The Pizza Franchise Industry
Pizza franchises are often considered part of the general fast food franchise industry. Nevertheless, the pizza franchise industry has grown so much over the years that it warrants its own section in our comprehensive food franchise report.
According to the Pizza Power 2013 State of the Industry Report from PMQ Pizza Magazine, the pizza industry is mirroring the recovery of the overall restaurant industry. The report shows a third consecutive year of growth with annual sales of over $36 billion.
Commodity prices, particularly milk, cheese and wheat, have widely affected the industry in recent years. If commodity prices rise, as they are expected to do through 2017, pizza franchises and independent operators may have to consider raising prices to offset the increase, or find creative ways to absorb extra production costs, such as offering different menu items.
Operating a pizza franchise provides numerous advantages for franchisees versus their independent pizzeria counterparts. These advantages include an established business model, access to a larger pool of resources, and the marketing benefits that come with the experience and branding of a recognized pizza provider, all of which are evidenced in sales numbers. Although independent pizzerias outnumber franchise counterparts, pizza chains account for 60 percent of pizza sales in the U.S. while only accounting for 47 percent of the total number of pizzerias.
What is an emerging trend in pizza franchising?
The pizza franchise industry is already one of the most diverse when considering how the industry delivers product to customers. The four current modes are: sit-down, delivery, carryout and take-and-bake. A fifth method of delivery is now emerging. Could the pizza guy be learning something from the ice cream man?
Food trucks are a hot trend in the general food industry, and pizzerias are starting to see their relevance to better serve customers in new ways. The benefits of using a food truck/mobile kitchen can be plentiful:
- Creates potential new revenue streams via impulse purchases and catering opportunities
- Enhances brand marketing as a rolling billboard
- Opportunities to try out new locations
- Gives new customers a chance to sample the pizzeria’s goods
One variable franchises will have to consider before initiating a mobile kitchen strategy is cost. Scott Iversen, Toppers Pizza's director of marketing, says their first truck was built for approximately $160,000 but could have possibly cost less. Owners who choose to embark on this venture will have to first decide whether they want to purchase a new, used, or conversion made trailer, truck or van. It’s important that owners of pizzeria mobile kitchens make decisions with maintenance and repair requirements and costs in mind.
The most well-known franchises currently haven’t adopted this method of delivery though if the model proves successful for other pizzerias it will undoubtedly soon become part of the mainstream pizza franchise industry.
Looking Beyond the U.S. Border
As of July 2013, 52 percent of Domino’s Pizza franchises are outside of the United States. That statistic underscores how important international development has been for pizza franchises. In which countries are pizza franchises finding a less saturated yet promising market? Here are a few:
Domino’s, Papa John’s, Little Caesars, California Pizza Kitchen, Pizza Hut and Sbarro are among the franchises that want a piece of the action in India. In fact, India is such an important market to Pizza Hut’s parent company Yum! Brands that it spun its Pizza Hut India division off into a standalone business segment—a move only previously done with China.
Unsurprisingly, China is a country that many franchisors would love to gain a piece of the pie in. Pizza Hut is currently the largest pizza chain in the country with Papa John’s following. Challenges for pizza franchisors entering the Chinese market include a traditional Chinese diet excluding dairy products.
Russia is another country pizza franchises are looking into for expansion opportunities. The variety of offerings is important in Russia, where franchises often compete with Asian food restaurants for business. As a result, pizza franchises also commonly offer items such as fish soup, pulled-pork pasta and borscht.
“Local knowledge and ownership are critical to our success overseas,” says J. Patrick Doyle, Domino’s CEO. The same applies to other franchises, which often base much of their success on understanding the local palate.
Successful pizzerias have to tailor their wares to fit local tastes and pizza franchisees benefit from pizza’s already robust reputation as one of the most versatile meals in the world. Pizza toppings and combinations are limitless, which works well with adaptations for international expansion. Consider this list of popular pizza toppings around the world:
- Russians enjoy red herring pizza or mockba pizza, a topping comprised of a combination of sardines, tuna, mackerel, salmon, and onions
- Brazilians have a preference for little or no sauce on their pizzas, with popular toppings such as fruit, corn, potato sticks, ketchup, mustard and mayo
- Australians enjoy shrimp and pineapple as well as barbeque toppings
- In Costa Rica, coconut is a popular pizza topping
- A number of Japanese consumers top their pizzas with eel and squid
- In India, people like pizza topped with paneer (an unsalted cheese) and a variety of peppers
Pizza Franchising Information
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. Consider this snapshot of one factor before a brief look at a couple of financial aspects to research for your franchise investment.
FDD Profiles for Sample Pizza Franchises
Variety of Models
In response to the credit crunch that many prospective franchisees are facing, several franchises have developed different franchise models. These different franchise models are designed with the goal of allowing prospective franchisees a somewhat easier path to ownership.
For example, around 2009 Pizza Hut unveiled a Delco Lite model (“Delco” is Pizza Hut corporate shorthand for delivery and carryout). The Delco Lite Pizza Hut model is a more streamlined version of the company’ s traditional “Red Roof” style and allows the franchisee to open a location without spending nearly as much.
The Delco Lite model also helps with the hunt for real estate. Many shopping centers and strip malls have higher vacancy rates since the recession. Franchisees can target these areas for development since the size of a Delco Lite is comparable to a retail outlet.
If you are interested in a certain franchise brand, be sure to research what kind of models they offer. The franchise may have one that makes your investment more reasonable based on your particular situation.
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
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.
In addition to regularly assessed fees, other fees are charged on an “as needed” basis such as audit fees or costs for additional training. Prior to investing, prospective franchisees should do their research and carefully review a franchisor’s FDD for more detailed information on all systems, procedures and costs.