ANALYSIS: Once conquerors, now competitors

 
Aug. 23, 2004

My recent trip to Australia dispelled at least one assumption about the land Down Under: that Australian pizza eaters and the industry that serves them are mirror images of their American counterparts.

Learning that same lesson has been a struggle for Pizza Hut and Domino's Pizza. According to former and current executives, and franchisees of those chains, only in the last decade or so have the two giants solidly grasped that American pizza doesn't play as well in Australia as it does here.

Though Pizza Hut ruled Australia in the 1970s and '80s, and Domino's hit the ground running when it arrived in 1983, observers say neither chain learned quickly enough to adapt its products, services and operating practices to the country's culture. That left the door open for Australian upstarts Pizza Haven (1984) and Eagle Boys (1987), and both are posing stiff challenges for the foreign invaders.

Local leaders, local tastes

John Kozik, a former executive with Pizza Hut Australia, said the company's halcyon days benefited from to key things: pizza's novelty and Pizza Hut's lack of real competition. However, a major chink

Steve Coomes, Senior Editor

in the chain's armor, he said, was its failure to recruit local executives to run its operations. No one knows the territory better than a local, apparently.

Don Meij, CEO of Domino's Pizza Australia, and the chain's master franchisee in Australia and New Zealand, said Domino's key mistake during its first 10 years there was "treating this like the American market."

Like Americans, Aussies liked pepperoni, sausage and mushrooms, but they wanted more variety, Meij said. "Australians, I believe, have a better developed palate than Americans when it comes to pizza. Those flavors and those innovations have grown out of the desire for specialty pizzas."

Meij said Domino's also struggled to understand Australia's union-centered labor situation, not to mention the pay rates union members demanded. Unlike in the U.S., where delivery drivers made the bulk of their earnings in tips, that model didn't apply to Australian drivers. Tipping is not part of the country's culture, and that left the onus on the operators to pay much more, which hurt profitability.

Today Pizza Hut is facing some of its toughest times in Australia, especially in Victoria, where independents rule. According to Danny Diab, CEO of the Diab Group, which franchises multiple Pizza Huts, there are 1,500 independent restaurants in Victoria alone.

"As a percentage of that market, Pizza Hut is very small; over the years our market share has been eroded," Diab said. "Repatriating those customers and rebuilding brand equity has been an ongoing challenge."

Keeping stores open has been difficult there as well, as nearly two dozen Pizza Huts stores have closed there in recent years.

Still putting up a fight

Domino's unit growth over the last few years has been solid and steady. A recent acquisition and conversion of 16-unit Big Daddy's Pizza pushed the company over the 290 mark, and Meij said store number 300 will open this fall.

Whether Pizza Hut can stop the bleeding in Victoria remains to be seen, but its strength in large markets like Sydney, where it has 90 units, is solid.

Still, in a crowded market, can the American chains thrive for the long term? That depends largely on how one interprets "thrive."

If it means unit growth, then all the major players have a tough row to hoe. Much like the American market, one company's growth is another company's loss.

Worse, Australia's population is 20 million people and barely growing. Couples here have so few children that the government pays bonuses for those they have, plus tight immigration standards limit outsiders coming in. That means the pizza-eating population here is about as large it's going to get for the time being.

If "thrive" means profitability, then that begs the question of how much profit? Count your blessings, American operators: The combination of the price war and high wages here make margins thinner than a low-carb crust. High-volume sales do help, but that logic goes only so far if Australians are eating as much pizza as they ever will. The only hope, Diab said, is that operators will abandon the price battle and allow the cost of pizza to rise to a reasonably profitable number.

Lastly, if "thrive" means innovation, then, yes, American operators could grow in Australia - even with American ideas.

Since low pizza prices have so conditioned Aussies to use carryout, I'm wondering if take-and-bake pizza would work there. Such a price-conscious lot would surely consider a pizza that's $1-$2 cheaper if they baked it themselves -- especially once they taste the quality.

Despite scoffers who said the concept would never work in America, 820-unit Papa Murphy's Take 'N' Bake Pizza continues its steady march across America. The chain's goal of 1,000 stores by the end of 2005 is more than possible.

Could take-and-bake pizza work in the Australian market?

I think it could.

But then again, we all know what can happen when Americans assume too much about Australia.

Read related stories about the Australian pizza market
* The Battle for Australia
* Eye-opening odyssey 'Down Under'
* Pizza Delivery 'Down Under'
* PROFILE: John Kozik


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