Gerardo Flores, Chief Development Officer at Marco's Pizza
Marco's Pizza
Guest: Gerardo Flores, Chief Development Officer, Marco's Pizza
Host: Chris Hatch
Summary
Chris Hatch talks with Gerardo Flores, chief development officer at Marco's Pizza, which has about 1,230 stores and nearly 400 franchisees. Gerardo shares his 20-year franchise real estate career, including Jersey Mike's and Tropical Smoothie, and the move into a CDO role overseeing franchise sales, recruitment, finance, real estate and construction. He walks through Marco's path to ownership for franchisees, preferred brokers and approved vendors, a store format shrunk to about 1,200 square feet to offset rising rents and triple nets, and why about 95% of Marco's deals are second-generation space. He closes with why relationships are the real wealth in this business.
Key Takeaways
A CDO at a franchise brand runs much more than real estate: franchise sales, recruitment, finance and construction all have to work together on the "path to ownership."
Marco's franchisee process includes financial benchmarks, Discovery Day, an in-store evaluation and a final Decision Day. It's a two-way interview, and personality matters (owners should expect to work Friday nights).
Franchisees must use Marco's preferred broker in each market, plus approved architects, engineers and GCs, for consistency. One broker per market, not four or five.
To offset $40-plus rents and double-digit triple nets, Marco's shrank its format from about 2,000 square feet to roughly 1,200 by cutting lobby seating and keeping the kitchen the same.
About 95% of Marco's deals are second-generation space, found by getting ahead of vacancies through landlord relationships and rent rolls. That also helps avoid pizza exclusives.
Private equity buyers mostly want existing EBITDA. Marco's targets well-capitalized multi-unit, multi-brand operators to keep growing.
Relationships are wealth. Twenty years later, the person you did your first deal with can be the one who helps get a tough deal done.
Transcript
Editor's note: The recording had audio bleed between microphones, so duplicated lines were removed. Some names are spelled from the audio and should be confirmed.
[01:45] Chris Hatch: I wanted to welcome our guest to the Dirt Dog Pod this week. We have Gerardo Flores, Chief Development Officer with Marco's Pizza.
[02:05] Gerardo Flores: Thank you for having me, Chris. Appreciate it.
[02:07] Chris Hatch: Yeah, well, you're a great guest. We just got our first Marco's Pizza open in our portfolio, in West Valley City, and we're really thrilled with that. It appears that our franchisee out there, Jacob Webb, is off to the races and doing some good sales, so we're happy about it.
[02:25] Gerardo Flores: Jacob is a great franchisee for us. He owns all the stores in the Salt Lake Market. As a of fact, I just had a conversation with him today about some more development, not just within the Salt Lake Market, but outside of it. So I'm super excited. He's our area representative as well in the Utah market. So now he's starting to develop South Utah down in St. George. I absolutely love Jacob. I've known him for quite a bit, so great guy.
[02:47] Chris Hatch: I think it's definitely the sign that you're getting older when the people you grew up with, like from childhood, are now the business leaders that you're working with as an adult.
[03:01] Gerardo Flores: Well, adults exactly. Well, I'll throw another one at you. You know, you're getting old when your son is getting into the industry as well. So there you go I'm telling you I'm super proud of him. He is The joke we've had for a long time is is he started down He started going down several different industries after he graduated from college and I kept telling him I said it's inevitable You're fighting your destiny. You're going to end up in commercial real estate. So stop fighting it.
[03:09] Chris Hatch: Tell me about that. How great is that though, right?
[03:31] Gerardo Flores: And sure enough, he ended up in commercial real estate. So super proud of him. Just trying to give him all the knowledge I have and connect them with all the folks that we know. And I'd love to make the intro to you as well, Chris. But again, super proud of him. He's doing quite well.
[03:42] Chris Hatch: I love that. Is he doing brokerage work, something else right now?
[03:48] Gerardo Flores: No, he's working on the tenant side, actually. He's working for Marco's, of all folks. Yes. Yeah, he's a real estate coordinator for us right now. So he's got to do all the work that you and I did coming up into the industry. So call it the grunt work, if you will. But yeah, he's getting his feet wet and getting to ICSCs and retail live meetings and stuff like that. So yeah, he's doing well.
[03:51] Chris Hatch: OK. And what is he doing for Marco's? I love that. Is his direct report you or does he?
[04:15] Gerardo Flores: No, no, no, cannot have it. No, he reports up to the head of real estate. Yeah. Yes. It's way better. It's way better. Yeah, imagine working with your dad directly, right?
[04:20] Chris Hatch: Good. Yeah, that's good. That's probably better to be honest with you, right? Yeah, no kidding. Yeah. You know, it was funny. I started down that path and then I quickly pivoted over and started as a broker and just decided, look, I love you, but like, maybe I should come over here and work here for a while. Yeah.
[04:41] Gerardo Flores: Yeah, it's a great niche. I mean, I've been doing this for 20 years, Chris, and I don't call it a job. I absolutely love what I do, so it's definitely not a job.
[04:51] Chris Hatch: So tell me about why Marco's. How'd you end up there and why are you there and why do like it?
[05:00] Gerardo Flores: So I was I've been in the commercial real estate side of the business for 20 years and my dream was always to move up into a C-suite position and the opportunity just presented itself. I got a call from a mutual friend of a Jersey Mike's franchisee of ours and she called me up and said, hey, we're looking for a head of real estate to run Marco's. At the time I was running a real estate for Tropical Smoothie. And I joked and said, well, I have one of those already. I don't need another one. She said, well, coincidentally, we're also looking for a CDO. I go, coincidentally, that's my dream job.
I really would love to move up to a CDO role and run the ship, if you will. So I got the opportunity. Met with Tony Libardi, who's our CEO, and Jack Butorac, who's the owner of the company. Had a great meeting. And I remember leaving the meeting and calling my wife and saying, hey, listen, I gave them all I got. This is it. I threw everything at them. If it works out, great; if it doesn't... And I got a call later on that day saying, hey, we'd love to offer you the job. So it's been a wonderful run. Been challenging. Chris, the markets have been really tough out there lately, last few years.
But love Marco's, love the brand, love the food. And you can't, from my perspective, you got to believe in the food to really work for the company. So I've been lucky. I've been extremely lucky.
[06:10] Chris Hatch: And it's such a good interview to kind of leave it out on the field, When you've left it all on the field, I feel like what's the worst that can happen, right? It doesn't go your way.
[06:31] Gerardo Flores: Yeah, it wasn't meant to be. It wasn't meant to be. But again, it was just a great interview with Tony and Jack. And I left feeling really good. But like you said, I left it on the field. I left everything on the field. And it worked out. It worked out great.
[06:45] Chris Hatch: And so you go to Marco's and how long ago was that when you took that role?
[06:50] Gerardo Flores: About two and a half years ago, September of 2022.
[06:53] Chris Hatch: And you're sitting at, what's your store count today? And where were you when you started?
[06:56] Gerardo Flores: 1,230. Oof, I should know this answer actually. I'm trying to follow the FDD rules obviously here and give you the proper account. I want to say in the thousand range-ish, so I can get you that number down the road here, Chris.
[07:20] Chris Hatch: So to add 250 stores over two and a half years in today's environment, it seems like it's been much harder for developers to build multi-tenant over the last two and a half years.
[07:31] Gerardo Flores: It's been challenging and really our wheelhouse is a strip center developer. And it's been challenging, not just finding the real estate, but really making the deals pencil. It's been, again, we've had success. We're going to open, my expectation, we're going to open close to 100 stores this year again. It's challenging trying to backfill that pipeline right now. My hope is that when interest rates change, developers start really building more real estate and we're able to really drive more openings for ourselves. So our goal is to get to 150 and then 200 and 300 store openings, just like we sort of we did at Jersey Mike's. So that's ultimately the goal for us.
[08:03] Chris Hatch: So you spoke a little bit about the culture there with your interview process with the owner. How has the culture been from moving from like Jersey Mike's over to a Marco's? Yeah, it's definitely the culture of Jersey Mike's.
[08:36] Gerardo Flores: It's yeah, it's most definitely a different culture Jersey Mike's than it is at Marco's You know at Jersey Mike's it was really operated and run by one person all the decisions really had to be made by You know the top level and then again nothing wrong with that I don't want to disparage Jersey Mike's. It's an absolutely wonderful company But with here at Marco's it's there's a lot more autonomy in what we do it You know, I give my team the autonomy to make those decisions as well. So. Rather than it flowing down, for the most part, flows up. We really encourage our, at least my team members, to really make decisions on the ground level that benefit our franchisees.
[09:18] Chris Hatch: It's interesting. So going from a senior real estate manager to a chief development officer, what does that entail? What do you have? In other words, what grows? You said it was one of your kind of targeted jobs that you were trying to achieve. What does that change for you? What are you doing when you step into the office as a chief development officer that you did not do as a senior real estate manager?
[09:47] Gerardo Flores: Well, the simple thing is as you're a real estate executive, you're running real estate. Once you move into a CDO role for a franchise company, now you're not just running real estate, but you're running franchise sales, franchise recruitment, franchise finance obviously, as I mentioned, real estate, and the construction as well. So you not just have one pillar that you're overseeing a multitude of them. And really, it's getting them. all to work together as one to see this process down the road. We call it really the path to ownership process and really finding the franchisee, getting them through that process, getting them to sign a franchise agreement and then moving up to the pipeline to open up a store. So there's been a real shift, generally, away from the real estate side more to the recruitment and construction side.
[10:38] Chris Hatch: Have you seen post COVID more people want to move into a franchise role? Has that increased the number of franchisees prospects for you?
[10:44] Gerardo Flores: We have, believe it or not. Believe it or not, we've seen an uptick in franchise recruitment or franchise interest in California, despite the minimum wage increases. So yes, there's been an increase in the lead generation piece for us, because I think people want to take control of their lives. They want to be the bosses, if you will. And have more control over their future rather than sitting sort of behind the desk if you will.
[11:16] Chris Hatch: You know, it's blown my mind looking at some of the shopping pattern behaviors that have been adjusted post COVID. And then just looking at some of the residential decision making, right? So take we talked there at the first about Jacob Webb looking at Southern Utah now for some additional units. I just look at that. I mean, I was talking to a realtor friend of mine yesterday telling me about multiple listings in the two to $6 million range in St. George as new second home residences for people from California, which.
[11:41] Gerardo Flores: Whoa. Yeah.
[11:46] Chris Hatch: That market was always traditional, maybe a second home market for Salt Lake people. And now you're seeing new primary residents that are just relocating and they can work from home and they don't want to live where they're living.
[11:58] Gerardo Flores: That's, and you nailed it, Chris. And that's sort of some of the challenges that we have because there's just been such a shift in population from certain states to other states. The other thing that I foresee here shortly is a lot of these companies are calling their workers back to the office. You've seen the larger companies do it. We're not mandating that just yet, but, or if ever, I don't know what direction we're going to take there. But fact is that. What used to be a concentration of employment at a core has really dispersed into folks' homes. And I feel like to some extent, it's going to eventually come back to the way it used to be pre-COVID. Managing a demographic in that respect is a little difficult because it's fluid. It changes constantly.
[12:33] Chris Hatch: Are people eating more pizza post-COVID or less?
[12:52] Gerardo Flores: The pizza industry is about flat right now. And really, the shift has been third-party delivery. If you remember pre-COVID, there was really two things you can get delivered. It's pizza and Chinese food. Now you can get anything delivered. Sure, you can get groceries delivered at this point. You mentioned there has been a shift in the way people not just live, but eat and travel. The pizza industry has seen a shift in that respect as well.
[13:24] Chris Hatch: That's interesting, isn't it? So when you guys do delivery, it's all through third party app?
[13:30] Gerardo Flores: No, we do both. We have our own in-house drivers and then we also do the third party aggregators.
[13:38] Chris Hatch: You know, that's the one part about the pizza industry. Always blows my mind is not only are you trying to help a franchisee learn how to train their team members, how to make a great pizza and get it done, get the ingredients in right, but then also to get it delivered and do it safely and do it in a route that makes sense.
[13:57] Gerardo Flores: That's exactly it. I mean, when you have five, six, 10 drivers out on the road at one time, obviously, you got to keep them all safe. So it's a very fine-tuned process. I mean, we've been doing this for quite a bit. We have a robust POS system. We got great technology. We have new technology coming out as well. So it's exciting what's coming, but Marco's is coming.
[14:25] Chris Hatch: So a driver hops in their car and the way it works today that's out there is that he's got some route, he or she has some route that they're following. That?
[14:36] Gerardo Flores: Yes, and we're able to track them with our in-store POS system as well. We can calculate the distance, the time, get there and back so we can almost figure out how many deliveries we can do per hour. Again, the POS system is pretty robust and it helps us really manage the process.
[14:55] Chris Hatch: Yeah, interesting. So for those that might be listening to us here and listening to this episode and thinking about, hey, I don't appreciate my career where I'm headed, and maybe I want to be a Marco's franchisee.
[15:12] Gerardo Flores: Oh, that's a good question. I don't think there is a typical franchisee per se. Chris, we have a several-step process to really evaluate our franchisees. It starts with the application coming in. And then we take the application. And there are certain financial benchmarks that they have to meet to move to the next step. And if they meet those financial benchmarks, we take them through, as I mentioned, the path to ownership process. We have what's called a discovery day where they come in and we do a virtual meeting and we give them as much information as we can, as is allowed by the FDD. And then they take that information and they go back and they do their due diligence.
And then what we'll do is we'll put them through an in-store process. So we'll invite them to one of our local stores and we'll run them through what it takes to be a Marco's franchisee. They'll make pizzas or run the front of the house. We won't send them out on the deliveries, but we really sort of run them through the gamut, if you will, and really evaluate them. And then we get that evaluation. My team gets that evaluation back, and we keep them going down the process. And then once sort of all the I's have been dotted and all the T's have been checked, we go back and we have what's called decision day.
And that's when they come in and meet with some executives. And that's really the final decision on whether or not we move forward with them. But the one thing I always tell the prospects is it is just as much an interview for you as it is for us. So I want to make sure that the franchisee or the prospect is comfortable with us as we are with them. So it's a dual interview process, if you will. But from a true what is the ideal candidate outside of financial qualifications, I'm looking specifically for personality. You know, we work in the food industry, right? We want to make sure that they're going be able to take care of our customers. So personality is a big piece for me when I'm interviewing the final candidates.
[17:11] Chris Hatch: I would think that one of the reservations that some of your franchisee candidates might have is to run one of these restaurants, you have to have how many employees typically per location?
[17:21] Gerardo Flores: At peak times, anywhere between five to seven, plus another five to seven drivers as well.
[17:30] Chris Hatch: So does that mean you're staffing, what, 30-ish per location, more or less? Around 30. So how many people? Because it's interesting. So you're making a jump from probably, in most cases, some version of a W-2 paycheck, right? Or it's a salary. And then you're going in, and now you're an entrepreneur. And you're employing 30 or 40 people per location. How hard does it.
[17:34] Gerardo Flores: Around 30. 30 to 35 is correct.
[17:54] Chris Hatch: Does the parent company help with some of the systems and the payroll and that kind of stuff? Is there training on those kind of things?
[18:01] Gerardo Flores: There is. We have systems for just about anything, Chris, from food and labor percentage, food and labor calculation, to managing your drivers, to managing the schedules. So there's literally everything that we have within the system is automated. And there's nothing that you need to do. You don't need to handwrite a schedule. The system will help you handwrite a schedule based on previous week's performances. It really is a full supportive structure here. We have systems in place for all of it.
[18:37] Chris Hatch: Yeah, I would say that you're just making it a little bit idiot proof, which is like for me, that's how everything needs to be done, right?
[18:45] Gerardo Flores: We simplify it, right? You know, at the end of the day, it's pizza. We want you to have fun. Is it dumbed down a little bit? You know, maybe. But the fact of the matter is you try to simplify it because let's have fun. It's pizza. And it's a great product, too. So you get to enjoy it at the end of the day.
[18:50] Chris Hatch: I was going to say, when Ms. Hatch sends me to the grocery store, it's usually with a list that's texted, a hard copy, and then notes attached to each item, right? Yeah. Yes. This is exactly what I'm referring to. Yep. No problem. Got it.
[19:11] Gerardo Flores: Did you get pictures like I do then? Yeah, Mrs. Flores will send me with pictures too.
[19:21] Chris Hatch: Yeah, that's good. So pizza is a funny product because it's not as much, it's not like coffee where you're getting it every day, right, on the way to work or something. So what do you see seasonally I would assume that Friday and Saturday nights are generally just bigger nights in the business, is that accurate?
[19:40] Gerardo Flores: That is 100% accurate, Chris, with Friday night being our biggest night. That's really the, call it the Super Bowl of the week. And then we have, and speaking of which, we have certain big holidays that really drive sales for us. Super Bowl being one of them. Halloween being another one. And surprisingly to a lot of people, Valentine's Day is a big day for us. It's ordering pizza and driving it off to the kids and mom and dad going out to a nice dinner. So Valentine's Day is a big day for us.
[20:03] Chris Hatch: Interesting. And so, it seems like it would be interesting from a staffing perspective because you got to staff up for that, right? Yeah. And it's also kind of prime time because people usually like to be available on Friday and Saturday nights for their own personal lives.
[20:19] Gerardo Flores: Well, it's funny because another question I asked during the interview process is, you ready to give up your Friday nights? Because as an owner, you should be in your store every Friday night. So it's make or break for you, really.
[20:41] Chris Hatch: Yeah, no kidding, right? It's funny.
[20:42] Gerardo Flores: Yeah, so again, it goes back to personality, right, Chris? I mean, if you're used to going out and having drinks with your friends every Friday night and you're unwilling to give that up this may not be the right industry for you. So it's critical for me to understand what their purpose is as they move into franchising.
[20:52] Chris Hatch: Interesting. Okay, so I've gotten through the interview process as a prospective franchisee with you. I am there. You're starting to onboard me into the training. Are you typically looking to say, I live in this area. Here's a sandbox in which to go play, go find some sites. How does it work from there?
[21:23] Gerardo Flores: So what we do is we put you in touch with our real estate team. And this is really the kickoff. So we do have a true onboarding process. We'll do a full virtual onboarding piece where we introduce you to all the players. And I'm talking about the real estate, the ops, the marketing, and the construction folks, amongst other people. But we've gone through it, and we've done a full market planning. We'll talk to Salt Lake, for instance. We've already mapped out what we want Salt Lake to look like, right? We've done a full penetration plan for the Salt Lake market and we're ready to get going.
So once we get the franchisee into the system, we send them down and really talk to them about some of the areas in the market. Yeah, do we want them closer to home so they're able to oversee the business? Of course, but the real estate isn't always available there. So we really leave it wide open for our franchisees to take a look at the best real estate available in the market. So they are required to use our preferred brokers in the market. They're required to use our preferred or approved, I should say, architects and engineers. And they're required to use our approved general contractors as well.
And we do that for consistency, right? The last thing, mean, you're in the brokerage business. The last thing I need is four or five brokers running the Salt Lake market. I need one broker to really help me lay it all out and work with our franchisees to drive the real estate. So go through the real estate search process, go through the LOI process, get through the PSA and we get you into design. That's where you work with our engineers and architects. As you know, getting through that process and getting into permitting is where the delay is going to be. Once we get into the city, forget it.
I mean, who knows what's going to happen two weeks, two months, six months from now. So. Once we get you through that phase, we've got a GC selected, get you construction, get you open, and we turn you over to ops.
[23:24] Chris Hatch: Really streamlining that simplified version of the process you were mentioning.
[23:29] Gerardo Flores: It really sounds simple, but there's a lot of little steps in the middle. Keep in mind that during that phase, also looking at getting through training, hiring. They're going to training hiring and training their employees as well. So there's a lot of things that go on behind the scenes as we in development are trying to get that store through the process.
[23:30] Chris Hatch: And then as they're getting the store open, so it's under construction, getting open, they're finishing the training and now they're starting to staff. So do they buy their product? I assume there's somebody in the operational side that points them to here's where you buy pepperoni and here's where you buy dough and everything or what a flower and water.
[24:08] Gerardo Flores: Yes, so our operations team will be on hand to really walk you through what that first order is going to look like. And again, we have checklists for all of this. As you noted, Chris, we tried to dumb it down and make it easy. There's a lot of standard stuff that you need to buy to stock your store, simple stuff as in salt or sugar, whatever the case may be. But we have a long checklist of what needs to be purchased to fill that store.
[24:33] Chris Hatch: So of the 1,230 stores out there, do you know offhand about how many franchisees you have?
[24:41] Gerardo Flores: We have a little under 400 franchisees total that own all 1,230 stores.
[24:46] Chris Hatch: So average of three stores per person out there. That seems like good size, three stores. Usually seems like most people can keep a handle on three. Once you go from three to four, then you might as well go to 50, it seems like.
[24:48] Gerardo Flores: A little under three stores, yes. Candidly, once you start getting to that fourth store, you start talking about hiring a district manager to help out for sure. But that's my goal, Chris, when I came in here and really set the strategic plan for this company. Three-ish is great. I love nothing more than to have 400 franchisees and 2,000 stores, right? Get them to an average of five and then ultimately get them up. At the end of the day, the more stores our franchisees have, more successful.
[25:32] Chris Hatch: In the 20-year career that you've had, think, let's see, every one of your concepts has been franchise. Is that right?
[25:40] Gerardo Flores: It's all been franchise. Exactly. Yes. My career has been built on franchise.
[25:44] Chris Hatch: What have you seen over the last 20, what is this, if you had to look at like year one or your first few years of your career to now, what are you seeing in the difference? What's the biggest difference in the franchisees?
[25:56] Gerardo Flores: The biggest difference in franchising is really twofold. One is cost, obviously. There's been an exponentially higher cost in getting those stores open. Two is systems. When I first got into franchising, there weren't a lot of systems in place, but everything is automated now. Everything runs through the POS system. It's sort of one point of contact for everything. So it's a lot more streamlined. It's a lot more digital. You know, can check sales, can check your cameras, you can do everything with your phone these days. You didn't have that technology back in the day, so there's a lot more controls in place for sure.
[26:35] Chris Hatch: Do you think, I would assume that that makes it much more, it just makes it easier to manage? Back to your simplifying statement?
[26:44] Gerardo Flores: It gives me the opportunity to take a one store operator to two stores and three stores and ultimately, like I said, I'm hoping to get to that five plus average piece. The easier we make the operations, the more apt they are to grow with the company, yes.
[26:56] Chris Hatch: It seems to me from my impression that I would say we see a lot more private equity starting to come into the franchisee space. And just overall restaurant corporate ownership of restaurants franchise or space etc. Do you see that as well? Is that translating into what you're seeing on the new sales side for franchises?
[27:13] Gerardo Flores: From the franchisee side or the franchisor side?
[27:25] Chris Hatch: Well, both really, right? I mean, you have the perspective of both because you've worked for the franchisor and then you're selling to franchisees, right? Right.
[27:32] Gerardo Flores: Right. So I'll tell you, mean, my last two companies in Jersey Mike's and Tropical Smoothie just got purchased by private equity. Blackstone, I believe, both of them. Now that I think about it. So, but from a private equity perspective, those folks are looking for, as we call it, buying EBITDA. You know, they want to come in and buy large swaths of stores that are already producing EBITDA. They're not really interested in building new stores these days. They're just looking to consolidate big portfolios down into one and really operate them that way. So, which is great. I have absolutely no issues with that, but I'm the development guy.
I need to develop these stores. So, my hope is that when they come in and buy, like I said, a group of stores, I can really convince them to buy a couple of new franchise agreements and develop these stores.
[28:22] Chris Hatch: Yeah, or least intermix it, right? Maybe you buy a market that's got a few stores open and it's got more growth potential.
[28:29] Gerardo Flores: Exactly. That's exactly it. So we do target those, not sure I want to call them private equity, but larger MUMBOs, as we call them, multi-unit, multi-brand owners. We'd really love to grow their brand with those folks, very well capitalized. They have operations teams in place, good operators. They know how to market the store. So that's really what the target is. The target strategy is to chase those MUMBOs.
[28:51] Chris Hatch: And then on the franchisor side, you have the benefit of working for a private company today.
[29:02] Gerardo Flores: Yes, that's exactly it. And again, going back to the last few companies, they've all been private. Yeah, it's great because it's a lot less controls, I guess. And I don't mean it in a bad way, but decisions can be made a lot faster.
[29:19] Chris Hatch: I think it makes sense, the PE companies come in, they buy the private company, and they've paid a lot of money for it. So they've got to put a lot of checks and balances in to make sure that they're tracking to get a return on their capital, right?
[29:31] Gerardo Flores: That's exactly what I've seen with private equity, yes.
[29:35] Chris Hatch: Yeah, it's interesting. It's almost funny, like in the real estate Twitter world and the LinkedIn world, there's the communities and like the retweet that really like to make fun of it. You know, the Harvard MBA is wearing vests that take over some small to medium sized business. It's kind of the funny part of things, right out there.
[29:52] Gerardo Flores: Exactly. Yeah, I don't, I try to stay off Twitter these days, but very active on LinkedIn and there's a lot of good content out there.
[30:01] Chris Hatch: Yeah. You know, it's interesting. Let's go back to just kind of today's environment. And I look at the concept of building new strip malls. And we've looked at a few of them over the last year. And it's just interesting because I don't think we've looked at a single building where we haven't needed to achieve over $40 a square foot. To basically meet the cost for where the new construction looks like where it's going to lay out. And it's so interesting because as you start working with many of the shop space users, a lot of them just have a hard time. They're just not hitting average unit volumes to cover those kind of rents. And how do you see that impacting growth over the next 12 months?
[30:50] Gerardo Flores: Well, I mean, you nailed it. I mean, the fact that performers aren't really hitting those numbers is really impacting how we're trying to pencil our deals as well. I will tell you that we've gone from trying to do larger format stores to doing much smaller format stores just so we can make those numbers pencil. 40 plus, 50 plus, 60 plus rents are hard to swallow when you add double digit triple nets as well. And that's where the challenge really comes in and it starts to really impact the bottom line. So we've seen ourselves go from 2000 square feet to 18 to 16. We're down to about 1200 square feet formats right now.
And I could probably squeeze one in a little smaller than 1000 square feet, but now we start having some operational challenges at that point.
[31:41] Chris Hatch: So as you have shrunk the footprint, what is it that you were getting rid of to shrink that footprint?
[31:41] Gerardo Flores: We work very closely with our A&E to make sure that we're able to lay out the store format in the proper way. But to your point, to really offset what we're seeing as an increase in rents and triple nets, we're going with smaller format stores. The lobby for the most part where we reduce the lobby. We used to have seating in the lobby Now we don't have seating in the lobby and we're down to about 200 square feet of lobby space with no seating in there whatsoever so there's a bench in there where you can sit and wait for your pizza, but we went from I wouldn't say full service, but an order-your-pizza, sit-down type of concept, to a to-go, delivery and carryout model. It's just 1,200 square feet You got the engine in the back and 200 square feet in the front and that's really it.
[32:34] Chris Hatch: So engine didn't change. It was just that upfront customer experience. Interesting. It's back to the triple net part. You know, most of these triple nets are taxes right now. We're obviously seeing wild things happening with insurance and, it's like California wildfires and flooding on the East coast from hurricanes. It's just, it just seems like it's the perfect recipe that is just going to keep increasing over the next few years. And, it's just, it is a tough. Math equation to solve right now.
[33:06] Gerardo Flores: It's a challenge. Let's just assume interest rates come down and developers start building again, we still have that challenge of triple nets, all right? Colorado, for instance, it's challenging right now. Those are in the triple digits as well. Minimum wage, as you see, is spreading outside of California too, which is impacting our bottom line as well. So again, it's a challenging industry right now, but AUVs usually help offset that and getting the cost of that store format down is really our goal into 2025. We're really trying to drive the cost of not just construction, but the equipment. And we're really looking at every aspect of the box and make sure that we can get our franchisees in at a reasonable cost.
[33:53] Chris Hatch: Do you have much, is there much difficulty sourcing the various components that you need to run the pizza engine in the back room? You know, I know like during COVID, a lot of people hit a lot of supply chain problems. We're still having problems getting switch gear for multi-tenant buildings as an example.
[34:09] Gerardo Flores: Right. So the good news on our end is about 95 plus percent of our deals are second gen space. So we're not waiting for switch gears or HVAC systems or stuff like that. So knock on wood right now, we're not having any of those issues, but for the most part, a lot of the stuff outside of the electrical pieces, no supply chain issues.
[34:32] Chris Hatch: Boy, that number blows my mind. 90% of the deals that Marco's are doing are second gen spaces. With as tight as vacancy is, because it's really just such a robust market and so few people building anything, that kind of is mind blowing.
[34:47] Gerardo Flores: It's a testament to our real estate team, candidly. We're really looking for lot of off-market deals. We're really driving relationships between myself and our real estate folks. Looking at rent rolls, trying to get out in front of landlords putting potentially vacant space on the market. Just getting out ahead of it, Chris, really candidly is our piece right now.
[35:12] Chris Hatch: Well, the other component to think through and all that is how many times you wheel up to a grocery shop, anchor shopping center and have a multi-tenant building that doesn't already have a pizza user. So not only are you getting ahead of it, but it's also, you're avoiding the exclusive from the other pizza folks.
[35:28] Gerardo Flores: Yeah, and keep in mind, it's not just the top five, including us. It's all the small mom and pop shops, the local shops, any other concept that wants to block pizza from them, from us. Even the larger guys like Chuck E. Cheese and those guys that sell pizza that really don't quite compete with us, but they have an exclusive. Yes, it's challenging. It's challenging. Yes.
[35:53] Chris Hatch: Yeah, that's wild. That number is way higher than I ever would have expected you to have said.
[35:58] Gerardo Flores: Yeah, yeah, we have, yeah, we don't, not that we don't target new development, because we do, we've got the pipeline into '26 and '27, but the deals that we're approving at real estate committee are now coming in second gen.
[36:11] Chris Hatch: You know, it's interesting though, because if you look at like 23, 24, and 25, I feel like basically the only developers moving forward on new construction, it wasn't people looking to exit immediately because there was no math to solve there, right? I mean, you pretty much had to be building to hold because the market, the cap rate market went away, right? And yeah, how smart to be on it and gear the team appropriately. It's a great move.
[36:35] Gerardo Flores: Yes. Yeah, and it's really accelerated our growth. I mean, we've doubled our store count in the last six years, which is, again, that started before I got here too, but we're continuing that acceleration and store growth.
[36:48] Chris Hatch: As I prepare for the interview, I shout out to the open world on LinkedIn and Twitter, just questions that might need to get asked of you. One of the questions was, what's the top seller? What's the number one item sold to Marco's?
[37:02] Gerardo Flores: Oh, it's pepperoni. I mean, that's without a doubt pepperoni. Listen, Chris, you said you're a customer. I really encourage you to try one of our Magnifico pizzas if you haven't already. The ultimate Magnifico pizza is my personal favorite. I absolutely love it. Two types of pepperoni, two types of sausage. You just can't go wrong.
[37:17] Chris Hatch: I should have given you the disclosure upfront that I'm celiac. So I do have a gluten allergy. So yeah, I should have given you that upfront.
[37:24] Gerardo Flores: No worries. We do have cauliflower crust there too as well, but yeah, I understand.
[37:33] Chris Hatch: Yes. Yeah, no, what I usually do is I do your cauliflower crust and then I eat really low carb. So I'm like one of those gross humans that gets a fork and then I just eat the toppings.
[37:43] Gerardo Flores: Well, you do know we have Pizza Bowls too, right? You get a pizza without the carbs.
[37:47] Chris Hatch: Yeah, that's my jam. I live in that keto world. I'm a funny landlord. We only have one of your stores, but we really like tenants that we like to shop at, right? And it's important for me, right? And good operators. And we've already talked about how well we know Jacob.
[37:55] Gerardo Flores: Jacob is one of the best. He's absolutely amazing. As I noted earlier, I work here because I believe in the product. You do business with Marco's because you believe in the product.
[38:26] Chris Hatch: Well, that's big. 100 stores as you're looking into the future for 25 and trying to hit about that 100 store, 200 store mark per year. You know, that's pretty good growth, right? If you look at between now and 2030, then Marko's is sitting dang close to about 2000 stores.
[38:42] Gerardo Flores: That's a goal, honestly, and that's what we need to get to. We got to get to 1300 and 1400 and 1500, but the expectation is that we're going to continue exponentially growing this business. I have to get to 10% year over year growth and then 15% year over year growth. So that's really what I'm targeting right now. Those are the goals that we set for my team and the company is expecting us to hit it.
[39:09] Chris Hatch: Are there any kind of fun new markets that you guys have entered recently that you're having some good success in?
[39:16] Gerardo Flores: New markets? No, we've been steady with existing markets that we have. We get interest from different areas like Alaska. It's just a challenging market to enter. We love nothing more to do Hawaii. I'll do the site tours there. I'll have to take those Chris. There's no way around that one. Have to take them. Yeah, right. I'll take one for the team and just go and do Hawaii as well. I got the honor to open up Hawaii for Jersey Mike's.
[39:36] Chris Hatch: Way to fall on the sword there.
[39:46] Gerardo Flores: It's not as easy a market as people think. It's also a bit challenging out there. But no, I can't say that we've opened up any exciting markets recently. We're just really concentrating on the core right now. But Salt Lake is almost built out. Phoenix is another great market for us, with plenty of growth. As I mentioned, California surprisingly is still growing for us. So I'm excited, a lot of exciting times, a lot of green space for us to grow.
[40:14] Chris Hatch: Yeah, that's tremendous. It's interesting. We've been working with a handful of fast food groups that have chosen to close some of their stores in California and they're citing minimum wage problems amongst other things. And then it's fascinating to talk I've talked to a handful of retailers like yourself that are now actively expanding and possibly doing more growth in California than they've ever done. It's really the tale of two cities out there.
[40:37] Gerardo Flores: It really is. And again, that was a bit surprising. We started getting a lot of interest in California. We spent some time and money really marketing the area out there recruiting. So again, no one more surprised than I am right now.
[40:55] Chris Hatch: You know, I, for whatever reason, I have never gotten an ad ever on like Instagram or Facebook or anything. And lately it just seems like one after the next. Keep having these franchise concepts hit me. And I don't know if I've just hit the customer profile or maybe I'm talking too close to my phone about what I do for a living all day, every day. Right. It is funny though. It's interesting the way we're watching some of the franchise where it's fine. New franchise candidates.
[41:21] Gerardo Flores: Yeah, there's, we do a lot of marketing on meta and Google. And I don't know if our phones are listening to us or not, but there's a lot of data out there that goes behind really who we're targeting, how we're targeting them. Instagram's got some great analytics that really help you understand exactly who your customer is. So a lot of great data. I mean, almost a little too much data for us to analyze, but. We do have a business intelligence team here at Marco's that helps us really decipher.
[41:50] Chris Hatch: Wild. So you've had a wonderful career, right? And you've been with a variety of concepts. So you've gotten to see things in multiple situations. And got a lot of stores open. Tell us, Gerardo, what was a big, terrible mistake you've made in your career? We've got a lot of young people that listen to these episodes and new to the commercial real estate industry. What's something you did wrong?
[43:24] Gerardo Flores: I've made a lot of mistakes, Chris. I mean, think if there's a lot of young people out there, if there's any advice you're to take, understand that you're going to make a lot of mistakes. It's how you recover from them and more importantly, how you learn from them. I've learned just as much from my mistakes, if not more than my successes. It's critical to understand that mistakes are going to be made. Own them, move on from there. But one of the biggest mistakes, I want to say there's one single mistake, but one of the biggest mistakes I made early in my real estate career is not understanding the relationship side of it.
The real estate business is such a small community of folks. I'll give you a prime example. There's a gentleman by the name of Vasili Delakas, I'm sure you know him, but Phillips Edison. Him and I did one of our very, very first deals together in Page, Arizona of all places. He flew down from Salt Lake, I flew up from Phoenix, and we met on site at a Safeway that Phillips Edison owned. To this day, 20 years later, we're really good friends. I can reach out to him when I'm having trouble getting the deal done with Phillips Edison or he's having trouble getting the deal done with our franchisees.
So the relationship business is absolutely true and dynamic here in this industry. So when you get an opportunity, don't let it slip by you. Don't make the mistake that I made of not understanding the relationship side of this industry. So it's critical that you find your Vasili of the world and you move forward from there. So as I mentioned, I thoroughly love this business because people like you, Chris, and Vasili, who really make this industry really fun. And work hard. Honestly, work really hard. I mean, just when you work in the franchising business, you're not working for yourself. You're working for the franchisees. So keep that in mind as well.
[45:22] Chris Hatch: I think over, I have about 20 years of, just over 20 years of experience as well since I entered the industry in 2002. I think the biggest thing of wealth that I have from a working capital standpoint is all of the relationships I had gained over that time.
[45:44] Gerardo Flores: You cannot put a monetary number on it, but it is wealth. It is very much wealth that you can pick up the phone and call someone and say, hey, let's get through this. For your sake, for my sake, for the franchisee's sake, let's find a happy medium here and move this thing forward.
[46:02] Chris Hatch: Yeah, I had a QSR franchisee that was on the phone with us this morning and they were describing how two of our deals were dying and why, which is a little bit frustrating for us. We've already closed on one of them and have money into the second one. And it's interesting, you're sitting there talking and they're delivering these terrible news and they were really dreading the phone call. And I'm like, guys, it's okay. Like, let's all just breathe, okay? You know, look. It's unfortunate, let's try to figure out how we get out of these things. Let's come up with a plan of what's next. And you know, that's all you could do.
It's the thing in 10 years, I don't know where they're going to be and they don't know where I'm going to be. And we may need each other, right? And there's no point in freaking out or losing your mind or, yeah, got to keep that rep clean.
[46:45] Gerardo Flores: I've been with four or five different concepts and each one of them, we always go back and we run into the same folks all over again. Really, and it's healthy to understand that you can always reach out to someone and say, listen, it's an untenable situation, but let's see if we can figure out a way to get out of this together. But yeah, again, Chris, we pull different levers every day. No two deals are the same. And pulling that lever may not be the right one, but you don't know until you actually pull that lever. So the young people of the world need to understand that there will be mistakes. There will be mistakes, but own them and move past them.
[47:18] Chris Hatch: Yeah, I love that advice. Thank you for sharing that. To all the listeners out there that are listening, go get yourself a pepperoni pizza tonight and then DM me a picture of it and I'll send you a Dirt Dog hat.
[47:37] Gerardo Flores: Awesome. I will send them a gift card as well, Chris. Yes. Awesome.
[47:41] Chris Hatch: I love that. There you go. You heard it here first. So, Gerardo, thank you for joining us on the Dirt Dog Pod.
[47:46] Gerardo Flores: Of course. Thank you for having me, Chris.