Sheridan College

Papa John’s Pizza

Market Study & Analysis of Pizza Industry

Richard Cong Huynh

4/10/2013

TABLE OF CONTENTS

1. Introduction - 2

2. Market Overview - 3

2.1 Market Size & Growth - 3 2.2 Sales Volume of Total Market - 32.3 Market Trends - 42.4 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 - 105.2 Healthy Lifestyle Choices - 11

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5.3 Online Orders - 11

6. Social Media - 10

6.1 Pizza Hut - 106.2 Domino’s Pizza - 116.3 Overall Online Customer Engagement among Top U.S. Chains - 11

6. Conclusion - 11

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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 as store 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 delivered to 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 favourable profit margins

by avoiding deep discounts on menu items, a strategy that is employed by

many of their top competitors.

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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.

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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.

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 as Pizza

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

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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 made in just a

few minutes are growing 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

options including 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, 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). 

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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 positive sales

growth (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 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 Pizza have continued to innovate in ways

that have allowed them to achieve and maintain success 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

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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 offers a 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 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

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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 rates would increase labor cost ("Papa John's International," 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

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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 parent and 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

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markets, 2011). A 2011 consumer report further supported this conclusion

as they 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

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option ("All things to," 2012). This should also direct pizza chains to

consider the significance of online marketing strategies.

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 visit its 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,

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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 offered product 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 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 & Li found that Domino’s Pizza

demonstrated a higher level of commitment and consumer engagement than

Pizza Hut and Papa John’s (2013).

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The journal article found that Domino’s responded 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 handling

their social media activities. In addition, He, Zha & Li also noted that user

engagement level on Facebook is much higher than the engagement level

on Twitter. This may be due to the fact that the three pizza chains offered

more promotional and user engagement activities 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 are employing. 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 to 44, increase their use of online services, greater promotions tied to social media present opportunities to increase sales and garner more market share.

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