Image Source: Blaze
The pizza industry is flat-out sizzling! Or is it stuffed? Call it how you want, but pizza is hot! Literally, and well, figuratively. There are some pretty interesting statistics about pizza. Here are a few from the latest Pizza Industry Analysis at Franchise Help:
Americans eat on average 100 acres of pizza daily or 350 slices per second. In addition, 93 percent of Americans eat at least one pizza per month, easily making pizza the number one dinner choice in the United States. With such mass appeal, it is no surprise that this $40 billion industry (measured by sales per year) makes up approximately 17 percent of all restaurants in the nation…there are approximately 65,000 pizzerias in the country.
The story of pizza in the United States may be an old one, and some date its origins as far back to Italian immigrants in Chicago and New York around the turn of the 1900s. Even the beginning of Yum! Brands’ (YUM) Pizza Hut in the late 1950s suggests that pizza can be considered “old” news. But is it? Here are some more stats from Franchise Help that suggest pizza isn’t so old after all:
Amongst the population of American families with children 18 and under, 68% of their occasions with pizza involve children. In fact, a recent Gallup Poll demonstrates that children of ages 3 -11 claim to prefer pizza out of all lunches and dinner selections. However, despite this concentration on American families, pizza has proved to be popular among people of all ages up to 65.
From our tally, the pizza industry can be sliced into five pieces: sit-down dining–Pizza Hut, among many others; delivery—Papa John’s (PZZA), Domino’s (DPZ); carry out–Little Caesars; take ‘n bake–Papa Murphy’s (FRSH), California Pizza Kitchen (CPKI); and fast casual–Buffalo Wild Wings’ (BWLD) PizzaRev, Blaze (pdf) and RAVE Restaurant’s (RAVE) Pie Five, among many others. The industry remains dominated, however, by the “Big Four”—Pizza Hut, Domino’s, Papa John’s, and Little Caesars. As many as two thirds of industry sales come from just those four franchise chains.
From our perspective, the top franchises couldn’t be doing better. During the first quarter, domestic company-owned stores at Domino’s showed nearly 16% same-store-sales expansion, while domestic franchise stores performed equally as well. The company continues to add restaurants to its system, opening 110 on a system-wide net basis in the first quarter alone. Results at Papa John’s during the March quarter-end were great. The company witnessed domestic company-owned restaurant comparable sales growth of ~8%, while North American franchised comp growth came in at 6%, as it grew system-wide net store count by 36 during the period.
Yum! Brands’ Pizza Hut has been overshadowed by the food scandals plaguing the company’s KFC brand in China and Taco Bell’s resurgence in the US, but the chain is still hanging in there after all these years. Pizza Hut Division system sales advanced 2% in the first quarter thanks entirely to unit expansion, while same-stores sales performance in the US was off a mere percent. Holding the line is actually a win for the company, however, especially in light of the fantastic performance at Domino’s and Papa John’s.
Though the top chains are doing great, the next innovation in pizza will be fast casual–think of the service models of Chipotle (CMG) or Panera (PNRA), not quite fast-food but certainly not full-service by any means. For the past few years, companies have been racing to develop new fast-casual pizza concepts, and some estimates suggest that there could be more than 2,000 fast-casual pizzerias in service in the US in just the next five years.
Who are the major players? Live Basil Pizza (6 restaurants, October 2014), PizzaRev (19), Pie Five (26), Project Pie (13), Uncle Maddio’s Pizza Joint (25), Your Pie (21), Pieology (32), MOD Pizza (22), Blaze Fast Fire’d Pizza (40), the Pizza Studio (15), Pizzeria Locale (2). There are many, many more, and all believe they have what it takes to win in fast-casual pizza. Everyone far and wide wants to be the “Chipotle of pizza.”
But the way we see it–there will only be a few winners in pizza. First, at the right price, Domino’s and Papa John’s are executing incredibly well, and neither is worried about the fast-casual trend. Both are capitalizing on a digital and mobile focus, and it’s been working. In many cases, Domino’s and Papa John’s have the “right” business models for millennials, who want the ease of ordering on their phone or even smart watch.
As for fast-casual participants, we’re anxiously awating the looming initial public offering of Blaze. The company has big plans and believes it could reach 2,000 units domestically and another 1,000 in non-US markets. That would put it #5 in the pizza industry. Bold ambitions for sure, but the entity certainly has the backing. From Maria Shriver and movie-producer John Davis to Boston Red Sox co-owner Tom Werner and even Lebron James, we think Blaze has everything it needs to be a long-term winner in the space. At the very least, Lebron James has reach as a spokesperson, and as an investor, he may simply do it for free, a huge marketing advantage for Blaze.
Second, Buffalo Wild Wings’ PizzaRev has the backing and expertise of a management team that has already made it big with a relatively “dated” concept—beer, wings and sports. If Buffalo Wild Wings has been successful in the ultra-competitive and crowded bar-and-food space, we don’t think the managerial “grit” required in fast-casual pizza is much difficult. Though its ambitions in fast-casual pizza aren’t as large as that of Blaze, Buffalo Wild Wings seems to be taking a much more prudent approach to expansion, and that may be beneficial in the end.
Pieology is also growing fast, and Pie Five has the backing of RAVE (formerly the Pizza Inn), but the latter’s ~$150 million market capitalization isn’t much backing at all, even if its balance sheet is in decent shape ($2.2 million in cash and no bank debt). The rest on the list are long shots, in our view, but it will be at least a few years before the pack begins to separate. It’s almost a certainty, however, that not all of these start-up fast-casual pizza concepts will be the next “Chipotle of pizza,” and some will either have to shutter operations or be folded into a competitor.
One thing’s for sure though: we’ll be hearing a lot about fast-casual pizza in coming years. Blaze is our top pick once it comes to market followed by Buffalo Wild Wings, which could very well turn into the McDonald’s (MCD) of the “Chipotle of pizza.” Remember when Chipotle was under the Golden Arches’ wing? How times have changed.