Food Franchise Industry Reports:
Pizza franchises are a part of the general quick service restaurant (fast food) industry. There are four main types of pizzerias:
- Full service: A sit-down restaurant where the food is served at the table. Many full service pizzerias also offer take-out and delivery services.
- Limited service: Usually customers order, pay and collect their food at the counter. There may be casual diner-style seating available.
- Non-traditional location: Customers are served at non-traditional locations including office buildings, shopping malls, stadiums, airports, zoos, convenience stores and similar retail facilities. Usually take-out or delivery services are offered. There may be sit-down facilities depending on the location.
- Take-and-bake: Customers are able to watch as their pizza is made in the store, and usually it is taken home to heat and eat. Some restaurants of this type are set up for immediate cooking and for patrons to eat on-site.
The popularity of pizza in the United States began in earnest with the return of American troops to the U.S. after being stationed in Italy during World War II. The boom in demand allowed pizzerias to open all over the country between the mid-1940s and early-1960s. Franchises that were founded in this timeframe that would become mainstays and market leaders in the pizza business include Pizza Hut, Little Caesars, and Domino's.
The outlook for the pizza industry is positive despite several challenges, including fluctuating commodity prices. Developments such as the increased usage of mobile internet devices and the popularity of social networking sites have helped pizza franchises keep pace with the demands and landscape of the marketplace. Additionally, consumers have become even more budget-conscious over the past several years leading some diners to trade down from more upscale restaurants to other options, which include pizza establishments.
Pizza is at the top of the list when it comes to variety in product offerings. The versatility of the Italian-based food—a characteristic that continues to be explored through new recipe combinations—has allowed pizza to continually increase in popularity around the world. According to a report from Technomic, 40 percent of consumers eat pizza at least once a week compared to 26 percent two years ago.1
The more popular types of pizzas include:
- Chicago Style: Commonly called deep-dish pizza, made with a heavy, thick crust and large amounts of cheese, sauce and toppings.
- Detroit Style: A square deep-dish pizza served crispy with sauce on top and toppings such as pepperoni and olives beneath.
- New York Style: Usually a large, wide, thin and foldable pizza.
- Neapolitan: Very traditional and prepared in a unique way to preserve the original flavors of ingredients. Pizzerias making this style of pizza must undergo a certification process. VPN Americas, the official American organization representing the Associazione Vera Pizza Napoletana (AVPN) is a nonprofit association that oversees the craft of making Neapolitan pizza.
In addition to pizza types, chefs have explored numerous toppings. Consider some of these new combinations recently announced by Pizza Ranch:
- The Outlaw Pizza: Hot banana peppers, smoked pepperoni, Italian sausage, mini sweet peppers, green Anaheim peppers with Pizza Ranch's original sauce and cheese blend.
- Sundance Salad: A blend of hot banana peppers, mini pepperoni, mini sweet peppers, green Anaheim peppers and shredded parmesan cheese topped with a parmesan peppercorn dressing.
- Cowboy Cajun Corn: A creamy corn mixture with Cajun spices to complement onions and red and green peppers mixed with crisp fresh corn.
In the U.S., chicken (in various forms such as buffalo-style) has overtaken pepperoni to become the most popular pizza topping according to Technomic, reflecting the rise of chicken product popularity across all segments of quick service restaurants. Artisan-style (specialty) pizzas are also gaining in popularity. Examples of artisan-style pizzas include sweet tomato and ricotta, Tuscan salami and roasted veggie, and chicken and bacon carbonara.
The diversity of pizza toppings is only magnified when viewed on a global scale. Here are some samples of popular international pizza topping combinations:
- Indians often enjoy pizza topped with pickled ginger, minced mutton, and cottage cheese.
- Russians enjoy red herring pizza or mockba pizza: a topping comprised of a combination of sardines, tuna, mackerel, salmon, and onions.
- Australians enjoy shrimp and pineapple as well as barbeque toppings.
- In Costa Rica, coconut is a popular topping.
- Many Brazilians have a preference for green peas on their pizza.
- Japanese consumers top their pizzas with eel and squid.
- The Dutch enjoy a Double Dutch: double meat, double cheese, double onion.
Moving Beyond Pizza
Traditionally, pizza franchises have only offered pizza and closely related items like breadsticks and other Italian dishes to their customers. In recent years however, many pizza franchises have increased menu diversity by launching new product lines, such as salads, pastas and chicken dishes, to further compete with other lower-cost food chains in a bid to retain or gain customers.
The addition of healthier items to pizza franchise menus can be attributed to an increased focus on healthy eating that has overtaken the marketplace in recent years. According to a National Restaurant Association (NRA) survey, seven out of 10 consumers say they are trying to eat healthier when eating out now when compared to eating out a few years ago. That finding is mirrored by restaurant operators where two-thirds of respondents to the same NRA survey said their guests are ordering healthier items and paying more attention to the nutritional content of their food than just a few years ago.2
In response to the increased focus on healthy eating, pizzerias have taken steps to cut trans-fat from their food and provide options to patrons such as low-carb and gluten-free items.
One franchise where the expansion of its menu has caused a shift in company policy is Domino’s. Known as “Domino’s Pizza” since its inception, the company announced in summer 2012 that it is formally dropping the word “Pizza” from its name. When questioned about the move, Domino’s chief marketing officer Russell Weiner remarked, “So much of our menu is beyond pizza right now that we feel like we're more than just a pizza place.”3
It’s important to note that the expanded menu options in pizza franchises aren’t restricted to just food. Within the past couple of years, a number of Pizza Hut locations began applying for a license to sell beer at their restaurants illustrating that pizza franchisors are looking at every angle to expand their operations and provide consumers with what they want in one place.
Rethinking the Model
Some pizza franchises are rolling out changes to entice new franchisees and better adapt to consumer behavior.
For example, Pizza Hut unveiled its “Delco Lite” model about three years ago. The Delco Lite Pizza Hut model is a smaller, more streamlined version of the company’ s traditional “Red Roof” style and allows the franchisee to open a location without spending nearly as much.
A Delco Lite (“Delco” is Pizza Hut corporate shorthand for delivery and carryout) is about half the size of the traditional Pizza Hut model and costs about half as much to build. A traditional “Red Roof” Pizza Hut can require an initial investment of well over two million dollars whereas investing in a “Delco” model can initially cost around $900K (note: figures are from the franchisor’s Franchise Disclosure Document).
The compact nature of the newer model also helps with the franchisee’s hunt for real estate. Many shopping centers and strip malls have vacancies since the recession and the size of a Delco Lite is comparable to a retail outlet. This increases the number of location options for franchisees.
The new model appears to be working. According to a Wall Street Journal article, Pizza Hut has gone from a net attrition of 50 stores a year, to a net gain of 150 a year in the past three years.4
Pizza Hut isn’t the only franchise looking at making changes to its franchise model to boost sales. Domino’s is also considering how customers order their pizza.
Domino’s chief marketing officer Russell Weiner divulged in a 2012 AdAge interview that 80 to 90 percent of Domino’s business was delivery a few years prior, however that number has decreased to roughly 70 percent. These figures were supported by a Technomic study that revealed carryout pizza has become the number one pizza format in the country, overtaking frozen pizza. Responding to this consumer shift, Domino's is making on-site locations even more appealing to carryout customers by adding big-screen TVs and comfortable seating for customers waiting for orders.
The pizza consumer shift towards carryout is also a factor in the rise of “take and bake” pizzerias. Since customers are more likely to come in to a location, giving them the chance to make their pizza to order on-site is a logical progression. Letting customers watch as their pizza is made is growing in popularity as well. Within its remodeling plans, Domino’s is also adding “Pizza Theaters,” which will give waiting customers the opportunity to watch pizzas being made.5
Important Note: The provisions and fees illustrated in this report are only the most common and not a complete listing. Please review the Franchise Disclosure Document (FDD) for all of the provisions and fees related to investing in a specific franchise.
There are several factors to consider when opening a franchise that go beyond finances. Here is a snapshot of a couple of those factors before a brief look at a couple of financial aspects of franchise investment.
Several pizza franchises have developed applications to reach consumers regardless of their location. Pizza Hut created the industry’s first mobile app (for the iPhone) in 2009. Since then, Pizza Hut has been followed into the market by others like Domino’s, which hit a never-seen-before $1 billion in digital sales from April 2011 to April 2012. To capture the attention and loyalty of repeat consumers, pizza franchises have also turned to social media. By using websites such as Facebook and Twitter pizza franchises are able to more effectively market to and broaden their customer base through special promotions along with the back-and-forth interaction for which social media was designed. Franchisees are assisted significantly by the presence of their franchise system in the execution of these marketing efforts.
FDD Profiles for Sample Pizza Franchises
Staffing and Training
Each pizza franchise offers training courses and material specific to their system. Franchisees often receive an operations manual, store operations manual, kitchen training manual, equipment specifications manual and counter service training manual. All training programs are split into two components: classroom training and on-the-job training. The franchise training covers hiring and training staff for a successful franchise. The franchisor also supplies necessary training equipment and is available to assist should any challenges arise. Franchisees should expect to cover relevant expenses when training, including staff expenses.
Investment costs vary for different franchises depending on the particular business system and execution requirements. The following charts demonstrate, by comparison, initial costs associated with opening one of the 10 sample franchises presented.
Initial costs associated with opening a franchise include the franchise fee, training expenses (such as travel and living expenses, not the actual training courses), grand opening marketing costs, and more. One major variable in the initial investment into a franchise is the cost of real estate. Some franchisors may not include land or real estate costs in estimates because of the price variation between locations and whether their franchise system requires a new rather than leased building.
Estimated Initial Investment Range for Sample Pizza Franchises
A significant item within the initial investment is the franchise fee. This part of the overall initial investment grants the franchisee the right to use the franchisor’s trademarks, service marks and other branding. It also gives the franchisee access to the franchisor’s business system, including training opportunities.
The length of the initial franchise agreement terms for the 10 franchise samples ranges between five and 20 years, with the most common term being 10 years. Throughout the length of the agreement there will be costs for being a part of the franchisor’s business system.
These costs include items such as royalty fees, charges for technical support and marketing costs. The most common is the royalty fee and below is a look at royalty rates for each of the sample franchises.
Royalties for Sample Pizza Franchises
In addition to the regularly assessed fees, other fees are charged on an “as needed” basis such as audit fees or costs for additional training. All prospective franchisees should do their research and carefully review a franchisor’s FDD for more detailed information on all systems, procedures and costs involved before investing.