According to new research from IBISWorld, the frozen pizza production industry experienced solid revenue growth during the recession, but struggled in 2011 and 2012 as consumers returned to eating at restaurants.
During the recession, consumers tightened budgets and bought frozen pizza as a cheaper, convenient meal to eat at home. As the economy recovered and consumers gained confidence to dine out more, demand waned.
At the same time, health-conscious Americans perceived fresh food as nutritionally superior to frozen food.
"In response, (frozen) firms developed and introduced new pizzas made with healthier ingredients, including organic and gluten-free varieties," said Olivia Tang, IBISWorld industry analyst.
Firms also added gourmet ingredients to make frozen pizza more competitive against restaurant meals. As a result, revenue increased 0.8 percent per year on average to $3.1 billion in the five years to 2012. The slow rate stems from greater preference for restaurant dining, which caused revenue to fall 5.0 percent and 3.8 percent in 2011 and 2012, respectively.
Frozen companies also faced challenges from rising commodity costs and price competition from private label producers. The price of frozen pizza's main ingredients — wheat flour, cheese, vegetables and meat — all increased in the past five years, raising purchase costs and cutting into profit. Consumers' desire to spend less on food also made generic brand products' low prices more enticing.
However, because major players control the majority of the market, their brand-loyal customers were willing to pay higher prices for pizza, even when firms raised prices in response to expensive inputs. The popular healthy and gourmet options also allowed firms to raise prices further. As a result, profit expanded from 13.2 percent of revenue in 2007 to 14.5 percent in 2012.
According to IBISWorld research, the frozen pizza industry is expected to grow slowly, but steadily in the next five years. As the economy continues to recover, consumers will have more spending money, allowing them to afford eating at restaurants. However, more Americans will be busier as they return to work, prompting demand for convenient meals to prepare at home.
Healthy and gourmet frozen pizza options will also grow in popularity, boosting demand. Consequently, revenue is projected to rise at a slow annual rate through 2017. According to Tang, the frozen pizza production industry has a high level of market share concentration. In 2012, the top two major players (The Schwann Food Company and Nestle) made up nearly 70 percent of industry revenue.
Concentration has increased in the past five years as these major players have made significant acquisitions. For example, in 2010 Nestle acquired Kraft's frozen pizza business, which added brands such as DiGiorno, Tombstone and California Pizza Kitchen to its product mix.
Concentration is expected to continue in the next five years as major players continue to grow through advanced technology, acquisitions and their ability to bypass wholesalers and sell directly to retailers.
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