Report: Pizza segment positioned to double revenue in five years

Although consumer spending hit an iceberg in 2009, the pizza segment managed to stay afloat. Operators responded well to changes in spending and eating habits and were therefore well positioned when the economy began picking back up in 2010.

From 2007 to 2012, the segment's revenue growth rate was 1.5 percent – slow, but growth nonetheless.

According to a new report from market research firm IBISWorld, pizza businesses successfully navigated a slow away-from-home food environment by offering lower prices than fine dining and casual dining establishments; increasing their marketing and promotions efforts; adding healthier and more creative menu options; and stepping up their focus on customer service.

The growth rate in the five years leading up to now was pulled down by the recession years and is expected to pick up significantly moving into the next five years. The report estimates in 2012, for example, revenue growth will jump to 4.5 percent as consumer confidence in the economy improves.

Negative factors

Factors that will offset some of this progress include increased demand for healthier items, more competition from grocery lines and continued rising commodity prices.

  • Demand for healthier food: Pizza businesses are expected to use fresher ingredients and add healthier items to the menu, such as salads, whole-wheat crusts, flatbreads and locally-grown produce. Higher-end operations will go a step further – embracing organic and unique gourmet items. The report says as consumers become increasingly aware of obesity issues, chain restaurants will be most affected. "Despite any long-term aggregate declines in healthy eating, consumers are now more aware of the health issues associated with fatty foods and are increasingly going out of their way to avoid them," the report said. "This is a potential threat to the industry."
  • Grocery store competition: According to market research firm Mintel, more than 1,100 new frozen pizza products were introduced from 2005 to 2009. That trend doesn't seem to be slowing down, with new frozen lines from brands such as Naked Pizza and Cono Italiano. On the flip side, traditional frozen brands, such as DiGiorno, are establishing a brick-and-mortar presence, adding even more competitive pressure. Additionally, more food retailers are offering partially-baked pizzas in the refrigerated section, attracting price-conscious, convenience-seeking consumers who crave a quality pizza at a lower price.
  • Commodity pressures: The IBISWorld report predicts commodity prices to continue rising through 2017, as they've done for the past five years. Namely, milk and wheat will rise, causing pizza operators' main ingredient costs to rise as well. From 2007 to 2012, the world price of wheat increased an average of 3.4 percent per year. Milk, the main ingredient used in cheese, jumped more than 27 percent in 2010 alone, and 9.2 percent in 2011. Restaurateurs have either increased their prices or switched up their menu to deal with these mounting pressures, but profit margins and overall profits have still been affected. Large chains are able to manage the rise in expenses better, since they buy in bulk, compared to smaller chains or independents. The lofty increases in commodities have affected establishment numbers, which were down 11.5 percent in 2009 and 2.2 percent in 2010.

Outlook ahead

Some larger chains, such as Papa John's, bought back a chunk of franchises to help them weather the recession. IBISWorld's report, however, says conditions are improving and pizza establishments are opening up again, with employment numbers rising as a result.

Beginning with a strong 2012, IBISWorld expects pizza segment revenues to jump to an average of 2.9 percent per year from now through 2017 – doubling its growth from the previous five years.

And while many large chains bought back franchises to muster through the hard times, and other smaller businesses closed all together, that trend will continue to reverse as well. The report expects establishment numbers to grow more than 3 percent per year from 2012 to 2017, to about 86,500 restaurants.

Employment levels will benefit from this growth, and are forecast to grow 2.3 percent per year.

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