CiCi’s Pizza declared bankruptcy Monday as the COVID pandemic and economic downturn “severely strained” finances.
The 318-unit pizza chain agreed to sell itself to D&G Investors as part of a pre-packaged and expedited bankruptcy process. The move came after D&G acquired $81.6 million in debt from CiCi’s previous lenders. The firm will convert 100 percent of its secured debt into equity in CiCi’s and provide $9 million in debtor-in-possession financing to help the company through the bankruptcy process.
CiCi’s attempted to combat the unpredictable environment with a four-pronged strategy: reopening with the goal of health and safety; pursuing off-premises opportunities; repositioning the marketing strategy to focus on digital, the value-oriented experience, and the company’s target demographic; and optimizing cost structure by reducing supply chain costs, negotiating rent reductions, reducing overall square footage and corporate overhead, and managing commodity costs.
The effort wasn’t enough to soften the blows. In 2019, the brand earned $177.3 million in revenue and $14.2 million in adjusted EBITDA. However in 2020, revenue declined to $76.3 million and adjusted EBITDA lowered to a negative $2.7 million.
CiCi’s said that in addition to the COVID pandemic, fast casuals and third-party delivery have brought pressure to its buffet model, which depends on in-store dining for 99 percent of revenue.
Digital ordering and delivery at CiCi’s has grown 300 percent faster than dine-in traffic since 2014, according to court documents.
“CiCi’s introduction of digital ordering and delivery services has amplified its ability to reach customers, but the Company’s reliance on third party dispatch and delivery platforms has impacted margins and may reduce customer loyalty over the longer term by lowering switching costs,” said CFO Richard Peabody in the court filing. “As such, and because the in-store experience features less prominently today in the overall customer value proposition, CiCi’s must work harder and more creatively to differentiate its offerings from the competition.”
In 2019 and early 2020, CiCi’s management team initiated a strategy to improve efficiency and flexibility. In 2019, it closed three company-run stores and transferred 29 to franchisees. In 2020, it began the process of refranchising its remaining stores, including the closure of seven restaurants and transfer of 10 to franchisees. The pizza brand also planned to close one of its three distribution centers to consolidate operations. CiCi’s was in the middle of this turnaround strategy when COVID hit in March.
The instability caused CiCi’s to default under its credit agreement. For several months, the pizza chain negotiated with lenders on a path forward to address debt and defaults. According to court documents, CiCi’s lenders didn’t want to own the company, so the brand started a sales process in consultation with those lenders. While that process was ongoing, the lender group sold all of its debt to D&G.
CiCi’s then engaged D&G about a transaction. After a stalemate over costs, the two sides reached an agreement that contemplates a 45-day bankruptcy process.
D&G’s acquisition marks the fourth time CiCi’s has exchanged hands in less than 20 years. CiCi’s was purchased in a management buyout by Levine Leichtman Capital Partners in 2003, which then sold the pizza chain to ONCAP Management Partners in 2007. Under ONCAP, CiCi’s grew to roughly 650 stores in 33 states by 2009. Seven years later, CiCi’s was purchased by Arlon Food and Agriculture Partners. By then, the footprint had declined to 430 stores.
At the beginning of 2020, CiCi’s was down to 395 units. As of bankruptcy, the total slid to 318, including 307 franchises.
Buffet concepts have suffered greatly during the pandemic. Garden Fresh Restaurants, owner of Souplantation and Sweet Tomatoes, filed Chapter 7 bankruptcy last spring and permanently closed all 97 of its stores. In October, Golden Corral’s largest franchisee, 1069 Restaurant Group, declared bankruptcy with $49.7 million in unsecured debt.