Hot Stuff Foods

2930 West Maple Street
Sioux Falls, South Dakota 57118-5210
U.S.A.
Telephone: (605) 336-6961
Toll Free: (877) 841-1431
Fax: (605) 336-0141
Web site: http://www.hotstufffoods.com

Private Company
Incorporated: 1994 as Orion Food Systems
Employees: 609
Sales: $130 million (2005 est.)
NAIC: 424420 Packaged Frozen Food Merchant Wholesalers

Hot Stuff Foods is a Sioux Falls, South Dakota-based multibrand franchiser of fast-food concepts, mostly to convenience stores where it is the number one provider, but also to retail and corporate food courts, hotels, college campuses, and military bases. All told, Hot Stuff brands are found in more than 2,000 locations around the world, and the company is the fifth largest U.S. pizza operator. The company offers a wide variety of brands that cover every "daypart" and virtually every menu niche. Hot Stuff prides itself on being a one-stop shopping operation, its motto "One Company. One Contact. One Call." A client is able to franchise a combination of Hot Stuff brands to create a well-rounded foodservice operation that covers all dayparts. The company provides support all along the way, from site selection and brand selection to the training of employees and the running of the operation. What also makes Hot Stuff attractive to franchisees is the absence of a royalty fee. Instead, Hot Stuff makes it money through the sale of equipment and prepared ingredients.

The company's top brand is Hot Stuff Food on the Go, offering pizza and bakeable "fried" foods. The SmashHits Deli menu includes hot and cold subs and specialty sandwiches made from fresh baked bread, as well as wraps and Phat Burritos. Mac's Market offers a small self-contained unit that includes a variety of prepared "heat and eat" foods: breakfast sandwiches and cinnamon rolls, pizza slices, and submarine sandwiches. Another Hot Stuff concept, C-Street Bakery, sells cinnamon rolls, muffins, and donuts in the morning and cookies and brownies in the afternoon. Market Selects offers a line of sandwiches made from specialty breads and high-end cold cuts. Eddie Peppers is Hot Stuff's Mexican food concept, the menu including Phat Burritos and standard fare including tacos and nachos. Nap's Alabama BBQ offers southern-style ribs, pulled pork and beef, chicken, fried shrimp, and catfish. Asian Creations combines Chinese dishes with Cantonese, Japanese, and Thai cuisine. Hot Stuff operates two production facilities as well as a pair of research and development facilities.

ROOTS IN PIZZA DELIVERY: 1982

Hot Stuff was launched in 1982 as a regional pizza delivery franchise operation called Pizza Patrol, a division of Marshall, Minnesota-based The Schwan Food Company, a dominant player in the frozen pizza business. Schwan took a circuitous route to the pizza business. In 1944 a German immigrant named Paul Schwan took a stake in a Minnesota milk bottling plant that soon became Schwan Dairy. By 1948 the business added ice cream and four years later Paul's son, Marvin Schwan, launched a delivery service to sell the ice cream to rural customers who by that time had been connected to electricity and begun buying freezers. Both the dairy and delivery service enjoyed strong growth over the next dozen years. Then, in 1965, Marvin Schwan learned that one of his Wisconsin salesmen was also delivering Roma frozen pizzas. Recognizing an opportunity to achieve further diversity (a fruit juice company and prepared sandwich company had already been acquired), he arranged to market Roma pizza in four states. Within a few years frozen pizza sales were rivaling those of ice cream. By this time an older brother, Alfred Schwan, had left an engineering job with Deere and Company to join the family business. He advocated that the company begin manufacturing its own pizzas as a way to maintain quality control.

Schwan placed a simple classified ad—"Wanted: Frozen Pizza Manufacturer"—in the Wall Street Journal, resulting in the 1970 acquisition of Saline, Kansas-based Tony's Pizza. Schwan's timing was fortuitous as American consumers began buying frozen pizzas in greater numbers. Schwan then built on the success of Tony's by launching the highly successful Red Baron brand of frozen pizzas in 1976.

Pizza Patrol was founded as a Schwan division by Jeff Okerlund. The first location opened in October 1984 but by this time the home delivery business, led by Domino's, was well established and Pizza Patrol was not able to gain enough market share to turn a profit. Yet management still believed in the product and looked for a new way to exploit it. Learning that a Midwest convenience store chain was considering the launch of a pizza program, Schwan made contact and began developing a convenience store pizza program, which took the name Hot Stuff Pizza. The first Hot Stuff location opened in 1986.

The decision to develop other brands was a natural next step. For one, it was easy to add a brand to a Hot Stuff operation because the equipment was already in place and could be used. More importantly, additional brands allowed a franchisee to cover other dayparts, in particular breakfast, and also add menu items that could appeal to customers not interested in eating pizza. A number of fast-food franchises were already cobranding, combining their menus to bring customers to a store throughout the day. What Schwan would do was build a family of brands that could be mixed and matched to satisfy the need of a franchisee, who instead of dealing with multiple parent companies had a single operator to deal with.

The first brands to be added after Hot Stuff Pizza was Cinnamon Street Bakery (ultimately becoming C-Street Bakery), which could use the pizza pans and oven in the morning, and Smash Hit Subs, which could provide an alternative to pizza. All of these brands could be combined without expanding the space taken up by the Hot Stuff Pizza operation. The development of further brands and bundling them together was also a way to avoid "brand burnout." A new brand might open well, frequented at first by enthusiastic customers, but in time they moved onto something else. By combining brands a foodservice operation could greatly extend the life of a concept.

ORION FOOD SYSTEM BECOMES SCHWAN SUBSIDIARY: 1994

In 1994 the Schwan convenience store branding unit took the name Orion Food Systems and was incorporated as a wholly owned Schwan subsidiary. By this point the 1,000th location was opened. Among the brands the company developed were Mean Gene's Burgers, a concept launched in 1996 that was promoted by professional wrestling announcer "Mean Gene" Okerlund, Jeff Okerlund's uncle.

COMPANY PERSPECTIVES

Hot Stuff Foods will be The Standard Bearer, striving daily to lead the food industry in Quality. Hot Stuff Foods will be The Market Maker, leading the food industry in bringing the most innovative and Unique products to the market, fulfilling consumers' wants and needs. Hot Stuff Foods will support our valued retailers, helping them attain world class Execution through the continuous development of innovative solutions. Hot Stuff Foods will be The Franchisor of Choice, working with each franchisee to assure Sustainable growth through the continuous development of innovative programs. Hot Stuff Foods will be The Employer of Choice, creating a spirit of Team.

By 1997 Orion had 1,500 locations and offered nine franchise brands, including Moose Bros. Pizza, Eddie Peppers Great Mexican Food, Joey Pagoda's Oriental Express, MacGregor's Market, and Chix Rotisserie. Orion also made a stab at launching a full-service restaurant concept. Called Hometown Heroes, it was a theme restaurant that paid tribute to local sports stars and featured area memorabilia. The idea did not pan out and Orion elected to focus its resources on building its successful cobranding business, positioning itself as a one-stop solution provider of turnkey quick-serve concepts, whether it be for convenience stores or other locales such as shopping-mall food courts, hospitals, schools, or hotels. In late 1998 Orion entered another area with great potential: military bases. It signed an agreement with the Morale, Welfare and Recreation Program to make the Orion brands available to U.S. Army and Navy bases around the world. To appeal to the hotel market, Orion launched MacGregor's Market Restaurant, the first unit opening in January 1999 in a Green Bay, Wisconsin, Ramada. In 2000 Orion became involved in corporate foodservice when it won a contract to establish food courts with several of the company brands in two Midwest offices of MCI.

In addition to spreading the brands around the globe through military contracts, Orion also pursued international expansion through other means. Doing business in Canada was an obvious extension, but changing lifestyles in Europe made that market inviting as well. Just like Americans, Europeans were more on the go and attracted to convenience stores and fast food. Orion moved into the United Kingdom and then onto the Continent and France. In 1999 Orion reached an agreement with Emirates Petroleum Products Company, a major retailer of petroleum products in the United Arab Emirates, to gain a foothold in the Middle East. Orion then entered the Canary Islands, the first Spanish-speaking country to try the Orion brands, followed by Germany and Latin America in 2000.

Orion's slate of branded concepts increased to a dozen in 2000 with the addition of Stone Willy's Pizza and Summit Subs and the development of Graham's Grill. Stone Willy's and Summit were acquired from Orion's parent company, Schwan. They were successful brands, found on some 250 college campuses and hospitals, two channels that Orion was interested in pursuing. Graham's Grill, developed with a professional golfer on the PGA Senior Tour, Graham Marsh, was a mini-restaurant concept to provide fast food at golf courses.

Schwan was interested in selling Stone Willy's and Summit because it wanted to focus on its core foodservice manufacturing business. The parent company had also been in a state of flux since 1993 when Marvin Schwan died suddenly from a heart attack. He owned all of the company's stock, but according to his will two-thirds of it was bequeathed to the Marvin M. Schwan Foundation, which supported Lutheran religious and educational activities. Alfred Schwan arranged for the company to buy back the stock, agreeing to pay the foundation $72 million a year and a $600 million balloon payment in 2009. Marvin Schwan's children were not pleased with the arrangement, believing that the company had taken on far too much debt, and they sued their uncle. The matter was settled in 1997 when Schwan bought out the children's interest in the company. Alfred Schwan also struggled to find a chief executive to lead the company, which since the death of his brother had lapsed into disarray. In 1999 he finally found his man in Lenny Pippin, a seasoned executive who had once been, at the age of 27, the youngest vice-president at Kraft Foods Inc. To get Schwan back on track he began to divest noncore assets, including Lyon Financial Services and Orion Food Systems.

SALE OF ORION: 2002

In February 2002 Orion was acquired by the Mt. Kisco-based New York merchant banking firm Kohlberg & Company, LLC, at a cost of approximately $100 million. The next major step in the develop of the company came a year later when the owners installed a new chief executive, hiring Des Hague to replace Jeff Okerlund, who became vice-chairman of the company. Hague was well familiar with the convenience store business as well as branded concepts. He had been a senior executive at 7-Eleven and responsible for the launching of such foodservice programs as Big Eats Deli, Go-Go Taquitos, and Dreammm Donuts.

KEY DATES

1982:: Company is launched as Pizza Patrol by The Schwan Food Company.
1986:: First Hot Stuff Pizza location opens.
1994:: Orion Food Systems is formed.
2002:: Company is sold to Kohlberg & Co.
2005:: Name is changed to Hot Stuff Foods.
2006:: Lettieri's is acquired.

Under Hague, Orion sought to narrow its focus. It concentrated on convenience stores, military bases, and college campuses, and the core Hot Stuff Pizza brand. Added to the mix were the Large Party Pizza and a new lunch item, the Hot Stuff Personal Pan Size Pizza. Moreover, Orion introduced Hot Stuff Xpress and Hot Stuff Food on the Go, a pair of new compact merchandising formats. Dealing with the problem of limited space, especially important in convenience stores, had been a key concern for the company for some time. Orion developed an 18-foot-system in 2003 but it proved impractical. The concept was refined further, resulting in the Hot Stuff Food On the Go systems, essentially self-contained units that came in eight-, six-, and four-foot versions. For stores that had the room and wanted the theater that came with food preparation, the larger unit was suitable. The smaller units, on the other hand, came fully commercialized: Prepared food was made available, it could be put in the attached oven and with the press of two buttons and the passage of a minute or two it was ready to eat. The new On the Go systems were also less expensive and attractive to a new range of customers. While other food concepts required an outlay of around $30,000, one of the new simplified eight-foot systems was priced at just $3,999.

To continue to build the flagship Hot Stuff brand, Orion changed its name in 2005 to Hot Stuff Foods. To further the brand's recognition in early 2006 the company launched its first national advertising campaign on ESPN Radio. In the meantime, the company continued to add to its product lines and brands. Palm Pizza was introduced in 2005 as was Market Select Sandwiches. In the spring of 2006 the company added to its On the Go program with the introduction of Mac's Market, a four-foot self-serve food program that included a refrigerator with cinnamon rolls, breakfast and other sandwiches, and the new "Gripper" pizza, and a microwave oven.

In April 2006 Hague and his management team acquired Hot Stuff in a leveraged buyout backed by Allied Capital Corporation that included a $164 million investment. Hague assumed the chairmanship as well. He expressed a desire to take the company to new heights. To accomplish this goal, the company soon acquired a new factory to produce breakfast items, which included the new Breakfast Palm Pizza. Then in November 2006 Hot Stuff added to its capabilities by acquiring Minnesota-based Lettieri, a company founded in 1994 that specialized in handheld food products, including breakfast sandwiches, stuffed baguettes, calzones, and a wide variety of sandwiches. Lettieri's products were found in more than 40,000 convenience stores in the United States, as well as vending machines and other foodservice outlets. The addition of Lettieri's also gave Hot Stuff a second state-of-the-art production and research and development facility.

Ed Dinger

PRINCIPAL COMPETITORS

American Restaurant Partners, L.P.; Noble Roman's, Inc.; Pizza Pro, Incorporated.

Hot Stuff Foods

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Hot Stuff Foods

2930 West Maple Street
Sioux Falls, South Dakota 57118-5210
U.S.A.
Telephone: (605) 336-6961
Toll Free: (877) 841-1431
Fax: (605) 336-0141
Web site: http://www.hotstufffoods.com

Private Company
Incorporated: 1994 as Orion Food Systems
Employees: 609
Sales: $130 million (2005 est.)
NAIC: 424420 Packaged Frozen Food Merchant Wholesalers