Patty's pizza founder says Franchise expansion plan is not pie in the sky. (Up Front).

Patty's pizzeria has big expansion plans. Time will tell if they are half-baked.

Patty Phillips, founder of Patty's Presto Pizza Inc., operator of two Patty's Gourmet Take-and-Bake Pizza stores, has struck a deal with a Midwestern restaurant consultant and investor for an aggressive roll out of the concept, where customers place an order and then bake the pie at home.

Phillips said the business plan sets a goal of opening 500 locations in five years, which could make Patty's rollout the largest of the year. Franchising deals that call for 50 restaurants a year are considered aggressive.

"That's an awfully large offering for one franchisor or developer," said Terry Hill, spokesman for the International Franchise Association. "To grow to 500 in that amount of time would be quite a leap."

Anthony Bonelli, chief executive of Omaha, Neb.-based Restaurant Development Associates, Phillips' partner in the expansion, declined to comment on the number, although he said he had seen too many franchises flop by expanding too rapidly.

"We don't want to overgrow," he said. "We've learned you have to concentrate operations in one area and grow out from there."

That's why Bonelli said he wants to grow the company out of Los Angeles, where Patty's already has some name recognition. He said he fears the company would spread its supply chain too thin by expanding away from the original locations.

But Phillips, a vocal critic of Santa Monica's failed minimum wage law, would like to begin outside of California, which she believes is hostile to business. "The debate now is do we start in Nebraska or some other place that's more business friendly," she said.

Earlier attempts

Philips started out as a commercial real estate agent, leaving that business in 1988 and investing "every penny" she had in the pizza venture. "I really thought I would open six locations in six months and spend all my days on the polo field," she said. "Boy, was I naive."

She said she had been thinking about franchising for a couple of years, but previous deals fell through when she insisted on retaining ownership of her Santa Monica and Beverly Hills stores, where eat-in restaurant service is also available. She also wanted to retain control of the Marina del Rey dough production facility.

After taking out a Small Business Administration loan for $250,000 in 1994, Phillips expanded her operation to four storefront locations and the Marina del Rey facility.

A Carson City, Nev. location closed four years ago when it failed to cover the debt payments on the low-interest SBA loan, Phillips said. A second Beverly Hills location was closed in 1995 after the current, larger location opened that same year.

When it became clear that expanding the chain through borrowing wasn't going to work, Phillips focused on franchising, taking a onetime flat fee and an annual cut of revenues in exchange for exclusive rights to a defined territory.

"You pretty much get a partner in there, the franchisee, who is excited and wants to invest in it," she said. "Then you don't have the debt burden and you don't have to go to a bank every time you want to open another store."

Enter Bonelli and his partner in Restaurant Development Associates, Sidney Sweet.

Bonelli said he has worked as a restaurant consultant and occasionally has invested in franchises, including "dozens" of Blimpie Subs and Salads stores. Sweet was president and chief executive of Austins Steaks & Saloon Inc., a publicly traded restaurant owner and franchiser now based in Roanoke, Va.

Bonelli said he and Sweet have put up a substantial amount of their own money and raised funds from investors for the franchising deal, though he declined to reveal how much.

Under terms of the deal, Phillips would retain sole control of her two storefront locations and the Marina del Rey manufacturing operation, which also packages unbaked pizzas for sale to hotels and restaurants.

Phillips will have a greater than 50 percent stake in the new company and all dough will continue to be produced at the Marina del Rey facility, according to Bonelli.

Timely delivery

Mitch Speiser, a restaurant analyst with Lehman Brothers, said franchisors are increasingly interested in the "take-and-bake" concept. Already, some take-and-bake pizza chains have found success, including Papa Murphy's International Inc., a privately held Vancouver, Wash.-based chain founded in 1995, which has nearly 800 locations stretching from Canada to San Diego, though none in the L.A. area.

Almost all the locations are franchised, and the company is believed to generate $300 million in annual revenues, according to Robert S. Hill, a partner with J.H. Chapman Group LLC, an investment banking firm that specializes in restaurant acquisitions and mergers.

Hill said the existence of a successful chain is both good and bad news for Patty's Pizza. On the bright side, "the concept works," but "they will have high hurdles to win market share," he said.

Still, the road to franchise success is littered with the corpses of failed attempts.

McDonald's Corp. has surrendered trying to franchise a gourmet pizza concept called Donato's Pizza. In California, Hill said Tomatina International Inc., a San Rafael-based gourmet pizza chain, made a big push to franchise its operations nationally but hasn't been able to attract franchisees outside of the Bay Area despite having deep-pocket investors.

Pizza chains also have a hard time expanding nationally because of regional tastes, exemplified by the New York-Chicago, thin crust-thick crust schism.

"The industry as a whole has been trending flat to negative sales in same store growth," Hill said. "Discounting has gone up and continues to erode margins, which doesn't bode well for new entries into the market."