture lost customers by offering discounts and coupons. By 1993, three years after acquiring Skipper’s, National had fallen far short of greatly expanding the Skipper’s chain. The size of the chain was essentially the same as three years earlier, while meaningful profitability remained elusive. The company began experimenting with an English recipe in 1993, taking a back-to-basics approach to stimulating growth, but few outside observers expressed any belief that a return to lower-priced, fried fish would lead to a dramatic turnaround. One restaurant analyst, as quoted in the May 21, 1993 issue of the Puget Sound Business Journal, offered his perspective. “They have been trying to find a formula that will work and so far they haven’t produced the profit results. Should they go for the value price with volume or go for the high-quality food and service and get margins? They’ve been flip-flopping back and forth on that. They don’t really know what package is going to work best.”

Company Perspectives:

What we stand for: The Best Pizzas. We are committed to being the leading pizza provider in every market by making and serving the best pizza in America, providing our customers with outstanding service and providing our employees the resources necessary for success.

1993 Acquisition of Tony Roma’s

As the search for a solution dragged on, National executives pinned their hopes on a new expansion vehicle. In May 1993, the company announced its intention to acquire Tony Roma’s, A Place for Ribs Inc. Unlike the Skipper’s acquisition, PepsiCo officials offered little resistance to National’s desire to purchase Tony Roma’s, approving the transaction within 24 hours of learning of Bicknell’s intentions. Based in Dallas, Tony Roma’s was a privately owned rib and barbecue chain with 27 company-owned restaurants and 114 franchises. National paid $20 million for the chain, completing the acquisition in June 1993. The addition of Tony Roma’s marked National’s entry into the casual-theme restaurant business and, perhaps more importantly, imbued National’s headquarters with a renewed spirit of optimism. In the coming years, the expansion of Tony Roma’s was expected to fuel National’s growth, while plans for Skipper’s development were put on hold until profitability was achieved.

A new corporate title was adopted by National roughly a year after the Tony Roma’s acquisition. In acknowledgment of its diversified composition, the company changed its name to NPC International, Inc. in July 1994, but it would lose some of its diversity in the coming years. Skipper’s continued to chip away at NPC International’s earnings in the wake of the Tony Roma’s acquisition. In the company’s fourth fiscal quarter ending March 1995, officials announced that the company was incurring a $35 million charge to cover the cost of the closing of as many as 95 Skipper’s outlets. By the end of the company’s next fiscal year, it had decided to abandon the business altogether. After more than five years of frustration, NPC International divested its problematic quick-service seafood chain in March 1996, enabling it to focus more of its resources on the development of the Tony Roma’s chain.

During its first three years of NPC International ownership, Tony Roma’s expanded and launched a new prototype, as NPC International experimented with the casual-theme concept. In 1995, a $1.9 million prototype was opened in Grapevine, Texas, as part of NPC International’s attempt to attract younger customers and to strike more of a balance between male and female customers. The prototype featured multilevel dining rooms, a visible kitchen, and a menu with 19 new items. Instead of focusing primarily on barbecue ribs, the menu offered salads, seafood, and steaks. Tony Roma’s vice-president of marketing explained the reasoning behind the changes in an April 8, 1996 interview with Nation’s Restaurant News.“We certainly want to increase the frequency and give the customers a chance to make this a regular stop rather than one time a year for Uncle Harry’s birthday.”

Late 1990s: A Company Strictly Focused on Pizza

As NPC International entered the late 1990s, it again altered its strategic course. The company expanded Tony Roma’s to more than 190 restaurants and increased its annual revenue volume to more than $350 million before deciding to assume a far less active role in its development. In June 1998, NPC International teamed with a private equity firm named Sentinel Capital Partners to execute a recapitalization of Tony Roma’s. The move left NPC International with only a minority stake in the restaurant chain, leaving it free to devote all of its human and financial resources toward the growth of its chain of Pizza Huts.

As part of a massive restructuring program, PepsiCo spun off its restaurant holdings in 1997, including PHI. TRICON Global Restaurants, Inc., formerly a subsidiary of PepsiCo, became the new parent company of PHI and, as a consequence of the spinoff, inherited a considerable amount of debt from PepsiCo. To reduce its debt, TRICON began selling operations to its franchisees, adopting a strategy that dovetailed with Bicknell’s desire to expand his Pizza Hut system.

Held in check for years, NPC International began acquiring Pizza Hut units in earnest during the late 1990s. Not all of the units acquired by NPC International came from PHI: In mid-1997, for example, NPC International acquired 100 units from fellow franchisee Jamie B. Coulter, who in 1965 opened the first Pizza Hut franchise east of the Mississippi. TRICON’s strategic goal of paring down its operations, however, undoubtedly helped accelerate Bicknell’s expansion plans. During the last four years of the decade, NPC International acquired a staggering 482 Pizza Hut units, giving the company a total of 837 restaurants as it entered the 21st century. An agreement between NPC International and TRICON set the stage for further strident expansion in the future. According to filings with the Security and Exchange Commission, NPC International had the option to acquire additional Pizza Hut units up to a total of 1,300 restaurants. Based on this agreement and Bicknell’s penchant for expansion, NPC International promised to figure as the most powerful Pizza Hut franchisee for years to come.

Principal Subsidiaries

NP Acquisition Corp.; National Catering Co. Inc.; NPC Management Inc.; NPC Restaurant Holdings Inc.; Seattle Restaurant Store; NPC INTL Inc.

Principal Competitors

Little Caesar Enterprises, Inc.; Papa John’s International, Inc.; Domino’s Pizza, Inc.

Key Dates:

1962:: Bicknell opens his first Pizza Hut franchise.
1974:: Southeast Pizza Huts, Inc. is incorporated.
1984:: The firm, renamed National Pizza Company, debuts as a publicly traded corporation.
1989:: National Pizza acquires the Skipper’s seafood chain.
1993:: Tony Roma’s is acquired.
1994:: National Pizza is renamed NPC International.
1996:: Skipper’s is sold.
1998:: NPC International reorganizes, assuming only a minority interest in Tony Roma’s.