Looking Back '... Looking Ahead

 
Jan. 14, 2004

Compared to the tragedies marking the end of 2001 and the woefully flat market of 2002, life in the pizza business in 2003 wasn't all that bad. Though some top chains continue struggling to produce same-store sales gains, many independents claim business is very good, despite unceasing price and coupon wars.

PizzaMarketplace takes a look at five significant events during the year that was, and gazes into the crystal ball to predict five things to watch in the year that lies ahead.

1. Cheese market's rise and fall

Once again, the key cost component in every pizza—cheese—crushed operators' margins in the second half of 2003. After lingering near a $1 per pound last February, prices on the block market turned northward in May and rushed to $1.60 by

Best Gadget in 2003

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August. The price held there stubbornly for 13 weeks before a late-October slide shaved 12 cents off the price and kept the market tumbling until a bottom of $1.30 in late December.

Per usual, operators became frustrated by the market's volatility, but according to several dairy sources, few pizza players are considering buying milk futures in 2004 to smooth out the nauseating ride on the cost roller coaster.

2. Obesity lawsuits

The foodservice industry cheered the August dismissal of a lawsuit filed against McDonald's Corp. Lawyers for two teenage plaintiffs attempted to blame McDonald's for their obesity-related health problems, but a New York judge said they failed to make any connection between their health and their consumption of McDonald's food.

Though no pizza company was hit with an obesity lawsuit in 2003, lawyers rallying behind the cause of the corpulent promise it'll happen sooner than later. During the Multi-Unit Food Service Operators conference in September, one such lawyer, John Banzhaf III, a George Washington University law professor, said filing and winning obesity lawsuits is a matter of persistence.

"I think it's very clear that we will be successful in suing fast-food restaurants to pay their fair share (of the responsibility) for obesity," Banzhaf told the MUFSO crowd. "I think most of you are reasonably sure that we're going to find a judge who will let these suits go forward. And somewhere we'll find a jury that's going to rule in our favor."

In a smart maneuver to demonstrate some corporate health-consciousness, Pizza Hut appointed a "health czar" and launched a new low-calorie Lean and Delicious line of pizzas.

3. McDonald's sale of Donatos Pizzeria back to founder Jim Grote.

For the second time in its history, McDonald's proved it can't do pizza. As early as last February, PizzaMarketplace predicted the burger giant would sell Donatos Pizzeria back to its founder, Jim Grote. The deal was done in December.

Purchased in 1999 by former McDonald's CEO Jack Greenberg, Donatos, unlike the other "Partner Brands" (Chipotle and Boston Market), never blossomed under the burger chain's leadership.

When McDonald's bought it, there were 143 Donatos units. Over the next three years it grew the chain to more than 200 stores before a series of rapid closures in late 2002 dropped the number back to its present 180.

After Greenberg stepped down in late 2001, his successor, Jim Cantalupo, put all the Partner Brands up for sale, but only Donatos was sold.

Grote (who remained at the Donatos helm while under it was under McDonald's ownership) is excited to have

Stupidity Award for 2003

Angry delivery driver spits in customer's salad.

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his company back, but he also had kind words about his time with McDonald's (and why shouldn't he say nice things about a company that bought his chain for a high price and sold it back to him for a low one?) Early word from Donatos is that growth is not on the menu for 2004.

4. Turnaround of Little Caesars

After nearly a decade of decline, Little Caesars' army is on the march again. For more than a year, the normally secretive company has crowed about a string of quarterly double-digit same-store sales gains—great news for a company whose most startling numbers used to be store closures. Now Little Caesars is returning to large markets it abandoned just two years ago, such as Dallas and St. Louis.

How has Little Caesars done it? By improving its product, sticking to a low-cost carryout-mostly operations model and simplifying the customer's purchasing experience. The company's wildly successful $5 Hot and Ready campaign gives patrons a pepperoni-topped large pie they can pick up, without calling ahead, from 5 p.m. to 7 p.m. each day. The promo has even ignited price wars in several states.

Burying the hatchet with its franchisees greatly helped matters as well. As a result of a protracted lawsuit that ended in 2001, franchisees gained unprecedented say in areas such as marketing and product quality, saw a portion of their royalties reduced and were forgiven a huge chunk of debt owed to the company. Franchisees also formed a purchasing cooperative for sourcing goods outside Little Caesars' Blue Line distribution company.

5. Crimes against delivery drivers

Perhaps the most disturbing news of the year was the fifth-place ranking of pizza delivery driver on the Bureau of Labor Statistics' list of top-10 most dangerous jobs in the U.S. Jobs considered more dangerous were: timber cutting, commercial fishing, airplane pilot, and structural metal work.

Officials with three large pizza chains and members of the Association of Pizza Delivery Drivers said they don't believe crimes against drivers are on the rise, but all agreed that at the very least, media coverage of those crimes is way up.

APDD officials also said they believe the nature of driver-related crimes is changing. Not only do they appear to be better planned and less spontaneous, multi-person ambushes seem more common.

Five predictions for 2004

1. Two chains to watch: CiCi's Pizza and Papa Murphy's Take 'N' Bake Pizza.

The days when Papa John's rolled out 400 U.S. stores per year will never return, but CiCi's Pizza and Papa Murphy's appear to be the only companies

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that could realize net gains of between 80 and 100 U.S. units this year.

Why? Because both concepts represent points of difference in an otherwise predictable industry. Take Papa Murphy's, for example. Anywhere outside the western third of the U.S., take-and-bake pizza is novel; true, you'll find independent take-and-bake operators doing well, but even they admit their operations are little-known—and often little-understood—entities within their markets. The sky is the limit for take-and-bake growth, however, it will happen slowly.

CiCi's presents a different scenario. Though pizza buffets are anything but new, the difference between CiCi's and many others is that it does buffets well, inexpensively and tastefully. Its growth model is sound, and the franchisees now opening stores are experienced operators.

Unlike standard pizza concepts, take-and-bake and buffet concepts give modern customers what they want most: a sense of control.

Take and bake allows customers to cook an industry-grade pizza when and where they want, while buffets allow patrons to get a wide variety of as much food as they want for a small amount of money. Both are proof positive of the power of choice in the marketplace.

2. Pizza Hut's bistro concept will be one to watch.

Dine-in service is what made Pizza Hut what it is and that remains the key point of differentiation between the world's largest pizza company and its closest competitors. Last year Yum! Brands bought licensing rights to the Pasta Bravo concept, but instead of developing side-by-side Pizza Hut-Pasta Bravo units as it's done with its other brands, the company is testing Pasta Bravo dishes on some Pizza Hut dine-in menus.

Smart move. Not only does this meet customer requests for better menu variety, it maximizes Pizza Hut's considerable real estate investment. It also gives the chain a chance to update its aging Red Roof look.

Now the challenge will be execution of a broader and more complex menu and managing that highly perishable inventory. Much of pizza making centers on speed and ingredient memorization, but tossing pastas to order will require some additional finesse.

3. The low-carbohydrate trend will have a negligible and temporary effect on pizza.

In 1999 I was in Mandeville, La., where a pizza operator was cursing the "Sugar Busters" diet because it increased the number

R-E-S-P-E-C-T in 2003

Chris Bianco, chef-owner of Pizzeria Bianco, wins a James Beard Award.

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of requests he got for lower-carbohydrate, wheat-crust pizzas. Attempting to meet the perceived need, the operator made a separate wheat-based dough, but few customers ate it more than once. Quite simply, he said, it didn't taste very good.

Tom Lehmann, a.k.a the "Dough Doctor" and a director at the American Institute of Baking, told me once that wheat crusts high in low-carb bran have "all the eating characteristics of a china plate. That will keep them from ever catching on."

Will it?

I believe it will.

Sure, there will be some low-carb advocates who are going to avoid pizza altogether, and there will be those who, like some colleagues of mine, will buy a pizza, scrape off the cheese and toppings and toss the crust. My sense is, however, that anyone who's truly sticking to a diet already isn't eating pizza. Additionally, moderate low-carb eaters (not the radical Dr. Atkins dieter) will avoid the fringe carbs, such as the 20-ounce Mountain Dew, the daily candy bar or a cheesecake dessert. Pizza, in the minds of the masses, is a complete meal, and not an add-on bonus bite that'll get the axe come calorie-cutting time.

4. Cheese prices won't spike as sharply as they did in 2003.

If you liked those $1 per pound block cheese prices enjoyed in the first quarter of 2003, then do your best to savor that memory. I'm predicting it won't happen again anytime soon.

But neither will the spike to the $1.60s we saw in late June. For at least the next several months, sources I've read and spoken with forecast a fairly steady ride for buyers. Reductions in the number of dairy farms and overall cattle count have tightened milk supplies, but cheese demand remains fairly soft overall.

I'm no expert, but I'd look for block cheese prices to rise gradually in step with warmer temperatures before peaking in the $1.45 range sometime this summer. If dairy farmers control their products well—and barring any unforeseen catastrophes—prices will remain affordable for pizza operators.

5. Gift card use will skyrocket

This fall both Pizza Hut and Papa John's began replacing their gift certificates with re-loadable gift cards. The magnetic-strip cards can be used at any of either chain's stores anywhere in the U.S. because electronic transaction processing firms ensure everyone's money goes exactly where it's supposed to go.

Unlike a gift certificate, if the customer loses the card, it can be replaced with the value intact. And if the customer doesn't use the card's full value in a given transaction, the balance remains on the card, keeping the operator from having to give back cash change. Highly encouraging are surveys done by other retailers showing gift card recipients tend to spend more than the amount given to them on the gift card.

The best news for this year is that such programs are becoming highly affordable for smaller operators, too. Not only are card prices cheaper, the in-store technology required to run such programs is decidedly low tech.

Perhaps the paperless society has moved a step closer to reality.


Topics: CiCi's Pizza , Crime , Independent Operation , Little Caesars , Marketing , Papa John's , Papa Murphy's Take 'N' Bake Pizza , Pizza Hut , Pizza Toppings


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