‘We’re done’: How $5 Hot-N-Ready pizza fight shut down Little Caesars in KC

In the end, the fall of Little Caesars in Kansas City came down to 99 cents.

Utah businessman Alan Knox has shuttered all 21 of his Kansas City-area Little Caesars carryout stores. The first wave of closings came last Christmas, and the final few shut down in late September at the onset of football season.

In the 30th largest metro area in the country, there is nowhere to pick up Pizza! Pizza!

The closings come after Knox played out a desperate end game lasting nearly two years. He sold five stores in Utah and tried to sell his three best stores here. He defied a federal court order to shut all his Kansas City-area stores.

Knox also stopped sending weekly royalty checks to Detroit-based Little Caesar Enterprises — the company that sold him the Kansas City franchise eight years ago.

“That’s what I’ve done. That’s why they want me dead and gone,” Knox told The Star as the last of his stores were running out of ingredients and he was running out of options.

Knox had taken on a giant.

Little Caesar Enterprises is the third largest pizza chain nationally with an estimated $4.3 billion in sales this year, trailing only Domino’s and Pizza Hut. Little Caesars began with one store in 1959 and made billionaires of its founders, the late Michael Ilitch and his widow Marian, whose family business also owns the Detroit Tigers and Detroit Red Wings.

To Knox, the beginning of the end was that $5 Hot-N-Ready deal Little Caesars advertised nationwide. He couldn’t make money at that price, not in Kansas City. But when Knox charged $5.99, Detroit pressured him to go back to $5.

Others have said Detroit’s $5 promotion posed problems for Little Caesars franchise holders, particularly as food, wages and other costs have risen.

“The $5 price point … has become an unprofitable business model for many and is fast becoming unprofitable for many more,” Todd Messer, executive director of the Independent Organization of Little Caesar Franchisees, wrote in a recent issue of the Toga Times quarterly magazine for members.

A spokeswoman for Little Caesar Enterprises did not respond to a request for an interview. In an email, she said the company hopes to open new stores in the Kansas City market through a different franchisee in coming months but offered no additional details. Knox’s franchises have been terminated.

“We’re done,” Knox said Wednesday inside his Roeland Park warehouse stuffed with dough mixers, pizza ovens, freezers, warming units and Little Caesars signs stripped from the stores that closed in December.

A $5 million investment

The undoing of Knox’s Little Caesars empire in Kansas City comes after 30 years as a franchise operator.

His earlier stores were in smaller markets, including Des Moines, Nevada, New Mexico and Utah, where his home and business are based. In 2000, as the Little Caesars chain struggled against competition and Knox’s Iowa stores lost money, Knox took his business through a bankruptcy reorganization and emerged in 2003 to continue in business.

Eight years ago, Knox came to Kansas City after selling his 12 stores in Albuquerque. Corporate headquarters had been operating 16 stores in the Kansas City area and offered them and the market’s 1.6 million potential customers to the experienced franchisee.

“I wanted a shot at a bigger market,” the Topeka native said.

But his $5 million investment ran into trouble over those $5 Hot-N-Ready deals. Knox said his company’s finances shot up and down like the peaks and valleys of a mountain range.

Kansas City-area occupancy costs and taxes were too high, Knox said, so he charged $5.99, expecting to level out his business’ fortunes.

But Little Caesars was advertising its $5 price nationwide. Customers complained to the the Kansas attorney general’s office; Detroit put pressure on Knox. So for several weeks in 2013, he rolled the price back to $5.

With less revenue, Knox has claimed in court filings, the local Little Caesars group fell behind on its payments to Detroit. A lawsuit over those late payments led to a 2014 settlement that governed Knox’s operations and its dealings with Little Caesar Enterprises until the end.

“I’ve seen this movie before,” said Robert Einhorn, a franchise law attorney in Florida.

Einhorn is not involved in the Kansas City dispute, but his firm regularly represents franchisees against major chains such as Papa John’s and Burger King. He currently is working with a Little Caesars franchisee who has different problems than Knox.

Typically, Einhorn said, franchise agreements put all the risks of business on the franchisee while protecting the big brand franchisor.

National price promotions in particular can hurt operators, he said. It limits their revenues and turns the targeted products into loss leaders. Hamburger franchises can try to make up those losses on other products.

“It’s really hard on the pizza guys because that is their product,” Einhorn said.

Bounced paychecks

Some managers of the Kansas City franchises say Knox’s business problems became their problems. Paychecks would bounce. Employees would quit.

Now, hundreds of people are without jobs.

Heath Meyers, manager of the Blue Springs store, said he routinely cashed his own paycheck from the store’s vault. He accounted for the cash by adding his voided paycheck to the store’s receipts.

For a few pay periods last winter when other stores were closing, Meyers cashed out employees’ checks, too.

“Half the market had closed at that point. We didn’t know what was going on,” Meyers said.

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Kansas City-area Little Caesars restaurants have been closing as they run out of ingredients to make pizza. A federal court order also is hanging over their futures. Mark Davis The Kansas City Star

Other managers echoed Meyers’ experience, though they asked not to be identified. One said one or more paychecks bounced nearly every pay cycle and some managers routinely cashed employees’ checks to keep them from quitting.

Knox, asked about bounced paychecks as stores were closing, said the last of those would be covered this week. He also said the problem was indicative of the company’s situation.

“Wouldn’t you expect that to happen when you get shut down,” he said. “It’s a cash-flow business.”

Knox said he relied on the cash generated by his stores for more than the usual expenses of payroll, ingredients and rent.

Little Caesars was pressing him to open new stores, to remodel existing stores under a chain-wide program called i7 and to install a new sales system called Caesar Vision.

These additional costs have weighed on other franchises’ finances, according to Messer.

“When you add CV (Caesar Vision) and i7 along with portals, all at the same time, the demand on cash flow is putting many franchisees into significant debt,” Messer wrote in the Toga Times.

Asked about Little Caesar Enterprises’ relations with franchisees, Messer declined to weigh in. He noted that he operates Little Caesars franchises, too.

Detroit denies sale

Last year, Knox figured he had found a way out.

He sold his five stores in Utah with Little Caesar’s approval in March 2017. He used the money to begin work on two new stores here, in Belton and Topeka.

Knox also planned to sell his three best stores in the Kansas City area — Independence, Blue Springs and on 18th Street in Kansas City, Kan. The buyer was to have been Knox’s operations manager for the whole market, Giovanni “Joel” Delocana. Delocana could not be reached.

The price tag — $4,283,500 according to Knox’s filing in federal court — was to be financed from a $3.2 million loan lined up for Delocana and with Knox accepting a promissory note from Delocana for the difference.

Their deal, however, had to win Detroit’s approval.

At first, Detroit said no.

An Aug. 29, 2017, letter to Knox said he still owed money on pizza supplies and equipment deliveries, $130,000 worth.

Moreover, the rejection letter from Detroit said, the debt intended to finance the deal “places an unreasonable financial and operational burden” on Delocana as the new franchise owner. A mere 5 percent dip in sales would leave the stores bleeding cash rather than collecting more than they needed for expenses, it said.

And, it went on, all three stores needed remodeling or system upgrades — an additional $300,000 burden to the new operator.

‘Unprecedented’ conditions

With no sale and little hope, Knox turned to a new tactic that became his end game. He began to keep the royalty checks he owed Detroit.

Knox said Detroit’s rejection of his plans to sell the three Kansas City-area stores was unjustified. He saw the royalties as the only resource available to keep the stores supplied, staffed and operating.

Royalty checks stopped last October, according to Little Caesar Enterprises’ claims in court.

Knox said it came as the parent supplier began to cut off ingredient shipments to some of his stores. Those dwindling supplies, according to Knox, were why several stores closed last December.

The closings were the first public notification that Kansas City’s source of Pizza! Pizza! was in jeopardy. They also were the first notice Little Caesars customers and at least some area employees had of the legal battle that had begun in Michigan’s federal court nearly six months earlier.

The New Year seemed to begin differently.

Two days before Super Bowl LII, Little Caesar approved Knox’s previously rejected plan to sell the three stores to Delocana. In a Feb. 2 letter to Knox, Detroit’s blessing required the two men to accept four conditions that largely protected Little Caesar Enterprises.

Specifically, the men had to indemnify Little Caesar for “any claims relating to or arising out of the approval of the sale,” the letter said.

Knox called the condition “unprecedented” in all of his store sales and purchases over the years. He suspected corporate headquarters planned to send another franchisee into the market to establish the $5 price and drive the stores he was selling out of business.

The sale never took place.

By July of this summer, the court battle in Michigan had progressed decidedly against Knox. That month, a federal judge ordered him to close his remaining stores, return proprietary manuals to Detroit and stop using the signs and other markings of Little Caesars.

Knox said he defied the order, making a “personal decision” to gradually close down the group. He said it would be fairer to employees, landlords and customers than to shut the stores all at once.

Little Caesar was OK with that plan, Knox contends, because it kept sending trucks filled with pizza ingredients as long as he paid in advance.

Earlier unpaid food orders and missing royalties became increasingly large costs for Detroit to ignore. Through August of this year, Knox’s companies owed $842,386 for food, supplies and equipment delivered to the Kansas City stores, Little Caesar claimed in court. It said unpaid royalties and advertising fees had grown to $827,144.

The food trucks stopped coming, Knox said, and his remaining stores eventually ran out of ingredients.

Knox said he has been put out of business for fighting against the $5 national price and the pressures Detroit put on his stores.

“I’m standing up to a corporate culture that bullies and intimidates,” Knox said. “It’s more a show of power and using me as an example, or trying to make of me an example to the rest of the chain to not step out of line.”

Contact Mark Davis at 816-234-4372, @mdkcstar

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