PIZZA FRANCHISE US

Industry Overview
Given the current straitened economic conditions the restaurant industry is proving resilient. Eating out in restaurants and the purchasing of take-out and delivery meals is an essential part of the American lifestyle. The convenience and value offered by the restaurant industry makes management of consumers day to day living easier. Research by the National Restaurant Association indicates that consumers, although worried about the economy, intend to continue their patronage of restaurants. It is expected that quick service, take out and delivery style restaurants will benefit at the expense of upscale and casual dining. It is predicted also that moderating gas prices and other commodities will mean that consumers may have more disposable income in 2009. The US pizza market is a mature, developed market and highly competitive. Franchised pizza chains account for around 60% of the market. It is estimated that there are around150 well known pizza franchises in operation and an unknown number of local and regional pizza franchises. While the pizza market experienced growth until 2007 when it reached a value of $34 billion, the financial downturn resulted in flat sales in 2008, a trend which is expected to continue for 2009. As well as moderating sales, franchise operators are facing a minimum wage increase from $6.55 to $7.25 per hour effective July 24, 2009. On a more positive note, commodity prices are falling. The price of cheese, wheat and most pizza toppings has fallen in 2009. Also, the trading down by cash strapped consumers from casual and upscale dining to less expensive alternatives is expected to benefit pizza franchise operators.

Top 10 Pizza Franchise Chains Company Name 1. Pizza Hut 2. Dominos Pizza 3. Papa Johns Pizza 4. Little Caesars 5. Noble Romans Pizza Founded 1958 1960 1985 1959 1972 Units Service Type Takeout/Delivery Takeout/Delivery Takeout/Delivery Take-

14,759 Family Style 8,641 3,238 2,000 1,400

out/Delivery 6. Papa Murphys Take N Bake Pizza 7. Sbarros Italian Eatery 8. Godfathers Pizza 9. CiCis Pizza 10. Hungry Howie's Pizza 1981 1956 1973 1985 1973 1,073 1,040 656 631 575 Take-out only Quick Serve Quick Serve Buffet Takeout/Delivery

Source: Adapted from PMQs Pizza Magazine September 2008

Trends

Healthier Options

There is increasing demand among consumers for healthy meals and healthy kids meals. Consumers are also more interested in where their food comes from and how it is produced, with a growing demand for locally produced and organic ingredients. Pizzeria operators are responding by producing dough with healthier fats, offering whole wheat pizza crusts, healthier vegetable based toppings and salads.

Value

As consumers increasingly look for value, pizzeria operators are expected to respond with lower prices and promotions. Falling commodity prices will enable more aggressive pricing. Consumers have less to spend, but they still want to dine out for convenience and enjoyment. By responding with value pricing, specials and combo-deals, pizza franchises will meet this ongoing consumer need.

Technology Trends

The major pizza players are offering online ordering and some are now offering text ordering from mobile phones, PDAs and other web enabled mobile devices. Major pizza chains are using social networking sites like Facebook and MySpace as platforms to build a loyal customer base and to facilitate ordering directly from the sites. With an increased focus on green initiatives in the restaurant industry as a whole, pizza operators are introducing energy efficient equipment such as high speed ovens.

Territory
The majority of pizza franchises come with a protected territory although some franchisors reserve the right to open outlets within a given territory in certain circumstances.

Earnings Claims
It is difficult to predict what the future financial performance of a franchise unit will be. Earnings claims are contained in about 25% of franchisors FDD. They are accompanied by so many disclaimers that they only give you a very general indication of what money you might make. In our sample of pizza franchises, one small family style pizza franchise gave a potential revenue estimate of $800,000 and a net income of $160,000.

Outlook
The pizza franchise sector, like most industry sectors, faces the challenges of a weak economy and stagnant or declining sales in 2009. Tight cost control, falling commodity prices and management efficiencies will help offset the intense pressure on margins from price competition and flat or declining sales. There will be positive outcomes for franchise operators who enhance their levels of service and food quality while delivering value to the consumer.

Trends within the Pizza Industry

Expanded Menus
Traditionally, pizza franchises have only offered pizza and closely related items like breadsticks and other Italian dishes to their customers. But in recent years, many pizza franchises have increased their menus diversity by launching new product lines to further compete with other lower-cost food chains in a bid to retain or gain customers.

A favorite amongst a demographic similar to pizza eaters, chicken wings, is one of the foods that has found its way onto the menu of many pizzerias. For example, Dominos, a company not afraid of making changes, introduced their latest permanent menu items in early 2011 boneless chicken and wings. The chicken fare, which was promoted in a grand manner very much like their reformulated pizza, joined Dominos diverse menu that features pasta, ovenbaked sandwiches, and desserts along with their trademark pizza. Salads have also proved to be popular amongst pizza franchises looking to expand their respective menus. Among

the many outlets that give patrons the option of a salad bar at their restaurants are Cicis Pizza and Pizza Hut.

The addition of healthy items, like salads, to pizzeria menus can be largely attributed to an increased focus on healthy eating that has overtaken the marketplace in recent years. According to a National Restaurant Association (NRA) survey, seven out of 10 consumers say they are trying to eat healthier when eating out now when compared to when they ate out two years ago. That finding is mirrored by restaurant operators where two-thirds of respondents to the same NRA survey said their guests are ordering more healthy items and paying more attention to the nutritional content of their food than just a couple years ago.6 Also, in response to the renewed focus on healthy eating, pizzerias have taken steps to cut trans-fat from their food and begun providing options to patrons such as low-carb and gluten-free items.

Its important to note that the expanded menu options in pizza franchises arent restricted to just food. Recently, a number of Pizza Hut locations began applying for a license to sell beer at their restaurants illustrating that pizza franchisors are looking at every angle to expand their operations and provide consumers with what they want in one place. 7

Increased Technology Integration

Pizza, of course theres an app for that. Mobile phone usage has skyrocketed in the United States, particularly the usage of smartphones. Smartphones made up 54% of mobile phone sales in the first quarter of 2011, and this development in consumer behavior hasnt gone unnoticed within the pizza industry.8 Several pizza franchises have developed applications in the past few years to reach consumers no matter their location in order to capitalize on the growing population of smartphone users. Pizza Hut created the industrys first mobile app (for the iPhone) in 2009, and announced in May 2011 that they were updating their original iPhone app and introducing two more free mobile ordering applications for Android smartphones and the Apple iPad.9 Pizza Hut has been followed into the market by others

like Dominos, which in June 2011 generated over $1 million in sales from its new mobile app in the first week of its availability.10

To capture the attention, and subsequently the dollars, of consumers, pizza franchises have also turned to social media. Social media has become very important to the [entire restaurant] industry and social media users are much more active and likely to dine-out, to connect with restaurants online and post reviews, says Hudson Riehle, senior vice president of the Research and Knowledge Group for the National Restaurant Association. 11

By utilizing websites such as Facebook and Twitter pizza franchises are able to more effectively market to and broaden their customer base through special promotions along with the back-and-forth interaction social media was designed for. For instance, Pizza Streetza, which uses Foursquare to connect with customers, offers free garlic bread when customers check in.12