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The U.S. pizza industry is among the most saturated in the world. That’s not slowing down chains with hustle though. In fact, the fast movers are cannibalizing others with a ferocity that should be cause for alarm for those not investing in the arms race that is shaping up.
In 2016 we published a viral hit on the state of the pizza industry: How Tech is Killing Off Independent Pizzerias. And it’s about more than dough, sauce, quality ingredients, and toppings that make the difference for performance. Here, we’ll take a broader view of how things are shaping up for the global pizza market and some thoughts on where it is likely to head.
Here are 16 stats that put the category, and the performance of key players, into perspective.
Emerging Markets Offer Opportunity Away from Saturated U.S. Market
The U.S. already has a fairly saturated pizza market, with one pizzeria for every 5.1k people.
In this market, two chains have been locked in a decades-long battle for dominance. Even though 16 pizza brands make it into the top 200 chains in the U.S., sales are highly concentrated: Domino’s and Pizza Hut claimed 50% of the sales for these systems in 2017. When Little Caesars and Papa John’s are included, the top four systems account for a stunning 79% slice of pizza sales among the top 200.
Outside the U.S., there’s lower saturation. In the U.K., there are 13.5k residents for every pizzeria, while in China and India there are 370,000 and 353,000 people (respectively) for each and every pizza shop. With such low saturation, some of these markets are expected to post high growth rates for the pizza segment: in Asia Pacific and Latin America, pizza sales are expected to grow 1.4x as fast as the restaurant industry in general.
Both Pizza Hut and Domino’s have their sights set on these emerging markets. Domino’s is pursuing expansion in Brazil, India, Russia, and China. Pizza Hut is pushing growth in Sub-Saharan Africa, where it plans to have 250 units across 25 countries by 2020. In May 2018, it also announced a partnership deal with Telepizza that will give the Spanish company master franchise rights in three European countries, Latin America (excluding Brazil), and the Caribbean. This alliance will put Pizza Hut in first place in the latter two geographies.
Franchising Model Allows Chains to Grow Quickly and Claim Strong Returns
In the United States, eight cents of every foodservice dollar goes toward purchasing a pizza. Chains claim the majority (57.5%) of those sales, and that lead is expected to increase: with 5.8% sales growth in 2017, chained systems are more than doubling independent operations. Moreover, chain pizza restaurants have an average unit volume (or sales per location) that is 68% higher than independents.
Most of these chains have heavily franchised systems, which are built for scalability, and pizza is increasingly dominated by chains growing sales and share through franchising. In fact, the vast majority (an average of 89%) of pizzerias are franchised. Domino‘s and Pizza Hut both have more than 90% of their stores franchised.
The model — when it is done right — also lends itself well to higher return on total assets than what other foodservice businesses earn (as seen by these overnight successes decades in the making). Among all publicly traded restaurants in the U.S., Domino’s and Papa John’s have the highest returns on assets: 8.3x and 5.0x the industry median, respectively.
Not coincidentally, Domino‘s and Pizza Hut also invest heavily in tech (with an emphasis on online ordering) a theme that runs throughout the most successful foodservice companies.
The systemization leading chains have put in place is also giving them an edge in driving average unit volumes (AUVs), which are 49% higher than the rest of the pack
As our post on independent pizzerias’ struggles covered, this is forcing out smaller operators and leaving the leftover market share for the leaders, but it’s also having a big impact on other chains, who are having to deal with an increasingly intense level of competition.
Digital, Delivery — and Domino’s — Fueling Growth
The big story in the pizza industry over the past few years has been Domino’s and rightly so: its turnaround was so successful, it contributed to the pizza segment’s industry-leading same-store sales (SSS) growth in both 2015 and 2016.
While same-store sales in the U.S. were flat in 2016 for most of the foodservice industry, the pizza category grew substantially — led by the tremendous performance of Domino’s.
The chain has continued to post strong comps. In its 2018 annual report, it listed a 7.7% increase in domestic SSS growth and 3.4% internationally. Meanwhile, Pizza Hut posted flat sales, and Papa John’s is seeing a decline, projected at negative 6.5%–8.5% for U.S locations and between -2% and +1% for international units.
Domino’s wins have translated into significant AUV growth, which helped catapult it back into the position of world’s largest pizza chain.
Back in 2011, Domino’s AUV was similar to that of Pizza Hut — actually, it was 1% lower. However, the product turn-around and the implementation of tech to improve convenience gained the chain such growth that Domino’s AUV is now 30% higher than that of Pizza Hut.
Improvements have been derived not only in its U.S. system but also from massive international market wins. As of 2016, Domino’s market penetration was higher than that of Pizza Hut in India (by far) and in Saudi Arabia.
At the time, Pizza Hut still held the advantage in the U.S., but Domino’s overtook it in 2017. However, Pizza Hut still wins in the UAE with close to 20x the sales volume.
In the Pizza Industry, Gains Are Coming at the Expense of Competitors
The largest 50 U.S. pizza chains have increased their market share in the last few years, mostly thanks to the new brands that entered the rank.
While those brands remaining among the top 50 between 2010 and 2016 increased their market share (from 51% of the pizza market to 55%), the new brands (many of which are fast casual) took market share from the dropouts and smaller competitors. These new entrants claim a 7% share — 5 percentage points more than the exiting brands did in 2010.
This ongoing battle helps illustrate just how competitive the pizza industry — and nearly every category of foodservice — is these days. Gains for one almost always come at the expense of another. One case in point: between 2014 and 2016, Domino’s opened five stores for every four Pizza Hut stores that closed.
While certainly Domino’s deserves its dues, this is also partially a signal of the emerging global potential of (and increasing consumer and investor appetite for) delivery-only concepts, which in 2016 doubled overall foodservice growth as well as growth for every other segment, except fast food.
Pizza dominates the delivery-only category, with Domino’s and Little Caesar’s as the largest players in this segment. And what we can witness in this category in terms of digital investment, innovation, and gains (in AUV, SSS, profitability, market share, and enterprise value) serves as much as a case study for the pizza industry as it does a sign of things to come for the rest of the global foodservice industry.
As of 2016, sales from Domino’s digital channels were growing 13.8 times as fast as non-digital sales. Once consumers experience this greater convenience, it’s hard to go back. That force is reshaping market share, moving billions of dollars into new categories and channels. Domino‘s has fully committed to in-house digital development, investing over $100m into CAPEX in 2018 alone, which goes to both tech initiatives and central commissaries that ensure consistent quality across the heavily franchised system. In comparison, Papa John‘s and Pizza Hut are investing less than half that amount.
Domino’s leaned in — way in — and the results have been plain for all to see.
Investments in MarTech Helping Drive Growth
The investments required to follow in these footsteps may seem daunting — to aspire to forge an even more ambitious path forward may seem downright dubious — however, the prize for getting it right has already proven well worth the risk.
In 2011, Domino’s Pizza was growing by 13.5% internationally. New stores and increases in same-store sales equally accounted for that growth. In contrast, the chain grew by 16.2% in 2017, the majority (~75%) of which came from new units.
This has stimulated the pizza category chiefs to stoke their systems (and inspired other categories and segments of foodservice) with stronger marketing budgets, largely into the convergence of marketing and technology, or “MarTech.”
Based on franchisee contributions, the largest chains allocate an average 3.9% of sales to marketing. Quick-service companies go above and beyond this number, spending a median 4.6% of sales on marketing. Among QSR brands, some of the largest pizza chains — such as Papa John’s, Domino’s, and Little Caesars — have the heaviest spend as a share of sales.
And while these companies are exerting their global ambitions, they are clear that the fight for dominance will also play out on a block-by-block, delivery-zone-by-delivery-zone basis. Pizza chains are focusing more than a third of their efforts on local-store marketing, with pizza franchisees contributing an average of 6.5% of sales to both local and national efforts.
These chains’ focus on marketing underlines the fact that the battle for share of stomach isn’t just about tech gadgetry. It’s also about connecting with guests to develop the kind of brand loyalty that keeps systems vibrant in the long term. Another proof point: in order to boost sales in the U.K., Pizza Hut isn’t turning to promotions or discounts; it’s hired a new marketing leader who can help develop targeted campaigns.
Investments in Guest-Centered Innovation Key to Future Success in Pizza Segment
What can be deduced from this data? Here are five key takeaways for leaders across foodservice segments:
1. Global Growth
Category leaders will increase their global footprint and market share. The speed of emerging brands and scale and strength of established systems are both contributing to a shuttering of small mom-and-pop pizzerias and a siphoning of share from middle-market players not aging well.
Independent operators that fail to differentiate their brand (product, packaging, positioning, value proposition, and so on) will be forced to close or suffer painfully thin profit margins. Chains will continue to cannibalize independents in the foreseeable future. Among the chains, those that have figured out the formula for international development and made MarTech investments ahead of what was required will reap the most bountiful harvests. The divide between the leaders and laggards will continue to widen, leading to collapse for some of the tired brands among the top 50.
The story of the pizza industry is not about delivery or technology. It is about engineering greater convenience — we call this Convenience Engineering™ — into the business. This should first be guest-centered, but it should also ripple out to all essential constituencies (employees, investors, members of the media, and more) as well as the modernization of the internal systems and infrastructure that move the most important commercial levers within the business.
Domino’s has innovation in its corporate DNA. They invented the cardboard box, the plastic pizza table that keeps the top of the pie from being crushed, the original 30-minute guarantee, and even a pizza-centered automobile and autonomous delivery vehicles. The real strategic lessons of the Domino’s case studies are often lost in the sensationalism of the tactics surrounding technological investments and successes (or a sharp criticism of the product). The company has cycled through many of the same challenges any decades-old business must eventually face. It is interesting though to consider for a moment how easy it is to throw around the term innovation, yet how much more it requires to accomplish it. Easy to say, hard to achieve. What Domino’s teaches us is that all innovation must relate to the brand’s unique value proposition. Domino’s is the world leader in pizza delivery, and every new invention, technology, or marketing push is designed to keep that position secure.
Margins will fluctuate with commodity costs, market share will ebb and flow among those with hustle, and growth in mature markets can be challenging, but pizza is not a waning beanie baby–type fad; it has staying power. Significant capital is required to retool and refresh the relevance of aging pizza brands, but there is clear evidence that those investing in innovation are being rewarded on levels rarely seen in foodservice.
Meaningful Gains Come to Companies that Respond to Disruption with Speed and Agility
The takeaway here is not about Domino’s technology investments nor the white-hot speed at which Blaze grew (although both are certainly triumphs worth heralding), nor is it about chains versus independents. The takeaway is that regardless of where you are in the global foodservice industry, meaningful market share gains will require a more meaningful corporate commitment and investment, enhanced guest-centric capabilities, and a fortified competitive tenacity that is informed with superior insights (truncated here for brevity).
Think of market intelligence like a radar system — the advantage goes to the side that can see further and with more clarity, enabling them to respond with greater speed, agility, accuracy, and overall efficacy of effort.
About Aaron Allen & Associates
Aaron Allen & Associates works alongside senior executives of the world’s leading foodservice and hospitality companies to help them solve their most complex challenges and achieve their most ambitious aims. We have helped clients with deep-dive corporate intelligence, portfolio optimization strategies, data-driven diagnostics, advanced analytics, and holistic approaches to business and brand strategy.
Our clients span six continents and 100+ countries, collectively posting more than $200b in revenue. Across 2,000+ engagements, we’ve worked in nearly every geography, category, cuisine, segment, operating model, ownership type, and phase of the business life cycle.