Winners and Losers in 2005

Jan. 5, 2006

Winners in 2005

The U.S. Pizza industry, which turned 100 in 2005

It's doubtful Italian-born Gennaro Lombardi ever envisioned the effect Lombardi's Pizza would have on his adopted homeland. When he opened in 1905 to serve New York's working class, surely he never considered his coal-fired pizzas would spark a culinary love affair that would become a $30-billion-a-year food habit for Americans.

It's fitting that 100 years later, a handful of pizzaioli are opening shops dedicated to making pizza much like Lombardi did a century ago and, of course, like it's made in Italy today. Operators at shops like Pizzeria Bianco (Phoenix), Antica Pizzeria (Los Angeles), Una Pizzeria Napoletana (New York City) and Il Pizzaiolo (Pittsburgh) have sparked a rebirth of artisan pizza, pies made by hand from the purest ingredients, and often by the owners themselves. (Read also New York Pizza Show roundup: Show-stopping seminars.)

Papa John's

In 2004, underwhelming comparable-store sales and profits dragged Papa John's stock below $20 and led its leaders to slash 13 percent of its corporate staff. John Schnatter, the chain's founder, chairman and then-chief executive and president, said if he couldn't get Papa John's turned around, he'd turn over leadership to someone else. Schnatter made good on his word in April, when Nigel Travis, former chief operating officer for Blockbuster, was hired as Papa John's new president and CEO. To the pizza chain's credit, its sales momentum had turned positive in the months prior to Travis taking the helm (and Schnatter becoming executive chairman), but his influence ever since has been substantial. (Read also Schnatter mulls stepping aside at Papa John's Pizza and Papa John's Travis diving, not wading, into new CEO job.)


They grow up so fast ...

* Papa Murphy's hit 900 units in November.

* Hungry Howie's Pizza hit 500 units in March.

* CiCi's Pizza broke the 500 barrier in the spring.

* The North America Pizza & Ice Cream Show drew a record 4,500 attendees (exhibitor personnel aren't counted), making it the second-largest pizza-focused show in the United States. The largest remains the venerable International Pizza Expo (held annually in Las Vegas), which draws more than 6,000 attendees.

2005 the company posted robust comp gains and is likely to report record revenues. Its store count broke the 3,000 barrier and its revived stock hit an all-time high of $60 in late December. The launch of several new pizzas, including the Perfect Pan Pizza and the Spicy Meatball Pizza, are also credited with rejuvenating Papa John's. (Read also Papa John's launches 'Papa's Perfect Pan' pizza and Papa John's launches Spicy Meatball pizza).

Papa Murphy's Take 'N' Bake Pizza

In November, Papa Murphy's opened its 900th store and thumbed its nose at everyone who said — and, unbelievably, continues to say — take-and-bake pizza will never be a big thing. Its management's prudent and patient growth pace has made it a winner, and its eastward advance is proving its value to audiences many said would never be interested in baking their own pizzas. (Read also Papa Murphy's opens 900th take-and-bake pizza store.)

Management predicts store No. 1,000 will open in early 2006, which appears to be a foregone conclusion.

Hurricane victims helped by pizza industry

Few will argue that when disaster strikes, restaurants are some of the first businesses ready to help. Whether that's because operators are naturally inclined to serve others or because prepared food is a most precious commodity during such calamities isn't clear. What's certain is many pizza operators unselfishly shared their time, talents and treasures to feed victims of this year's hurricanes and help reopen pizzerias closed by those storms. (Read also HURRICANE KATRINA: Regrouping, rebuilding and reopening and A hurricane of help.)

Losers in 2005

Operator profits

It's a good thing cheese was largely affordable in 2005, because sky-high energy costs are hurting everyone's food costs. Hurricane damage to petroleum-centered industries in the Gulf Coast states not only drove up the price of gasoline, but natural gas used in the vast majority of pizza ovens nationwide as well. The world's two largest resin plants are based near New Orleans, and Hurricane Katrina's redecoration job there created a worldwide resin shortage. The result is pizza operators will pay more for their trash bags and delivery bags for some time to come.

With diesel fuel hitting record highs, food suppliers and distributors are passing along increased costs in

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the forms of price boosts or fuel surcharges. Most pizza operators, however, are holding the line on their own prices, concerned that customers will shy away from increases.

Pizza Inn

Despite the dark cloud over beleaguered Pizza Inn, new chief executive Tim Taft promises the chain is building the foundation for a turnaround. Taft was hired in March to get the long-foundering ship steaming again, but the job came with the duty of cleaning up the mess made by his predecessor, Ronald Parker, who was sacked in late 2004. (Read also New Pizza Inn CEO eager to start turnaround.)

Taft built an impressive record as COO at the 745-unit Whataburger chain, and he's confident he can spur similar sales growth at Pizza Inn. Additionally, a new Pizza Inn prototype unit was introduced this fall, and Taft appears to be making headway in repairing the wide and craggy rifts between headquarters and some franchisees. (Read also Delayed Pizza Inn annual meeting convenes, CEO promises brighter future.)

For the time being, however, the publicly held chain will likely post a loss for 2005 due to negative comps and two ongoing and costly legal battles with Parker and former vice president Keith Clark. (Read also Parker, fallen Pizza Inn CEO, added to compensation lawsuit.)

Chuck E. Cheese's Pizza

Despite some 60 percent of its sales coming from food and beverage, Chuck E. Cheese's has endured a rough year because of revenue shortfalls in its amusements component. According to regulatory filings, the company believes rising gas prices cut disposable income patrons commonly spent in its nearly 500 "eatertainment" facilities in the U.S. Still, its stock price remains steady, and it likely will post a modest profit for the year.

Delivery drivers

Let's face it: Even if tips are good and operators have boosted reimbursement rates, drivers are paying about 50 percent more to operate their vehicles this year than last. High prices for gas and oil changes are obvious villains, but watch out for rising tire prices.

Though the number of operations charging for delivery has increased substantially, not all of those fees are going to help offset drivers' expenses. When Papa John's 570 corporate units began charging $1 for delivery this year, a spokesman for the chain said most of the fee was being used to offset rising food and insurance costs, not to pay drivers more.

Delivery driver union

The Association of Pizza Delivery Drivers failed to unionize any pizza shops in 2005. Despite a growing membership of several hundred drivers, APDD members remain unsuccessful at getting the number of votes necessary to establish a union at a pizza shop.

A review of predictions for 2005

1. The cheese price roller coaster will be much smoother this year, but expect prices to remain above average while supplies remain firm but balanced.
Reality: I was half right here. Prices did remain slightly above average, but dairy market jitters kept prices somewhat volatile. The good news was prices peaked at $1.75, 45 cents lower than the 2004 record, and the common swings weren't drastic.

2. While continuing to promote their core pizza products most heavily, more chains will add healthful offerings, such as salads. Expect to see these offerings bundled in family meal deals.
Reality: I can find no firm evidence to suggest this happened on even a modest scale.

3. Despite high cheese prices, operators of all size will experiment and offer broader and more vividly flavored cheese combinations on pizzas.
Reality: Some operators stepped out and experimented with more boldly flavored cheeses, but the key word there is some, rather than many. Pizza, by and large, is still pizza.

4. High gasoline prices and the increase of crimes against delivery drivers will result in the formation of at least a half dozen driver unions next year.
Reality: I was clearly out of touch with reality. As mentioned above, APDD failed again this year to form a union. What's sad, however, is gas prices are much higher than anyone expected, and crimes against drivers appear to be on the rise.

5. Pressure from drivers to increase reimbursement will drive the increase of delivery charges at large pizza companies.
Reality: Pizza companies of every size added delivery

New toys in 2005

* PiStar Communications began a trial of its satellite-guided pizza delivery and dispatch system. By using GPS, the system gives drivers audible point-to-point directions to delivery destinations. Plus, via a POS terminal screen, operators can view each driver's progress and exact location during a run, which better enables them to dispatch upcoming orders.

* SuperFast Pizza introduced two innovative mobile pizza kitchens to Fond du Lac, Wis. Call center personnel receive orders via phone or the Internet and then dispatch them to vans containing onboard pizza ovens, refrigerators and ingredients for several types of pizza. Orders typically arrive at customers' doors in less than 20 minutes.

charges this year, but more often it was gas high prices and their effect on food costs — not driver complaints — that drove the change.

Predictions for 2006

1. Rising energy prices will help increase pizza sales. Analyst Dennis Lombardi predicts even high fuel prices won't make consumers dine out less this year, rather they'll seek out value-oriented food options. The National Restaurant Association gave a similarly bullish prediction that sales for the entire foodservice industry will hit $511 billion in 2006, an all-time record.

2. Rising energy prices will continue to increase food cost. Companies at all points in the food chain either increased prices or tacked on surcharges to reflect rising production and delivery costs. Since these increased charges are not visible to the enduser, the risk of making the middleman — the pizza operator — pay more is relatively risk free.

3. Papa Murphy's Take 'N' Bake Pizza will break the 1,000-store mark. OK, this is a gimmie, but neglecting to mention this would overlook the staying power and potential of take-and-bake pizza. It is, and will remain, the strongest growth category within the pizza segment for years to come.

4. A continued emphasis on dine-in operations at Pizza Hut. As chain pizza has become more standardized over the past two decades, the need for differentiation has become ever crucial. And one facet of Pizza Hut's business its nearest competitors don't have is dine-in. This year alone the chain has moved boost dine-in business several ways including its family-centered "Gather around the good stuff" advertising campaign, its rollout of family-style board games at 3,250 of its U.S. units, and the continued expansion of its Italian Bistro model (essentially a modernized Red Roof with an expanded pasta and sandwich lineup).

Not only are families dining out more often, rising energy prices are leading them to make more value-conscious choices. That plays into the hands of Pizza Hut nicely because the cost of going to one of its parlors is appreciably lower than a visit to a casual-dining competitor such as California Pizza Kitchen.

5. Cheese prices will remain low ... for now. Given that USDA believes block prices will average about $1.35 for the year, my echoing its forecast isn't exactly bold. But I make that point with this caveat for 2007: Cheese prices are bound to rebound. Dairy farmers are making very little profit with cheese at these prices, so it's inevitable they'll move to shrink their herds some, tighten supplies and send prices moving upward again.

The current structure of the dairy industry will nearly ensure this happens as ongoing farm closures/consolidations (read "reduced fragmentation due to fewer dairy farmers) will allow a smaller number of decision makers to have greater control over larger herd numbers.

Topics: Domino's Pizza , Marketing , Operations Management , Papa John's , Papa Murphy's Take 'N' Bake Pizza

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