Final Case – Group Report

9 – 4 2 0 – 1 1 8
J U N E 8 , 2 0 2 0

This case is an abridged version of “MOD Pizza: A Winning Recipe?” HBS No. 416-004. Funding for the development of this case was provided by
Harvard School, and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve
as endorsements, sources of primary data, or illustrations of effective or ineffective management.

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B O R I S G R O Y S B E R G

J O H N D . V A U G H A N

M A T T H E W G . P R E B L E

MOD Pizza: A Winning Recipe? (Abridged)

Competitors can copy our store design and our pizza, but not our culture.

— Ally Svenson, co-founder and head of brand

Serial entrepreneurs Scott and Ally Svenson, founders of MOD Pizza (MOD), sat in their living
room one evening in May 2015 preparing for an upcoming board meeting. The young company
headquartered in Bellevue, Washington already had 46 stores, and had recently raised $45 million to
fund its ambitious growth strategy of 100 stores by the end of 2015, and 200 stores by the end of 2016.1
The Svensons wanted MOD to not only be a solid business, but to have a meaningful impact on the
lives of its employees and in the communities in which it operated. MOD paid its employees well,
provided advancement opportunities, and worked hard to foster a strong company culture that was
welcoming and supportive. While expecting strong financial performance of its stores, the company
gave employees—known as “MOD Squaders” or “MODsters”—considerable autonomy.

Leadership worked hard to nurture the MOD culture and discussed how to retain and sustain its
core elements as the company expanded. Did MOD need safeguards, and if so what should they be?
Or could the culture be successfully spread by hiring the right people at the store-, district-, and market-
manager level, inculcating them in the MOD culture, and trusting them to train frontline staff? The
option to go public in the future was also on the table. Would MOD be able to stay true to its founding
values and principles as a public company, or would shareholder demands ultimately change its ethos?

Pizza Restaurants
Pizza was a popular food in the U.S. One market research firm found that 84% of adults had eaten

pizza made outside the home within the preceding month2 (see Exhibit 1 for pizza consumption data).
An emerging category of pizza restaurants were fast-casual1 concepts; one prediction called for 2,000
such stores in the U.S. by the late 2010s.3 Ally said: “Raising four boys, we were always out driving

1 Fast-casual restaurants were “a hybrid segment of fast food and casual dining, combining the convenience of limited service
with the ambiance and quality of full service. Defining features included check averages of $6 to $9; decor that was more
sophisticated than a QSR (quick service restaurant); and food prepared to order, with customization of ingredients by patron
being the norm.” Katrina Fajardo, “Scope and Themes,” Pizza Restaurants—US, November 2014, Mintel, accessed April 2015.

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420-118 MOD Pizza: A Winning Recipe? (Abridged)

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them to and from activities in the evening. We’d look for quick meals but we didn’t want fast food.
One of the only things everyone would agree on was pizza, but we didn’t have time to sit down at a
restaurant. Instead, we’d always end up at Chipotle because the food was good and it had a cool
atmosphere. It surprised us that no one had done anything similar for pizza.”

The concept was particularly popular with young customers, such as millennials (those born
between 1980 and 1999). According to the CEO of a fast-casual restaurant, these customers were used
to “getting everything their way. [. . .] It’s just a customized world they’ve grown up in; they haven’t
known anything different.”4

Scott felt that the true fast-casual pizza sector comprised a small grouping of restaurants that
included MOD, Blaze Pizza, Pie Five Pizza Company, Pieology, PizzaRev, Pizzeria Locale (backed by
the fast-casual chain Chipotle), Project Pie, and Uncle Maddio’s, among others.5 Strong competitors
started to emerge in 2011 and 2012, many of which grew quickly by franchising their concepts (see
Exhibit 4 for a list of MOD’s competitors). “The fast-casual restaurant category has gotten a lot of press
because of the successful initial public offerings [IPOs] of companies like Shake Shack, Potbelly, and a
number of other concepts that have been very well received by the public markets,” Scott explained.
“So it is not only the hottest category within the restaurant space; it may well be the hottest category
with growth equity right now. But the fast-casual pizza niche that we’re in is a niche that just didn’t
exist a few years ago.”

Customers’ ability to order a meal to their specifications was a key aspect of fast-casual pizza
restaurants, as were other shared experience attributes. “Their executives all toss around the words
artisan, choice, and control, and regularly reference other fast-casual categories, like Mexican,
sandwich, and burgers, in conversation. The stores all boast a wide range of crusts, toppings, sauces,
and cheeses. They all bake their pizzas in specialized ovens in just a few short minutes. Most are
focusing on a personal-sized [pizza] [. . .] and offering a laid-back, modern dining room and beer and
wine services. And they all want to be the Chipotle of pizza,” one observer said.6 Prices were relatively
uniform between the restaurants MOD competed with—typically around $7 or $8 for an individual-
size pizza—and these prices included customers’ ability to add as many toppings as they wanted.

Many of the major fast-casual pizza restaurant chains had locations across the U.S., but California
was a particularly intense area of competition. The East Coast, by comparison—notably the
Northeast—had a smaller number of restaurants. Blaze Pizza, with its greatest concentration of stores
in Southern California,7 recorded $33 million in system-wide sales in 2014,8 and anticipated over 100
locations operating in 2015.9 Pieology’s 42 stores (in 2014) earned $44.6 million in system-wide
revenues Most of Pieology’s stores were in California, clustered around Los Angeles, San Diego, and
San Francisco, though it had stores as far east as Alabama and Kentucky.10 Project Pie had 20
locations;11 nine stores were in the U.S. (six in California), one store in Scotland and 10 in the
Philippines.12 PizzaRev had 28 stores—21 in California and the remainder in Minnesota, South Dakota,
Texas, and Utah.13 Uncle Maddio’s had 37 stores,14 and one observer noted that the company and its
franchisees were “on track to have 300 restaurants open in five years with 1,000 units in development
and [were] opening units every 10 days.”15

The fast-casual pizza sector attracted interest from experienced restauranteurs: the founder of the
Smashburger chain started Live Basil Pizza,16 Blaze Pizza was started by a founder of Wetzel’s Pretzels,
Buffalo Wild Wings had invested in PizzaRev, and the former CEO of Applebee’s was a Pie Five
franchisee.17 The cofounder of one chain described it as a land grab with enormous stakes.18

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MOD Pizza: A Winning Recipe? (Abridged) 420-118

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Founding and Growing MOD
Scott and Ally were raised in Bellevue, a city within the greater metropolitan Seattle area. Each

moved east in the mid-1980s (a year apart) to attend college (Scott at Harvard University and Ally at
Wellesley College). The couple married and moved to London, England, after graduation, where Scott
worked in finance and Ally in publishing. In 1995, the two started their own business, Seattle Coffee
Company.19 Ally worked at the company full-time while Scott initially continued working as deputy
CEO of a healthcare company.20

“Setting the business up was a lifestyle thing. It wasn’t something we did, thinking, ‘Here’s a great
business opportunity, we’re going to make a lot of money.’ It was more, ‘Here’s something we miss in
our daily lives.’ That’s probably why it was so successful—it was a labour of love,” Scott said.21 The
company grew to 65 locations in the U.K., and had 12 licensed locations across South Africa, the Middle
East, and Southeast Asia. The Svensons sold the company to Starbucks Coffee Company in 1998 for
some $85 million.22 Scott stayed on through 1999 as the president of Starbucks U.K. and then of
Starbucks Europe. The Svensons then helped to launch and build the Carluccio’s restaurant chain, a
second financially lucrative venture. It went public in 2005,23 and had 34 U.K. locations by early 2008.24

In 2000, the Svensons returned to Bellevue to raise their four children. Scott established an
investment firm, the Sienna Group; neither he nor Ally were actively looking for a restaurant start-up
when the idea for MOD surfaced. In the late 2000s an entrepreneur, who had previously opened
restaurants to sell pizza by the slice, approached the Svensons. He was now looking to sell personal-
sized pizzas. The idea was rough, but intrigued the Svensons. They recruited some experienced
restaurant entrepreneurs, and together worked to refine this idea into a restaurant concept. The
Svensons chose to name the company after Britain’s “mod” youth culture of the 1950s and 1960s, which
Scott said was to “evoke the attitude, energy, and spirit of the mod era,” characterized by Ally as a time
of “playful and innocent rebellion.” This fed into the company’s personality and branding (see Exhibit
3 for in-store advertising). The name also stood for the company’s mission to “MODernize” consumers’
pizza restaurant experiences and for customers’ freedom to “MODify” pizzas to their liking. Lastly,
MOD could also stand as an acronym for “made on demand.”

MOD Launches

In November 2008, during the global economic recession, the Svensons opened their first MOD
store in downtown Seattle. They used this opportunity to stress-test the concept. “We wanted to see
how inexpensive we could make our food and how much we could pay our people,” Scott said. The
Svensons decided to let customers add as many pizza toppings as they wanted, but to charge a flat rate
per pizza. The idea came from an experience the Svensons had at a luxury hotel where the mini-bar
items were available free of charge. “It’s not that the items were expensive, but it was the idea that the
hotel wasn’t trying to nickel and dime us that stood out to me,” Scott explained.

MOD soon had an advisory board that included colleagues from their time with Starbucks, such as
Jim Alling (see Exhibit 5 for MOD’s executive team and board members). “Scott told me about the new
store and I went for a visit. There was a huge line and great energy,” Alling said. He noticed a few
inefficiencies and areas for improvement, and when he mentioned them to Scott, Scott asked Alling to
come in and help. Alling ended up investing in MOD and working in the store for the next six months.
“We didn’t want to start out with the wrong DNA. We had to get the quality and attitude right to make
MOD something that customers would remember,” Alling said. He helped with basic food safety
functions such as how to handle and prepare food, with operational details such as how to make the
pizzas faster, and with aesthetic details such as how to make the pizzas look and feel more handmade.

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In late 2010 and early 2011, MOD had four stores in different settings to experiment and determine
scalability of the concept. The first store in downtown Seattle, one in a trendy Seattle neighborhood,
another in an affluent suburban residential area, and the fourth near a major university. Two stores
delivered strong results, one delivered average results, and the one in the trendy neighborhood was
eventually closed. The greatest insight came from the store in the residential area. The company had
printed stickers with the MOD logo and left them at the register for people to take; the Svensons soon
noticed the stickers all around town on stop signs, car windows, and people’s laptops. The heaviest
users were teenagers, and this impressed upon the Svensons the opportunity for MOD to serve as a
community meeting spot. “We want the brand to resonate with this generation and their values,” Ally
said. Chris Schultz, MOD’s senior vice president of operations, added: “Our biggest fans are people
between the ages of 6 and 16 who have a voice and are making the family’s decision on where to eat.”

Making a Difference with MOD

With an idea of who MOD’s customers were and where the company should locate its stores, the
Svensons asked themselves if they really wanted to spend the next 10 years building a chain of pizza
shops. Scott explained:

We both said that we didn’t. We had already run two successful ventures and we
didn’t need this company to pay our mortgage. We wanted to make sure that we filled
the remaining chapters of our professional lives doing something compelling. Through
conversations with our team and our own explorations, we decided to use MOD as a
platform to make a difference in the lives of the people who work for the company. Most
of our positions are entry-level, and food-service jobs have historically not been respected
or well-regarded. We want to make service a noble profession.

To this end, MOD paid its people at least $10 per hour.25 In 2008, the minimum wage in the U.S.
was $6.55 per hour.26 It also provided benefits to employees working at least 26 hours per week. It was
equally important to the Svensons that MOD be a fundamentally sound business. “MOD is
unapologetically for-profit,” Scott said. “The business has to be successful and competitive, but we
decided to ultimately measure success not in terms of revenues or the number of stores, but by how
many people we could employ. MOD has a purpose beyond pizza. We wanted to run a business that
our boys could be proud of.” The Svensons believed this philosophy resulted in a stronger performing
company. “If you want to inspire and engage millennials as employees, you need to give them
something to believe in beyond a paycheck,” Scott said. “We’re a pizza restaurant, but we sell pizza in
order to make a difference in people’s lives.” He continued:

There are a core group of companies that are trying to embrace what some have termed
“enlightened capitalism.” I believe that the world has changed over the last few years
from an environment where there was a clear division between for-profit companies
exclusively focused on business, and nonprofit entities, such as government agencies or
NGOs, who took care of everything else. The way in which the government has been
managed over the last generation with over-commitments and accruing unsustainable
amounts of debt means that it has limited resources and capacity to engage in
communities and make a difference. This vacuum has to be filled, and I think there is a
need for companies like MOD and others to step into that void.

MOD grew slowly and focused on getting its culture and operational processes right. In 2012, the
company had sales of $5.8 million27 and became cash flow positive. Soon thereafter, large investments
to grow the business (e.g., adding people and infrastructure) resulted in operating losses.

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MOD Pizza: A Winning Recipe? (Abridged) 420-118

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Funding Growth

MOD had 14 stores in Washington, Oregon, and California by the end of 2013; the company
reported revenues for the year of roughly $9 million. The company relied on funding from the Svensons
and other early-stage investors,28 who had put in a combined $7 million.29 “MOD was able to raise so
much money from friends and family because people believe in and trust Scott and Ally. They take this
responsibility personally and feel obligated to make MOD successful because this is a bet on them as
individuals that they can pull this off,” said MOD’s CFO Kelly Allison.

In 2014, MOD obtained an additional $15 million in capital and grew stores to 31 (including one
franchise) across seven markets. The company’s workforce expanded to 762 employees. MOD sold
over 2,255,000 pizzas in 2014, up from 1,063,619 in 2013. Revenues increased to roughly $20 million in
2014; same-store sales grew over 9%, though MOD did have a negative net income. The average
contribution margin (a measure of store-level profitability) for individual stores operating for at least
one year had risen 46% between 2013 and 2015.

MOD closed a $45 million funding round in March 2015, with the private equity firm Perella
Weinberg Partners Growth Equity Fund (PWP) investing approximately $27 million. The Svensons and
other MOD leaders had debated whether institutional investors were the right ones for what MOD was
trying to build, but ultimately felt comfortable moving forward with PWP. A key moment came when
the PWP partners doing the due diligence said that MOD might be trying to grow too fast and risked
disrupting the culture. “Raising money was a distraction for Scott. MOD could have raised another
round of funding from friends and family, but now Scott is free to focus on what’s most important,”
Alling said. MOD’s leaders expected to again be cash flow positive by the end of 2015.

Marketing

MOD did not use traditional advertising channels such as television, radio, or print, but connected
with customers through social media, word of mouth, and guerilla marketing tactics like handing out
stickers. MOD was also experimenting with digital advertising in the Chicago-area market. Ultimately
though, MOD relied on the in-store experience to earn business. “MOD’s people are the front line of
our marketing efforts,” said Mary Douglas, director of marketing. Schultz explained, “We sell pizza at
one fixed price, so we can’t upsell customers to a more expensive product. The only way stores can
grow is if their customer traffic increases. We want the service and experience to be so good that we’ll
have a lifetime customer after they come in once.”

MOD Squaders were empowered to take care of customers by “Spreading MODness,” which
enabled employees to give customers complimentary food or drink at their discretion. One manager
said that he used this freedom to give a pizza to a customer who seemed to be having a bad day or to
a parent trying to get dinner for multiple young children. Store managers also chose a local
organization or charity to partner with as part of each store’s opening event (MOD donated over
$89,000 in 2014). “We want to teach our team members life skills through philanthropy and giving
back,” Scott explained. “It makes the team feel empowered when they raise $3,000 for a local cause and
they really get a buzz from giving back and helping the community. There’s a correlation between
giving back, feeling gratitude, and feeling happy, which helps make them successful. We operate on
the premise that happiness precedes success. And if we can help them develop life skills, then there are
lots of benefits for MOD in terms of our position in the community.”

However, it was difficult to distill the elements of what made “MOD” into a cohesive message.
“We’re trying to solidify what our brand is,” Douglas said. “We see MOD as a lifestyle brand. Our

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420-118 MOD Pizza: A Winning Recipe? (Abridged)

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messaging asks people ‘Are you MOD?’ and ‘How do you MOD?’ Being a MOD means doing the right
thing. Our message is that there is much more going on here than pizza.”

Store Location

“Once we are in a market, we take an aggressive approach to secure the best locations,” Scott said.
“We try to cluster the stores to be efficient, but we also have to be opportunistic if a great piece of real
estate is available.” Suburban neighborhoods were optimal locations as they provided sufficient
customers for both lunch and dinner. “We want to go where we can make a difference,” Scott added,
“Places where $10 per hour is a lot of money.” When MOD opened a store in Allentown, Pennsylvania,
a city with a median household income of just over $35,500,30 Scott recalled an employee coming up to
him and saying, “You gave me a chance and I won’t let you down.”

Franchising

Leadership identified 20 to 30 possible U.S. markets to enter and then categorized them into three
buckets: (1) markets close to where MOD currently operated—to capitalize on efficiencies and to build
the brand—and where management had some experience; (2) important markets that did not fit the
first category, for which MOD would need to seek a franchise partner; and (3) markets where MOD
was willing to work with a franchisee but would not actively solicit one. John Dikos, MOD’s vice
president of partnerships, offered an example for the latter category: “If someone came to us and said
they wanted to open a store in Cheyenne, Wyoming, we’d consider it, but that partner would have to
commit to opening a significant number of MOD stores across the entire Mountain West market in
such states as Wyoming, Idaho, Utah, Montana, etc. We’re only working with a small number of
franchisees, so we’re being disciplined about our approach to partner selection.”

Partners needed to have restaurant experience, acumen to run a franchise at scale, meet financial
thresholds, and share the company’s philosophy on running a business. “We also want to know why
they want to open a MOD store,” said Dikos. “If a potential partner says that he or she wants to open
a MOD franchise in order to give an opportunity to the people that helped make him or her successful,
that’s a great answer. We look for partners who can take the same kind of financial risk that we have
in building a different kind of business. We want partners who are willing to take a leap of faith and
are thinking about how low they can price their food while still taking good care of their team.” When
a potential partner passed this first level of screening, MOD took them to the company’s Bellevue area
stores to see how they interacted with store employees, how they reacted to the company’s culture, and
how they talked about MOD. People from MOD would also go and visit the prospective franchisees at
their restaurants to see how they worked with their employees.

“There is temptation to grow quickly by using other people’s money,” Alling said, “but we didn’t
want to turn MOD over to franchisees until we knew the model worked. Also, we couldn’t properly
incubate our culture if MOD grew too fast.” To enter key markets faster than MOD was able to on its
own and to be a first mover in the fast-casual pizza segment in these markets, leadership undertook a
careful review process and selected five franchise partners. MOD’s leaders envisioned working with
as many as 15 partners at scale, and over time, each partner might have between 20 and 50 stores.
Future MOD franchise stores would operate in California (near Sacramento), Colorado, Michigan,
North Carolina, and South Carolina by the end of 2015. However, 90% of all MOD stores would still
be company owned by the end of 2015. (See Exhibit 6 for MOD’s geographic presence in 2015.)

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MOD Pizza: A Winning Recipe? (Abridged) 420-118

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MOD in 2015
MOD’s stores differed from one another in decor and layout (see Exhibit 7 for images) because the

Svensons did not want them to have an identical feel. “We have to be bold enough to let each MOD be
unique to its community and put the right team in place to create their own MOD,” Ally said. “We
consider each new store to be the next in the series, not the next in a chain.” In 2015, new stores were
to be 2,500 to 2,700 square feet in size, and the targeted cost for opening a new store was approximately
$525,000.2 The weekly sales goal (or average unit volume) set for stores in 2014 was roughly $21,000,
and MOD ended the year comfortably above target. One district manager estimated that one of his
stores in a semi-urban area conducted 8,000 transactions per month. Stores’ highest costs were for
ingredients and labor, which combined to account for around 60% of sales. MOD had year-to-date sales
growth of 13.2% as of early 2015. (See Exhibit 8 for sample financial information for stores.)

The key metrics MOD tracked included same-store sales, performance of new stores and markets,
customer feedback (based on reviews posted to Yelp, where MOD had an average score of 4.2 out of
5), and efforts to gauge employee engagement (presently assessed via surveys, though employees
would eventually be able to send feedback via a portal on the team’s internal website). Leadership also
kept a close eye on the state of the company’s culture, though there were not yet any formal metrics to
track this. MOD’s leaders projected revenues of $60 million in 2015.

MOD could typically tell how well a store would perform based on opening week results. The only
store MOD had closed was in Seattle in 2013. It did not fit with its intended positioning since it did not
have a strong base of local families, and the neighborhood was described by Jamie Finch, an analyst
for MOD, as “a trendy neighborhood where most of the restaurants are chef-driven one-off concepts.”

When a customer walked into a MOD store, he or she stepped up to the counter and placed an
order. The customer’s food then moved along in an assembly-line fashion where other employees
constructed the pizza to customer specifications. The pizza then went into the oven for roughly three
minutes, and customers typically received their food within six to seven minutes of placing the order.
Customers could also purchase salads, dessert items, and milkshakes that were made to order, as well
as alcoholic beverages. Prices were set at $7.47 per pizza in MOD’s Washington, Oregon, Arizona, and
Texas stores, and at $7.87 in its California, Chicago, and East Coast locations. MOD’s franchise partners
charged $7.27 in Denver, $7.77 in North Carolina, and $7.87 in Michigan.

Each store had 20 to 25 people on payroll. Employees were cross-trained on all functions from
cleaning dishes to cooking pizzas so that they could perform whatever task was most needed at a given
moment. Most stores were run by a general manager (GM), who was supported by an assistant general
manager (AGM) at locations with high sales volumes. Both GMs and AGMs were salaried positions.
AGMs were paid $28,000 to $34,000 annually, and GMs $36,000 to $50,000. GMs were eligible for
bonuses based on their stores’ sales relative to budget, and on food and labor costs relative to budget.
GMs received 15% of their base salary in bonus if they reached all their target goals, and could earn
more if they surpassed these …