Market study & Analysis of pizza industry


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Market study & Analysis of pizza industry

  1. 1. SHERIDAN COLLEGE Papa John’s Pizza Market Study & Analysis of Pizza Industry Richard Cong Huynh 4/10/2013
  2. 2. 1 TABLE OF CONTENTS 1. Introduction- 2 2. Market Overview - 3 2.1 Market Size & Growth - 3 2.2 Sales Volume of Total Market - 3 2.3 Market Trends - 4 2.4 International Expansion and Growth - 5 3. Competitors - 6 3.1 Market Share - 6 Pricing Strategy - 6 Menu Changes - 7 4. Business Conditions - 8 4.1 Rising Commodities Cost and Volatility - 8 4.2 Consumer Confidence - 8 4.2 Government policies and regulations - 9 4.3 Saturated Fast Food Industry - 10 5. Demographics and Consumer Behaviour - 10 5.1 Rising Youth Population with Disposable Income - 10 5.2 Healthy Lifestyle Choices - 11 5.3 Online Orders - 11 6. Social Media - 10 6.1 Pizza Hut - 10 6.2 Domino’s Pizza - 11 6.3 Overall Online Customer Engagement among Top U.S. Chains - 11 6. Conclusion - 11
  3. 3. 2 1.0 INTRODUCTION Papa John’s International, Inc. operates in the highly competitive pizza industry, franchising pizza delivery and dine-in restaurants. The first Papa John’s restaurant opened in 1985 and the first franchised restaurant opened in 1986 ("Papa John's International," 2012).The company continues to see growth in revenue as well asstore numbers as 2011 saw 237 units open globally("Papa John's International," 2013). As of December 30, 2012, there were 4,163 Papa John’s restaurants in business, operating all across North America as well as in 35 countries. Domestically, all Papa John’s pizza ingredients and toppings are purchased at their quality control centres, which are then deliveredto individual restaurants weekly. To ensure the consistency in food quality across different geographical locations, store owners are required to purchase their goods from their domestic quality control centres and/or approved third party suppliers("Papa John's International," 2012). Papa John’s pizza is the world's third largest pizza consumer company in terms of sales, behind Pizza Hut and Domino's Pizza ("Papa John's International," 2013). The pizza industry is largely fragmented and competitors include international, national and regional chains, as well as a large number of local independent pizza operators. Papa John's have differentiated itself as a brand that offers quality pizza at premium prices. This premium position has garnered the company favourableprofit margins by avoiding deep discounts on menu items, a strategy that is employed by many of their topcompetitors.
  4. 4. 3 2.0 MARKET OVERVIEW 2.1 MARKET SIZE & GROWTH The pizza industry is experiencing a steady level of growth as the number of units among local, regional and national operators continues to rise. As seen in figure 1, 2012 had over 70,000 operating pizza stores, where more than half were independently owned (Barret, 2012). Recently, Little Caesars Pizza was responsible for almost 58 percent of new pizza stores opened thus far in 2013. In second place, Papa John's added 110 restaurants while Pizza Hut added 58 new locations after having closed 24 U.S. locations in 2011 (Coomes, 2013). Growth internationally is expected to accelerate up till 2016, as continued expansions in Latin America and Asia allow chains to maintain and recoup revenue losses from struggling U.S. markets ("All things to," 2012). As a result, differentiation becomes a critical factor within the pizza industry as some chains’ continue to invest in remodeling their restaurants while others, such as CiCi’s pizza, offer buffet catering to their consumers. 2.2 Sales Volume of Total Market Although fast food consumption in the U.S. declined during the recession, the gradual recovery of the economy, compounded by cheap and innovative menu options, have fueled pizza sales (Research and markets, 2011).Sales at pizza restaurants reached $36.1 billion in 2012, up 3.8 percent from 2011 (“It’s delivery,” 2013).Sales have increased over the past two years as pizza operators revamp their menus to include more specialty pizzas, side dishes, and desserts in an effort to increase traffic (Technomic, 2012).This is a clear indication that there is more room for growth for pizza chains in the face of stiff competition among other fast-food operators that compete for the same consumers.
  5. 5. 4 Price value and product variety have mainly been the key factors in garnering greater sales volume for many top U.S. pizza chains.As figure 2 illustrates,chained operators accounted for more than one third of sales in 2011("Papa John's International," 2012). That trend continued into 2012 asPizza Hut was the top earner with $5.7 billion in U.S. sales holding Domino's Pizza –with $3.6 billion in sales - in second place. Pizza Hut’s introduction of new product recipes and innovative marketing campaigns played key roles in their success (Coomes, 2012).The top brands overall have experienced average growth in the U.S. market, with sales increasing to 3.9 percent comparable to 3.6 percent a year ago("Papa John's International," 2012).Quality menu items that offer good value for money should continue to be key drivers of growth, as consumers seek maximum return on food purchases. 2.3 Market Trends Restaurants are embracing customizable pizza concepts as consumers demand the freedom to add as many toppings of their choosing for a set price. Similarly, customized pizzas with fresh ingredients madein just a few minutes aregrowing at an impressive rate (Ruggless, 2012). Other novel trends worth mentioning are the growth in popularity of pizza trucks and mobile pizzerias;most recently, businesses have been offering healthier optionsincluding gluten-free pizza in addition to whole wheat pizza(Ruggless, 2012).Also, some pizza operators have focused on delivering higher quality items to their customers, a position that Domino’s Pizza and Papa John’s have used with great success("All things to," 2012). Finally, although it has become a staple within the pizza industry, online ordering continues to be a necessity in customer ordering. The success of the top pizza companies can be attributed to their adoption and execution of technology for greater customer convenience and flexibility. In 2010, 6 percent of pizza orders were placed online,
  6. 6. 5 doubling what it was three years earlier (Ziobro, 2010).The growth of online ordering will be further examined later in this report. 2.4 International Expansion and Growth The top U.S. pizza brands have begun rapidly expanding overseas as the domestic market becomes highly saturated.As figure 3 illustrates, Australia, Latin America, Middle East and Asia stand out as important emerging markets(Barret, 2012). As nations gradually recover from the recession, large U.S. chains are hoping international operations can maintain and increase revenue. Pizza Hut's 500+ units in China make it that country’s market's pizza leader, while Domino's 300+ units in India make it that nation's largest restaurant chain. Domino's India operations will become a key international subsidy as it posted 69 straight quarters of positivesalesgrowth (Coomes, 2011).Similarly, Domino's Pizza has become a top player in the UK through strong locations and marketing initiatives("Papa John's International," 2012).Some chains even have more international stores than United States-based units. 3.0 COMPETITORS 3.1 Market Share The pizza industry is dominated by three companies: Pizza Hut, Domino’s Pizza and Papa John’s, which all rank top in sales and unit counts. In 2012, within the U.S. market, Pizza Hut gained the most market share, capturing 14.68 percent of all U.S. pizza sales(Barret, 2012). In 2013 thus far, however, Pizza Hut earned 11.65 percent market share value, while Domino’s made up 7.60% and Papa John’s came in at 4.23 percent (He, Zha& Li, 2013). The dominance of Pizza Hut and Domino's Pizza is
  7. 7. 6 striking, as these two chains' combined for $18 billion in sales in 2011, more than doubling the earnings achieved by the next eight largest pizza players put together ("All things to," 2012). This report will focus on these top two pizza chains as Pizza Hut and Domino’s Pizzahave continued to innovate in ways that have allowed them to achieve and maintainsuccess in a highly competitive industry. Pricing Strategy: Domino's Pizza and Pizza Hut have seen big increases in store sales based on price value strategies. Pizza Hut offers almost all of its pizzas for $8, $10 or $12, easily attracting value cost customers and thereby stimulating business (“Domino’s profit,” 2010). Domino's has also offered their products at discount prices, promoting two medium, two-topping pizzas for $5.99 as well as featuring deals that include specialty pizzas for $7.99(Ziobro, 2010). Tempting consumers with value based pricing is benefiting these two chains’ bottom line. Domino's domestic same-store sales grew 3.5 percent in 2012 while Pizza Hut had fourth-quarter sales gains of 6 percent in the same year (Morrison, 2012). Menu Changes: During the periods of recession and consequent high unemployment rates among its target markets, Domino’s adjusted accordingly by broadening its menu beyond pizza with its new subs and pasta lines, and introducing higher quality pizzas with new recipe changes at a cheap price (Research and markets, 2010).Domino's sales have been rising since it began featuring a pizza rebuilt from the dough up with a thicker crust with garlic seasoning, a new mix of cheese and sauce. U.S. same-store sales rose more than 14 percent in the company's first quarter in 2010 (O’Leary, 2010). Pizza Hut has also reinvented itself, especially for their international markets to accommodate different consumer preferences. For example, Pizza Hut in China offersa high variety of pizza selections, as well as ribs, spaghetti and steak, and cafe lattes (Gasparro, 2012).In 2008, as a direct response to changes in consumer trends, Pizza Hut started its "The Natural" pizza conversion, implementing all-natural ingredients in
  8. 8. 7 their foods. They also introduced higher-priced dinner items to increase visits to their restaurants including pasta dishes and chicken wings (O’Leary, 2010). 4.0 BUSINESS CONDITIONS 4.1 Rising Commodities Cost and Volatility Pizza players are being hit particularly hard as the costs of many pizza ingredients - wheat, pork, beef and dairy - remain high, while many operators continue to offer discount prices. Wheat crop shortfalls in Russian, Ukraine, Argentina and Australia have tightened supplies of low quality wheat used in livestock feed, and that's shifted demand onto corn supplies to make up the difference. Higher corn prices translate into higher feed prices from dairy and beef producers (Coomes, 2010). Through 2017, the price of milk and wheat is predicted to increase, causing operators’ ingredients costs to rise("Papa John's International," 2012).Some restaurants will be forced to increase prices to help with the rise in expenses, while others will cope by changing some of their menu offerings. 4.2 Consumer Confidence The impact of the recession has played a part in increasing pizza operators’ revenues, leading more consumers to eat in while boosting delivery sales in the process(“All things to," 2012). However, the industry is healthier when more people are working with greater disposable income. With increasing unemployment rates, reduced access to credit, as well as economic uncertainty, such factors could cause consumers to spend less on food or shift to lower priced products(Coomes, 2011). 4.2 Government policies and regulations Pizza stores are subjected to a variety of federal, state and local laws affecting their businesses. Licensing and regulation include health, safety, sanitation and other laws in which the pizza store is located in. The failure to obtain required licenses or approvals can delay or prevent the opening of a new restaurant in a particular area. Also, further increases in minimum wage rateswould increase labor cost("Papa John's International,"
  9. 9. 8 2012).Additionally, the industry continues to wait for the widespread menu labeling laws that were outlined in the Patient Protection and Affordable Care Act of 2010 to take effect. The law would require all pizzerias with more than 20 locations to provide nutritional information that labels an entire pizza as one serving. The menu-labeling standards and national health care policies set to take effect in 2014 can negatively impact sales and revenues(Coomes, 2011). 4.3 Saturated Fast Food Industry In addition to competition among other pizza operators, pizza chains compete in a highly saturated fast food industry.As table 1 demonstrates, of the top 10 global players, only Yum! Brands’ is involved in pizza; however,their position is derived from its KFC operation("All things to," 2012). Within a rapidly increasing competitive food industry, companies are now working towards greater menu variety (including healthier and different pricing menu items), snacks and speciality beverages, and longer dine- in hours. 5.0 DEMOGRAHPICS & CONSUMER BEHAVIOUR 5.1 Rising youth population with disposable income Changes in family structures and patterns have also impacted the pizza industry to a large degree. Only 60 percent of all meals today are prepared and eaten in the home, largely because the increasing number of two working parentand single-parent households means less time to cook (Singh &Goyal, 2011).More recently, pizza sales are largely fuelled by the rising youth population with greater disposable income(Research and markets, 2011).A 2011 consumer report further supported this conclusion as they
  10. 10. 9 noted the core pizza consumer is aged 18 to 44, accounting for 77% of pizza restaurant customers. And those with an annual income of $75,000 to $99,900 are the biggest pizza users, as are households with children (Barret, 2012). Due to this large consumer demographic coupled with the versatility of pizza to be consumed at various occasions, the opportunities in discovering new target segments are extremely high("All things to," 2012). 5.1 Healthy Lifestyle Choices Changes in consumer preferences and trends such as avoiding foods that are perceived as unhealthy, high calorie content and little nutritional value could adversely affect pizza restaurants. The same 2011 consumer report revealed that nearly 1/3 of women indicated that they expect nutrition labeling to change what they order (Barret, 2012). As a result, pizza operators should take into consideration diet, health and weight concerns as they develop new products as well as subsequent marketing initiatives to address such issues. 5.2 Online Orders As mentioned above, many pizza chains are heavily investing in e-commerce technology as digital orders have become increasingly common among their main consumers. For example, approximately 14 percent of all Domino’s online sales come from wireless devices (“Domino’s pizza,” 2011).For stores and pizza operators without online ordering systems, such a hindrance will cause chains with greater investments in technological ordering systems to gain greater competitive advantage over these smaller independent operators. For top pizza chains, this represents a massive opportunity in terms of expanding their online ordering capabilities as consumers are likely to gravitate towards the most convenient, user-friendly option ("All things to," 2012).This should also direct pizza chains to consider the significance of online marketing strategies.
  11. 11. 10 5.0 SOCIAL MEDIA The U.S. pizza industry is one of the first industries that have entered the social media arena for business purposes(He, Zha& Li, 2013). The top pizza operators- Dominos, Pizza Hut as well as Papa John’s – have all utilized social media (Facebook, Twitter, Youtube) to further engage with their existing customers as well as market themselves to prospective patrons. For example, the top three brands all had user comments, pictures, videos and company initiated contests uploaded across their respective social media platforms. For an industry that is characterized for its direct mail approach to marketing, social media represents a significant paradigm shift. The 2010 pizza franchise report found that 85 percent of pizza-chain sales are now tied to promotions and discounts acquired through social media sites ("Pizza franchise report 2011," 2011). Additionally,Pizza Hut and Dominos’ have assigned specific staff members to monitor and reply to content their customers posted online. 5.1 Pizza Hut The underlying purpose of Pizza Hut’s social media strategy is to get customers to visitits restaurants, instead of strictly ordering online. Mobile advertisements have been created to increase traffic to their Facebook page and website with a focus on user engagement, content heavy materials and location based promotions. For example,Pizza Hut urged customers to create a Pizza Hut song and upload it to Facebook to be entered into the “Pizza Hut Top This!” contest. After "liking" the Pizza Hut Facebook page, users can view the contest rules for how to record and submit their videos. Also, the chain created an online community called “"HutLoves," where members are offeredproduct promotions at their nearest restaurant (“Pizza hut,” 2012). 5.2 Domino’s Pizza Domino’s Pizza uses social media as a direct marketing tool, with the goal to create faster conversion rates to increase ecommerce sales. For instance, Domino’s launched an international online party that offered 50 percent off any menu priced pizza ordered online through a specialized Facebook page(“Domino’s pizza,” 2011).Dominos has also used Facebook to offer exclusive deals to its Facebook fans. For example, the business
  12. 12. 11 launched their new boneless ribs dish with an exclusive offer on their social network site (“Domino’s pizza,” 2011). Domino’s also uses social media to nurture their relationships with their customers. They have begun posting direct customer feedback on their website, without screening positive or negative comments. This is in addition to past initiatives that included displaying a photo of an unacceptable pizza and an apology to a disgruntled customer on national television from the CEO (“Domino’s pizza,” 2011). These strategies helped in creating more honesty, openness and transparency between the company and their customers. 5.3 Overall Online Customer Engagement among Top U.S. Pizza Chains In a study examining the social media presence among top pizza chains during the month of October 2011, He, Zha& Lifound that Domino’s Pizza demonstrated a higherlevel of commitment and consumer engagement than Pizza Hut and Papa John’s (2013). The journal article found that Domino’sresponded to user comments more quickly, uploaded more photos/videos, as well as initiated more contests, clearly illustrating the chain’s strong efforts in monitoring and handlingtheir social media activities.In addition, He, Zha& Lialso noted that user engagement level on Facebookis much higher than the engagement level on Twitter. This may be due to the fact that the threepizza chains offered more promotional and user engagementactivities on Facebook than on Twitter. Research into the benefits of each social media tool should be further analyzed in future research. 6.0 CONCLUSION The growth in pizza units domestically and internationally is a testament to the innovative strategies businesses areemploying. Menu changes and value priced products have been important drivers to the success of many top pizza operators. With the rising youth population and greater disposable income among households, investment in technological ordering systems for customer convenience promises to be significant differentiators among a saturated pizza industry. As the main pizza consumers, aged 18
  13. 13. 12 to 44, increase their use of online services, greater promotions tied to social mediapresent opportunities to increase sales and garner more market share. Works Cited All things to all people: The story of pizza. Euromonitor, 2013. Barret, L. (2012, 12).Pizza power 2013 state of the industry report. Pizza Magazine, Retrieved from of-the-Industry-Report/. Coomes, S. (2011). Pizza chains promote convenience, eye global growth. Nation's Restaurant News, 45(13), 56.Retrieved from Coomes, S. (2013). PIZZA. Nation's Restaurant News, 47(14), 60. Retrieved from Domino's pizza; domino's pizza celebrates first ever global domino's day on facebook. (2011). Marketing Weekly News, , 391. Retrieved from Domino's profit rises 56% as pizza hut cuts prices. (2010, Jul 27). Wall Street Journal (Online). Retrieved from Gasparro, A. (2012, Apr 16). Domino's sticks to its ways abroad; pizza chain, unlike rivals, won't reinvent menus; after success in india, china is next target. Wall Street Journal (Online). Retrieved from He, W., Zha, S., & Li, L. (2013). Social media competitive analysis and text mining: A case study in the pizza industry. International Journal of Information Management, 33, 464– 472. "It's Delivery, and Dine-In, and Frozen: U.S. Pizza Market Tops $40 Billion." Internet Wire 17 Sept. 2012. Computer Database.Web. 24 Sept. 2013. Morrison, M. (2012). Papa john's tries to hold the price of its pies. Advertising Age, 83(10), 3-n/a. Retrieved from O'Leary, N. (2010). Hard times for 'the hut'. Mediaweek, 20(23), 18. Retrieved from Papa john's international 2012 annual report. (2012). Retrieved from FORM 10-K website:
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