Pizza Industry Essay, Research Paper
THE RESTAURANT & FAST FOOD INDUSTRY
ANALYSIS OF THE PIZZA CHAIN SECTOR
THE RESTAURANT INDUSTRY AND HISTORY
Where and when did the fast food concept come into play? Consider the hamburger. While German immigrants brought the first “Hamburg Style Steak” to the United States in the early 19th century, the humble hamburger, “White Castle,” became the basis for a new kind of restaurant in 1916 called “the fast food chain”. J. Walter Anderson, who sold five-cent hamburgers with french-fries and colas, opened the oldest burger chain. Other restaurants followed and in 1948 brothers Richard and Maurice “Mac” McDonalds figured out a fresh approach that would produce fast food even faster. They eliminated waitresses and indoor tables from their hamburger stand, cut down on menus, streamlined food operations and lowered prices. Richard built the stand’s giant golden arches, which emerged through the roof. In 1954 Ray Kroc, a milk shake machine salesman, paid the brothers a visit and was overwhelmed by the volume of business the McDonald’s were serving up with bags of burgers and fries with factorylike efficiency. Kroc envisioned a string of establishments across the country. He made a deal with the McDonalds under which Kroc got the right to use their name and methods in franchising the concept. The brothers would get a bit more than a quarter of the 1.9% of the franchisees’ gross to be collected by Kroc. The McDonald’s concept spread like a brush fire and the rest is McHistory. Ray Kroc, who built the McDonald’s Corporation, and his belief that there was equal beauty in the expanding restaurant business, definitely envisioned the future of the fast food industry most accurately.
INDUSTRY CHARACTERISTICS
The restaurant industry is a classical mature industry with characteristics such as consolidations, acquisitions and divesture activity. Restaurant operators have found it easier to grow by acquisition rather than internal development. This is significant since acquiring companies do not have to perform a great deal of market analysis of a particular customer base or geographical market area.
This industry is intensely competitive with respect to price, service, location and food quality. There are many well-established competitors with substantial financial and other available resources. Some competitors have been in existence for a substantially long time and some franchisees are established in good markets.
It is extremely competitive for the consumers’ dollars. These restaurants not only compete with other restaurants, but other generic forms of competition; such as eat-at-home foods and supermarket deli take-out arrangements.
The business is very capital intensive. It can cost approximately $1 million dollars to open a new fast food store and even more for traditional dining establishments. Most fast food chain restaurants are franchisee operated.
The industry is segmented into two major categories: fast food and full-service restaurants.
ENVIRONMENT & OVERVIEW OF THE MARKET
Traditionally, restaurants (and hotels) have been among the most entrepreneurial of businesses in the sense that the barriers to entry are relatively weak or minor.
Factors creating environmental changes were a result of the early 1970’s when dual-income families became the norm and generated more disposable income for eating out and leaving less time for cooking at home. The demographic shift, and the restaurant industry’s ability to deliver a consistent product, at a reasonable price, has created a generation of U. S. consumers who eat out. Restaurant sales have grown steadily throughout the 1990’s (about 5% in 1999). United States citizens spend nearly half of their food dollars eating out (approximately $350 billion each year).
As an introduction to the overall restaurant industry, Graph 1 illustrates Percentage of Market Share Sales by Segment for the Top 100 Restaurants for 1998 and the Second 100 Market Sale Shares by Segment for 1998. 1998 aggregate Restaurant Sales totalled $123.6 and $16.6 billion for a combined total of $140.2 billion. Combined Pizza sales for the 200 chains, as a percentage to aggregate sales, represent 15.96% of market share, or $22.380 billion for pizza segment sales.
GRAPH 1 GRAPH 2
Table 1 on Page 4 illustrates Pizza Chains Ranked by the number of U. S. Units for fiscal years ending 1998, 1997 and 1996. The four power players, in the pizza chain industry, dominant the market with a combined percentage rate of 89.51%. Pizza Hut, with its 39.52% of total units and their #1 ranking, is definitely the leader in the number of units in the United States.
Table 1
PIZZA CHAINS RANKED BY NUMBER OF U. S. UNITS
1997
RANKING
1998
RANKING
CHAIN
FISCAL
YEAR
END
1998*
1997
1996 % OF
1998
TOTAL
UNITS
1 1 Pizza Hut Dec. 1998 8,471 8,698 8,910 39.52%
2 2 Domino’s Pizza Dec. 1998 4.489 4,431 4,300 20.94
3 3 Little Caesar’s Dec. 1998 4,350 3,900 4,008 20.29
4 4 Papa John’s Dec. 1998 1,879 1,517 1,160 8.76
5 5 Sbarro, the Italian
Eatery Dec. 1998 806 780 732 3.76
6 6 Godfather’s Pizza May 1999 592 554 540 2.76
7 7 Round Table Pizza Dec. 1998 530 540 539 2.47
8 8 Chuck E. Cheese’s Dec. 1998 320 306 308 1.50
TOTAL 21,437 20,726 20,497 100.0%
Source: Nation’s Restaurant News Research
*Actual Results, Estimates or Projections
Table 2 PIZZA CHAINS RANKED BY SALES PER UNIT
1997
RANKING
1998
RANKING
CHAIN FISCAL
YEAR
END
1998*
1997
1996
1 1 Chuck E. Cheese’s Dec. 1998 $913.8 $922.7 $796.7
2 2 Round Table Pizza Dec. 1998 729.0 730.3 728.0
3 3 Papa John’s Pizza Dec. 1998 681.0 648.3 607.6
4 4 Sbarro, The Italian Eatery Dec. 1998 585.2 557.8 549.3
5 5 Pizza Hut Dec. 1998 559.1 533.8 553.8
6 6 Domino’s Pizza Dec. 1998 515.7 504.0 491.7
7 7 Godfather’s Pizza May 1999 488.7 495.1 498.6
8 8 Little Caesar’s Pizza Dec. 1998 303.0 347.7 341.7
AVERAGE $596.9 $592.5 $570.9
*Estimated Average based on mathematical equation of annual system wide sales growth
and change in number of operating units.
Source: Nation’s Restaurant News Research
Table 2 on Page 5 illustrates the ranking of pizza chains by sales per unit for fiscal years ending 1998, 1997 and 1996. This ranking alters the position of the four power players, due to sales being spread over more system-wide units for the major players, versus the smaller chains who did not have as many units.
THE BIRTH AND GROWTH OF THE FAST FOOD INDUSTRY
What caused the change that resulted in a shift from “at-home food” to “fast food” consumption? One factor is attributed to the birth rate in the late 1960’s and early 1970’s when more women sought professional careers during their childbearing years. Another factor was the presence of Ray Kroc, the man who deserves the most credit or blame for transforming the eating habits of Americans.
This trend in eating patterns is illustrated below in Table 3.
Progressive Grocer’s, in 1990, made a plausible prediction on “Food Eaten at Home Versus Food Eaten Away from Home” based on a survey and responses, it was concluded ” Food eaten away from home would increase 108% from 1970 to Year 2000″.
TABLE 3 TREND OF FOOD CONSUMPTION
Numbers in Percent of Food Dollar
1970 1980 1988 2000
Food-at-Home 76.0 71.0 67.0 50.0
Food-away-from Home 24.0 29.0 33.0 50.0
As indicated by Table 3, the trend did decrease from the category of “Food At Home” and increased for “Food Away from Home” category. Between 1997 and 2002, the number of U. S. households headed by people aged 25 to 44 will decline by 1.7 million to 43 million. By 2008, they will overtake the younger set from 43 million to 40 million, altering the landscape of consumer spending in the 21st Century. As 77 million Americans, aged 35 to 53, move into a new stage of life, it will signal fundamental changes that go far beyond the demand for products and services that appeal to the middle age. At the same time, mature households aged 65 and order will gain spending power through increasing affluence, rather than increasing numbers.
General trends in the industry are continuing to move toward prepared foods, and pizza with takeout and home delivery, should continue to do well.
Overview of the Food Service Industry
The fast food sector consists of sandwich stores, pizza stores and chicken units. The sandwich stores encompass hamburger chains and Mexican food varieties such as tacos. The pizza segment features various types and forms of pizza such as thin-crust, deep dish, Chicago and New York style pizzas. Some chains offer exclusive home delivery, such as Domino’s, while others offer a combination of in-store and home delivery.
Quick-service (fast food), full-service restaurants and other establishments make up the sector of retail trade. Within this sector, quick and full-service restaurants account for approximately 90% of all food service sales. Quick-service restaurants have been expanding the fastest. They have gone from a 28% share of food service sales in 1970 to approximately a 48% share in 1996.
History of the Pizza Segment of the Fast Food & Restaurant Industry
The history of pizza had its beginning when it was considered a peasant’s meal in Italy for centuries; however, modern pizza is attributed to baker Raffaele Esposito of Napoli (Naples) in the Italian region of Campania. In 1889, Exposito of Pizzeria di Pietro baked pizza especially for the visit of Italian King Umberto I and Queen Margherita. The pizza was very patriotic and resembled the Italian flag with its colors of green (basil), white (mozzarella) and red (tomatoes) and was favored by the Queen. The pizza was named “Pizza Margherita” after the Queen and set the standard by which today’s pizza evolved. It firmly established Naples as the pizza capitol of the world. In 1830 the world’s first true pizzeria, Antica Pizzeria Port’ Alba, opened and is still in business today at Via Port’ Alba 18 in Naples.
The world’s best, and unarguably the most authentic pizza, is Pizza Napoletana (Neapolitan Pizza) which maintains its pre-eminence through the quality of the local products such as herbs, tomatoes grown in the volcanic ash of Vesuvius, fresh mozzarella and the artistry of the pizzaioli or the pizza makers.
Pizza migrated to America with the Italians in the latter half of the 19th century. By the turn of the century, Italians had begun to open their own bakeries and were selling groceries as well as pizza. Gennaro Lombardi opened the first true U. S. pizzeria in 1905 in New York City at 53 1/3 Spring Street and, then reopened at 32 Spring Street. It wasn’t until after World War II, when returning GI’s created a nationwide demand for the pizza they had eaten and loved in Italy, that pizza went public. A first recollection of pizza could possibly be Chef Boyardee’s “homemade” pizza whose ingredients came packaged in a box with canned pizza sauce, a packet of parmesan cheese and crust flour. In the late 1950’s, Pizza Hut, Shakey’s and various other mass production pizza parlors appeared and further popularised pizza.
ABSTRACT OF THE RESTAURANT AND FOOD SERVICE INDUSTRY
AND THE TOP FOUR PIZZA CHAIN RESTAURANTS
SUMMARY AND INTRODUCTION
Food service organizations revealed that aggregate domestic systemwide sales grew to $123.59 billion for 1998 or 6.41% growth rate compared with a 5.33% rate of growth in 1997. Continued consolidations, faster growth in restaurant openings and widespread improvements in sales per unit were factors behind the acceleration in growth.
Domestic pizza delivery sales have not grown as quickly, but have shown stable growth. From 1988 to 1997 pizza delivery sales in the U. S. grew at a compound annual rate of 6.2%. In 1990 and 1991, even when the U. S. was in a recessionary period, pizza delivery sales continued to grow at an annual compound rate of 2.5%.
The Top 100 companies had aggregate revenue of $72.98 billion in their latest fiscal year, and includes Pizza Hut, Domino’s, Little Caeser’s and Papa Johns. Their collective growth slipped to 6.66% from 8.18% in the preceding year. Factors contributing to a decline in revenue growth were refranchising, or company-store divestitures and a slackening in the pace of franchised restaurant openings.
Over a three-year span, the eight chains making up the pizza segment, have seen their collective market share erode from 9.39% to 8.84% with a slice being worth $10.93 billion collectively.
As Pizza Hut enjoyed its first full fiscal year under the ownership of Tricon; a major shake-up took place at Domino’s Pizza when founder Thomas S. Monaghan unexpectedly sold the pizza chain to Bain Capital Inc. of Boston, a private investment company. Bain paid an estimated $1 billion to acquire a 90-percent stake in Domino’s. In addition to selling the Ann Arbor, Michigan based chain, Monaghan, who was chairman and chief executive, also stepped down from day-to-day operations.
Despite fierce competition in the pizza segment and a year of unusually high cheese prices, three of the category’s four largest players, Pizza Hut, Domino’s, and Papa John’s thrived in 1998 with strong sales’ performance. Each player’s source of revenues appears to be generally healthy and continue to grow moderately over last year.
Table 4 indicates Pizza Chain Rankings for U. S. System-wide Sales for fiscal years ending 1998, 1997 and 1996 and supports the narrative and prior explanation on Page 9.
PIZZA CHAINS RANKED BY U. S. SYSTEMWIDE SALES
FOR FISCAL YEAR ENDING
MM-$
CHAIN DECEMBER 1998* DECEMBER 1997 DECEMBER 1996
Pizza Hut $4,800.0 $4,700.0 $4,927.0
Domino’s Pizza 2,300.0 2,200.0 2,100.0
Little Caesar’s 1,250.0 1,375.0 1,400.0
Papa John’s 1,156.3 867.7 619.2
Other 1,420.1 1,369.8 1,301.8
TOTAL SALES $10,926.4 $10,512.5 $10,348.0
Source: Nation’s Restaurant News *Actual Results, Estimates or Projections
PIZZA HUT HISTORY & PROFILE
Pizza Hut began in 1958, when two college students from Wichita, Kansas, Frank and Dan Carney, were approached by a family friend with the idea of opening a pizza parlor. Although the concept was relatively new to many Americans, at that time, the brothers quickly saw the potential of this new enterprise.
After borrowing $600 from their mother, they purchased some second-hand equipment and rented a small building on a busy intersection in their hometown. The result of their entrepreneurial efforts was the first Pizza Hut restaurant, and the foundation for what would become the largest and most successful pizza restaurant in the world.
Pizza Hut, now a subsidiary of Tricon Global Restaurants, Inc. (NYSE: YUM) is the world’s largest pizza restaurant chain. Pizza Hut operates 8,471 units in the United States and 3,814 units in 88 countries and territories throughout the world under the Pizza Hut name for a total of 12,285 units. In 1998, U. S. sales totalled $4.8 billion and average U. S. system sales were $645,000. It employs more than 240,000 people worldwide. The company is the recognized leader of the $30 billion pizza category.
1998 was a great year for Pizza Hut. By introducing great new products, great promotions, great operations and, in partnership with their franchisees, great new assets, Pizza Hut’s management and employees can’t wait since their future looks strong. The pie chart below indicates the competitive position Pizza Hut has in the pizza chain sector, and in particular, with their major competitors.
Chart 3 1998 PIZZA HUT % OF MARKET SHARE
Source: Tricon Global Restaurants, Inc. Independent sales are fragmented.
1998 Annual Report
Over the past four decades Pizza Hut has built a reputation for excellence that has earned them the respect of consumers and industry experts alike. Their products have been voted number one in countless consumer surveys nationwide. Their accomplishments, as innovative business leaders, have been cited by publications such as, Restaurant Business, Fortune and The Wall Street Journal.
Strategies
In May of 1997, Pizza Hut announced a $50 million investment to put more quality in everything. The company introduced higher quality ingredients, added up to 40-percent more toppings than major competitors, installed 2,500 additional phone lines to speed delivery orders and re-calibrated ovens to ensure consistent cooking.
Intensive training was introduced and covered the basics of quality, service, and running great restaurants more effectively. The company created an innovative program to encourage franchisees to invest in the upgrading of restaurants.
To strengthen the Pizza Hut asset base, in December of 1997, the company announced a strategic plan to dramatically refocus its business. The company strengthened its business by closing or consolidating marginal stores.
“The Best Pizzas Under One Roof” advertising campaign was introduced in the summer of 1998 to tell consumers that Pizza Hut has a great variety of pizzas to select from, including Pan Pizza, Personal Pan Pizza, Thin n’ Crispy, Stuffed Crust Pizza and Hand Tossed Style Pizza. Pizza Hut has recently had a steady line of successful new product introductions including The Edge, Sicilian and recently The Big New Yorker Pizza. The Big New Yorker is a traditional-style larger, 16-inch pizza with New York style foldable slices.