Smart choices helped Garlic Jim’s ride out recession

EVERETT — Five years ago, Garlic Jim’s was a local pizza chain on the brink of exploding onto the national scene.

The Everett-based company, founded in 2004, had more than 50 stores in 10 states. Garlic Jim’s had hired sales people in places like Texas, Florida and New Jersey to find franchisees and planned to open as many as 75 to 85 new stores by the end of 2008 and five times that many by 2013.

But by the spring of 2008, several people interested in opening Garlic Jim’s pizza shops couldn’t find financing. Many hoped to use equity in their homes as collateral but found that impossible during the housing crisis, said Dwayne Northrop, Garlic Jim’s chief executive.

“We knew something was up,” Northrop said.

When financing dried up, so did Garlic Jim’s nationwide expansion plans. Four years after the recession began, roughly half of the Garlic Jim’s shops remain, and most are located in Washington and Oregon.

“We survived it,” Northrop said. “We’ve had some closures but we’ve regrouped.”

Garlic Jim’s is a case study in small-business survival. The recession prevented a growing company from going big, but the business is still around thanks to a little humility and some smart decisions early on.

Northrop, who worked first for Domino’s before starting the Jet City Pizza Co., now is ready to build the business again. He aims to license 20 to 25 franchises this year and have 10 to 12 of those stores open by the end of year. And he sees an improving economy for those looking to launch their own restaurants, pizza or otherwise.

“There’s never going to be a better time to buy restaurant equipment or to get a lease,” Northrop said. “You can probably get a store open for about one-third of the cost” of pre-recession times.

Commercial rental rates in Snohomish County hit a low in 2011 as the amount of property available for rent hit a five-year high, according to a recent report by commercial investment firm Kidder Mathews. The average commercial rent rate slowly increased in the first half of 2012 as the vacancy rate improved.

Used restaurant equipment is more readily available than it was before the recession, Northrop said. In some cases, restaurant owners left their equipment behind when they walked away from their businesses.

“There are a lot of situations where the landlords seized restaurant equipment and are willing to sell it” cheaply, Northrop said.

Northrop estimates that someone looking to open a Garlic Jim’s franchise could do so with as little as $75,000 to $100,000. That’s down from $300,000 to do so in 2006.

But what are the chances of success?

Garlic Jim’s emphasis always has been gourmet pizzas, Northrop said. The franchise aims to compete not on price but on quality and service.

National chains emphasize fast service but a so-so product. Mom-and-pop shops “can’t deliver as fast as Domino’s but their product is good,” Northrop said.

During the recession, fast-food restaurants like McDonald’s, which offers dollar items, flourished. But the past few years have been rough on premium restaurants, even the ones serving pizza.

Now there’s indication that consumers are ready to fork over more money for eating out. Analysts who watch McDonald’s have noted the burger joint’s growth has slowed in recent times, which could reflect stiffer competition from newer chains like Panera Bread Co., which offers higher-end food in a casual atmosphere.

But just as the economy is improving, the cost of food is becoming volatile.

Restaurants face uncertainty over food prices this year, given the drought in the Midwest. But Garlic Jim’s might be positioned better than most thanks to an early decision that helped the small chain survive the recession.

Like Domino’s, Garlic Jim’s operates a food commissary, which supplies pizza ingredients to franchise shops. The company actually has two commissaries, one for Garlic Jim’s franchises and one for Pacific Coast Foods, which mainly distributes ingredients for pizzas.

“We produce sauces and dough,” Northrop said.

The Garlic Jim’s food commissary, Northrop said, operates on a “slim margin” to help franchises grow by keeping ingredient prices stable. As a result, most Garlic Jim’s stores haven’t raised prices since 2006, Northrop said.

And the pizza chain’s ingredient sources “are insulated somewhat” from drought price increases by the fact much of the food is sourced within Washington and Oregon.

“From a purely business perspective, buying things locally keeps you from having to ship,” Northrop said.

Besides keeping the price of food purchased by franchisees stable, the commissary has other advantages.

First, the ingredients arrive ready to use, controlling franchisee labor costs for food preparation. “We’re trying to do high volume — a thousand dollars worth of business in an hour” on a Friday night, Northrop said.

Second, when store owners are responsible for procuring food, they spend too much time on the phone trying to save money and too little time making sure their employees are providing good service and a good product, Northrop said.

Having survived the recession, Northrop’s thoughts about expansion have changed a bit. Garlic Jim’s no longer seeks a nationwide presence, at least not now. Instead, the pizza chain is focused on growing in the areas where it has done best: the Puget Sound area and Portland.

Michelle Dunlop: 425-339-3454; mdunlop@heraldnet.com.