- WHITE PAPERS
If you want to get Allan Bass fired up, tell the veteran pizza delivery man that delivery charges may soon be the nationwide norm.
After 22 years in the business, Bass says he knows his customers well, and that charging them for delivery will anger them, plus lead them to tip less.
"The bottom line is that it'll hurt the driver," said Bass, a delivery driver for Tony Boombozz Pizza and Panini in Louisville, Ky. "The customers won't like it, and it'll backfire on the companies that charge. You wait and see."
Whether Bass' remarks would concern the brass at Pizza Hut is a moot point. The company has allowed franchisees to levy fees -- as much as $2 to $3 at some stores -- for years. Last year it applied a minimum charge of 50 cents per run at its U.S. corporate stores.
Not that Pizza Hut's the only one; smaller chains and independents throughout the nation routinely charge $1 to $2 per delivery, and delivery fee tests are underway at the industry's number two and three chains. Domino's Pizza has experimented with charges at 100 corporate stores in several major markets for about three months, and Papa John's has allowed the same at a handful of franchise stores in San Diego since at least the middle of last year.
Patty Sullivan, a Pizza Hut spokesperson, said delivery charges are nothing new and likely are here to stay.
"Fees have been around forever," said Sullivan. "I would suspect that it's something you're going to see across the board in many segments of the (foodservice) business."
While it's not unusual for smaller operators to copy strategies of larger chains, several operators say they won't follow the industry giants down this road. Not charging a fee, say some, provides marketing leverage over those that do. Others fear their customers won't like it, and thus won't use fees. Still, others are weighing their options.
"Gosh, I didn't know (Pizza Hut) was charging for that," said Gary Wilson, a Tony Boombozz franchisee and Bass' boss. "If all the chains start doing it, then we'd have to consider it. It would be easier then to charge, but still, I don't know if we would."
"As long as our stores are profitable, I wouldn't (charge a fee) for the world."
Peter Picurro says his company will flee the fee for now.
"At this time we are not even considering it," said Picurro, owner of five-store Picurro Pizzeria in Tucson, Ariz. "I feel as the others charge a fee, it will be our competitive edge that we do not."
Shawn Lynch, president of Dough Boys, Port Charlotte, Fla., is somewhere in the middle on the issue. He'd love to boost his bottom line with fee revenue, but he's concerned that his gain will be his drivers' loss.
"The positive is that you're guaranteed a delivery charge, but the negative is that drivers will more than likely lose the tip. People are just that cheap sometimes," said Lynch. "We all have a terrible time keeping drivers, and to do something that might make that worse ... I don't know if I'd do it."
Why Charge at All?
Since high cheese prices were such a drain on operator profits last year, logic seemed to dictate that raising pizza prices would help profits most quickly. Pizza Hut's Sullivan, however, said that wouldn't address what is her company's highest cost category.
"The delivery segment is the most expensive part of our business, so a delivery fee offsets that expense," said Sullivan. Raising and lowering prices in step with market prices -- as done at the gas pump -- would only irritate customers, she said. "That's just not the way we want to run our business."
Tim McIntyre, vice president of communications at Domino's -- the company that set the free delivery standard -- said a delivery charge rather than a price hike allows customers to opt for carryout if they don't want to pay for delivery.
"That gives them the choice to say service and convenience aren't worth the extra dollar," said McIntyre. Domino's also is confident delivery customers will continue to use the service regardless of fees because it fits their lifestyles. "They rely on delivery. For them, there has to be a special reason to pick it up themselves."
Twenty-store Pizza for Less, in Little Rock, Ark., has charged $1 for delivery since its founding in 1989. Average checks at the bargain-priced chain are less than $9, but at its sister chain, Pizza Perfect, which serves more expensive premium pizzas, free delivery is standard.
Jeryle Johnson, vice president of operations over both chains, said charging for delivery at Pizza for Less allows those operators to keep menu prices low. Driver tips, however, tend toward the low end as well.
"It definitely seems to be that the tips the guys at Pizza Perfect get are double those the guys at Pizza for Less get," said Johnson.
Picurro says that most operators have the cost of delivery built into the cost of every item on the menu. Any operator that doesn't "would eventually go broke. ... We have chosen, instead, to ... offer those that wish to save money, a discount to pick it up."
Dough Boys' Lynch said if he charges for delivery, he'll make sure the charge is closer to the actual cost than the fee levied by Pizza Hut.
"Fifty cents is ridiculous," said Lynch. "What's that going to pay for? If you're going to do a delivery charge, it should be for what it costs, $2 to $3."
Sullivan admitted Pizza Hut's charge is small, but said the chain decided that it was enough to help reduce the cost without offending customers.
"We asked what amount would avoid any sticker shock, and that's what we agreed upon," she said. "If they prefer not to pay the 50 cents, we offer take out and dine in."
Tim Kelly, a one-store Pizza Pit franchisee in Iowa City, Iowa, said if he charged $1 per delivery, his profits would leap well beyond break-even, where he is now.
"I currently do not charge for delivery, but now that the big guys are doing it, I would certainly consider it," said Kelly, whose sales mix is 90 percent delivery and 10 percent carryout. "That would add approximately $2,200 to my bottom line each month."
Doug Ricklefs, a four-store Happy Joe's Pizza franchisee in Muscatine, Iowa, charges a delivery fee mostly to cover the cost of maintaining his company-owned delivery vehicles. His customers, he said, don't balk at the $1 to $1.50 fee.
"It is my feeling that having a pizza delivered is a convenience; the customer is definitely willing to pay," said Ricklefs. "We were also giving free delivery and paying the drivers $1 per delivery ... (but) now we at least charge $1 per delivery so that what we pay the driver is a wash for us."
Perception is Nine-Tenths of Reality
The beauty of adding a fee, said Sullivan, was the ability to be up front with customers about it rather than concealing it in a price increase. That way, she said, they would more easily understand the reasoning behind the cost.
Other operators said it's simpler just to boost the price of the product because everyone knows that, sooner or later, food costs go up.
"It's all about perception," said Pizza Perfect/Pizza for Less' Johnson. "The customer thinks he's getting a deal if we say free delivery."
"In the long run, it is simply a perception game," said Picurro. "Do we offer a lower-cost pizza and charge for delivery, or a higher-cost pizza and offer a discount to pick it up?
Dough Boys' Lynch agreed, saying the industry has hurt itself by doing everything it can to stay below $9.99 and remain profitable. In the past, portion sizes, he said, sometimes shrank to make the numbers work, and yet customers continue to believe they're getting the same good deal.
"I've read that people spend less of their salary today on food than they did years ago," Lynch added. "So they think that any price increase is substantial because these low prices are in their minds."
"The customers won't like it, and it'll backfire on the companies that charge. You wait and see."
Happy Joe's Ricklefs said his shops never mention the delivery charge.
"We do not advertise that we charge," he said. "We also have not given out coupons for free delivery, (because) that would be admitting we charge."
Both Johnson and Picurro also believe that customers will misperceive a delivery charge as going into drivers' pockets, rather than operators'.
"I have heard from companies that started charging a delivery fee that their drivers' tips reduced dramatically," said Picurro. "(S)o you have employees who are making less money and blaming you."
Bass, the Boombozz delivery driver, believes that any loss of tips will be inversely proportionate to the size of the fee.
"It would depend on the amount charged, but I think the drivers' income would be reduced by 25 to 30 percent," he said.
Perception can work both ways, too, it appears. For example, Johnson said that even if more operators move to charge for delivery, he intends to stay free because he believes customers will perceive value in that.
"As long as our stores are profitable, I wouldn't change it for the world," Johnson said. "I probably would say, 'Still delivering for free,' as a marketing tool, for sure."
Run the Option
Like many operators, Picurro tries to increase carryout traffic by offering customers bargains if they come and get it. He also sells carryout customers low-cost hot bags that entitle them to an 11 percent discount with each purchase.
Johnson also said carryout specials are his favorites, but despite the benefit they offer to both him and customers, delivery isn't going away, and operators need only hunker down and decide how they'll make it work to their benefit.
"No question that I make more on a $5.99 pick-up than a delivery," said Johnson. "If you pay a guy $6 an hour, and the average run takes him a half hour, then you're out three bucks.
"Unfortunately, delivery is a necessary evil right now. And with the big guys controlling the way business is done, then that's how everybody else has to play for now."
Topics: Public Companies