Have people had enough pizza? That’s the question Eric Gonzalez, a senior restaurant research analyst at KeyBanc, posed to the Restaurant Finance & Development Conference audience today, November 14, as he detailed challenges facing the quick-service pizza segment but noted pizza is ultimately “among the cheapest ways to feed your family.”
Four major chains—Domino’s, Pizza Hut, Little Caesar’s and Papa Johns—generate more than half of the segment’s revenue, with an almost even split between carryout and delivery sales, said Gonzalez. During the five years preceding the COVID-19 pandemic, the category’s growth in the United States was almost entirely driven by Domino’s, and in the ensuing years Domino’s and other chains continued to pull share from small multi-unit brands and independent restaurants.
“Peak pizza,” however, when same-store sales growth for Pizza Hut, Domino’s and Papa Johns reached upwards of 16 percent and in some cases nearly 30 percent, came between the second quarter of 2020 and the first quarter of 2021, noted Gonzalez. That was reflected in average unit volumes in 2021, which for Domino’s hit $1.3 million in the U.S. and for Papa Johns was $1.07 million for its stores in North America. Recent category performance, though, shows non-pizza chains surpassing pizza chains in total AUV growth since the start of the pandemic.
That AUV growth, said Gonzalez, is largely driven by price increases, which non-pizza chains implemented at higher rates while the big pizza players lacked that same pricing power. Papa Johns and Domino’s raised prices between 8 and 9 percent since 2021, while burger chains such as Wendy’s, Jack in the Box and McDonalds “raised prices cumulatively 20 to 30 percent,” said Gonzalez.
Pizza consumers, continued Gonzalez, who are largely ordering online, can compare prices across platforms, manage the check lower and will “abandon their carts” if the order gets too expensive. Drive-thru chains, meanwhile, have a more “captive” audience and can effectively pass higher food and labor costs on to the consumer without sacrificing traffic. “Once you’re in the drive-thru, you can’t really back up,” he said.
Though challenges persist in the segment, Gonzalez said pizza’s strength likely won’t wane too much. Large pizza chains, he noted, are among the most digitally native brands in the fast-food industry, meaning they can effectively target their marketing, gain maximum benefit from loyalty programs and capture consumer insights that meaningfully drive traffic. Menu innovation is on the rise, with Papa Johns, for example, successfully introducing items such as Papadias, Papa Bowls and Garlic Epic Stuffed Crust Pizza. And of course, said Gonzalez, the value proposition of pizza is hard to match.
Is coffee going cold?
Cold beverages made up more than 80 percent of sales for Dutch Bros Coffee last year, and for Starbucks it was 64 percent. That’s a notable shift in U.S. coffee consumption, said Greg Francfort, lead restaurant analyst at Guggenheim Securities, and happens to line up well with the structural advantages of a small-box service model and menu mix.
Those smaller footprint, drive-thru heavy concepts—Dutch Bros, Scooter’s, Aroma Joe’s, 7 Brew and about a dozen others—are “reinventing coffee,” said Francfort and quickly growing. What had traditionally been a 2,000-square-foot coffeehouse model with a dining space and lots of seats has evolved into a largely kiosk-adjacent format at about 600 square feet—making fast expansion more feasible.
Related: Emerging Franchise 7 Brew Wants to Change the Drive-thru Coffee Experience
Dutch Bros hit 800 stores this fall, and it’s estimated it will have close to 1,000 units by year-end 2024. Scooters and Caribou are likewise moving at an impressive clip, with the latter signing franchise agreements to put more than 300 units in development domestically. Francfort estimated the number of small footprint stores will top 4,100 at the end of next year, but white space remains.
Store density data suggests the southeastern United States is “extremely underpenetrated,” said Francfort, relative to the northeast. Texas, in particular, has seen aggressive in-filling from Dutch Bros and Scooter’s, he continued, but “as these chains get bigger, they’re going to run into each other a little bit more,” which makes careful development planning paramount.
More hype than bite
Over the last 12 years there’s been a 200 percent increase in investments in disruptive food technologies, representing billions of dollars.
“One of the only things we haven’t seen is a banana hot dog, and I hope it stays that way,” said Thomas Bailey,a senior consumer foods analyst atRabobank. Those supposedly disruptive foods, ranging from insect proteins to even plant-based meats, “have struggled to survive on the plate,” he continued, without much actual change in what people are consuming.
No one really wants their food disrupted, Bailey explained, and technology investors have conflated their success in that arena with thinking they’ll get the same results in the food industry. Incremental innovation, meanwhile, is “really the driving force” for restaurant brands.
Take Taco Bell’s Doritos Locos Tacos. Its introduction put top line sales up 13 percent and a billion units were sold in the first year, said Bailey. That type of innovation is “less risky and has much more immediate benefits.”
The Restaurant Finance & Development Conference, presented by the Restaurant Finance Monitor, Franchise Times and Food On Demand, runs Monday, November 13, through Wednesday, November 15, at the Bellagio in Las Vegas.