Pizza chains hit by rising commodity costs, intensified competition

Pizza chains hit by rising commodity costs, intensified competition

Dina Berta

Slices of profit were thin for pizza restaurant chains in the Second 100 as they introduced doughless pizza, raised prices, promoted discounts and focused on operational basics to weather 2003 and a challenging start to 2004.

“Last year was moderately successful, and certainly the first half of this year was ugly,” says Dave Poth, vice president of marketing for Mazzio’s Pizza, which operates primarily in Oklahoma, Arkansas, Texas and Mississippi.

The pizza segment was hit hard by rising dairy and gas prices earlier this year, causing some chains to hike prices or institute delivery charges. The war in Iraq, job layoffs and a sluggish economy in 2003 did not help matters either, operators say.

“There was a lot of dire news about layoffs and so forth,” Poth says. “Everything combined seemed to keep people away from restaurants.”

The pizza segment also is one of the most competitive in the industry, according to restaurant analyst Jerry McVety of McVety & Associates in Farmington Hills, Mich.

Regional pizza operators in the Second 100 face challenges from national pizza players with far larger advertising budgets and discount promotions as well as from competing neighborhood independents and such fast-casual operators as Panera Bread, Baja Fresh Mexican Grill and Qdoba. Another battlefront is the growing takeout service offered by casual-dining chains, such as Outback and Applebee’s, McVety says.

“The pizza business is not gaining ground as much as it is swapping customers from one company to another,” he observes. “What’s important now is sustaining your customer base and not letting it erode.”

Mazzio’s started a remodeling program to update its aging stores and upgraded its menu items, particularly in the pasta and sandwich categories, Poth says. Already the tide seems to be turning for the 190-unit chain. Sales are up 11 percent so far this year, compared with the number for last year, he says.

The 420-unit Pizza Inn chain, based in The Colony, Texas, has been spending more time on customer research and improvements in training and operations.

“It gets more competitive every day,” says Danny Meisenheimer, Pizza Inn’s vice president of marketing. “The focus for us has been going back to fundamentals–buffet, delivery and carryout. The power of radio and TV is not there for us. We really have to rely on a great-tasting product.”

Pizza Inn, which has had consecutive years of declining same-store sales, is seeing a turnaround in 2004, Meisenheimer says. Comparable-store sales are on the rise, increasing steadily by an average of 1 percent and 2 percent for the past few months.

Last year was also a transitional year for Donatos Pizzeria Corp. The Columbus, Ohio-based chain of 181 stores ended its relationship with McDonald’s Corp. in December when Donatos’ founders, the Grote family, bought back the company. McDonald’s had purchased the pizza chain in 1999, when it had 146 branches.

“More than anything else, 2004 is a stability year,” says Tom Krouse, Donatos’ chief concept officer. “This year is a chance to get focused on operations at the restaurant level and do the best job from a sales and profitability standpoint and stabilize ourselves to prepare for growth in the future.”

Donatos’ executives landed on the Today Show earlier this year for a segment on low-carbohydrate diets. The pizza chain had introduced its No-Dough Pizza–regular pizza toppings on a soy crust that is baked on a plate.

Mazzio’s also came up with a crustless pizza, for which toppings are baked in a ceramic dish without the dough. The 10-carb-grams pizza had a successful launch in February, but sales have tapered off, Poth concedes.

“That [low-carb] cloud was circling around all of us–what to do, what to do,” he says. “Our take is that low carb is a fad, but healthier eating is the trend.”

Product innovation is likely to continue in the crowded pizza segment as regional operators jockey for market share, consultant McVety says.

“I think there is always an opportunity for someone to bust out of the crowd and be recognized,” he comments.

One chain that hopes to do just that is Madison Heights, Mich.-based Hungry Howie Pizza and Subs Inc., whose chain has nearly 500 stores in 18 states.

Marketing manager Jennifer Jackson credited part of Hungry Howie’s growth to the chain’s strong franchise development program.

“In the last five years, we’ve opened 100 stores, and we plan to open 200 stores in the next five years,” Jackson says.

PIZZA CHAINS RANKED BY GROWTH IN NUMBER OF U.S. UNITS

(Year-to-year percentage change)

Latest- Prec.- Fiscal

Year Year Year

Rank Rank Chain End

11PapaMurphy’sTake’NBakePizzaDec.’03

22Godfather’sPizzaMay’04

36DonatosPizzeriaDec.’03

43HungryHowie’sPizzaSept.’03

55PizzaInnJune’04

64Mazzio’sPizzaDec.’03

AVERAGE:

Latest * Preceding

vs. vs.

Chain Preceding Prior

PapaMurphy’sTake’NBakePizza7.235.92

Godfather’sPizza1.374.11

Donatos Pizzeria 0.55 -8.59

HungryHowie’sPizza-0.451.59

Pizza Inn -2.28 -4.88

Mazzio’sPizza-8.02-2.75

AVERAGE: -0.27 -0.77

* Actual results, estimates or projections

Source: NRN Research

PIZZA CHAINS RANKED BY U.S. SYSTEMWIDE SALES

Latest- Prec.- Fiscal

Year Year Year

Rank Rank Chain End

11PapaMurphy’sTake’NBakePizzaDec.’03

22Godfather’sPizzaMay’04

33HungryHowie’sPizzaSept.’03

44DonatosPizzeriaDec.’03

55Mazzio’sPizzaDec.’03

66PizzaInnJune’04

TOTAL:

U.S. Systemwide Foodservice Sales

(By Fiscal Year, in Millions

Chain Latest * Preceding Prior

PapaMurphy’sTake’NBakePizza$326.9$332.4$314.5

Godfather’sPizza304.0287.0280.0

HungryHowie’sPizza227.0220.0217.0

Donatos Pizzeria 175.0 195.0 176.0

Mazzio’sPizza161.0164.0167.0

Pizza Inn 153.9 157.2 171.0

TOTAL: $1,347.8 $1,355.6 $1,325.5

* Actual results, estimates or projections

Source: NRN Research

PIZZA CHAINS RANKED BY NUMBER OF U.S. UNITS

Latest- Prec.- Fiscal

Year Year Year

Rank Rank Chain End

11PapaMurphy’sTake’NBakePizzaDec.’03

22Godfather’sPizzaMay’04

33HungryHowie’sPizzaSept.’03

44PizzaInnJune’04

55Mazzio’sPizzaDec.’03

66DonatosPizzeriaDec.’03

TOTAL:

Year-end Number of Units

Chain Latest * Preceding Prior

PapaMurphy’sTake’NBakePizza786733692

Godfather’sPizza591583560

HungryHowie’sPizza445447440

Pizza Inn 343 351 369

Mazzio’sPizza195212218

Donatos Pizzeria 182 181 198

TOTAL: 2,542 2,507 2,477

* Actual results, estimates or projections

Source: NRN Research

PIZZA CHAINS RANKED BY U.S. SYSTEMWIDE SALES GROWTH

(Year-to-year percentage change)

Latest- Prec.- Fiscal

Year Year Year

Rank Rank Chain End

13Godfather’sPizzaMay’04

24HungryHowie’sPizzaSept.’03

32PapaMurphy’sTake’NBakePizzaDec.’03

45Mazzio’sPizzaDec.’03

56PizzaInnJune’04

61DonatosPizzeriaDec.’03

AVERAGE:

Latest * Preceding

vs. vs.

Chain Preceding Prior

Godfather’sPizza5.922.50

HungryHowie’sPizza3.181.38

PapaMurphy’sTake’NBakePizza-1.665.70

Mazzio’sPizza-1.83-1.80

Pizza Inn -2.12 -8.07

Donatos Pizzeria -10.26 10.80

AVERAGE: -1.13 1.75

* Actual results, estimates or projections

Source: NRN Research

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