Pizza Franchise Study

This report gives a brief overview of the US pizza industry and outlines the costs and fees associated with a typical pizza franchise. The data contained in this report was drawn from the Franchise Disclosure Documents (FDD), formerly known as UFOCs, of a representative sample of 20 pizza restaurant franchise chains and from published industry sources.

 

Industry Overview

Given the current straitened economic conditions the restaurant industry is proving resilient. Eating out in restaurants and the purchasing of take-out and delivery meals is an essential part of the American lifestyle. The convenience and value offered by the restaurant industry makes management of consumers’ day to day living easier. Research by the National Restaurant Association indicates that consumers, although worried about the economy, intend to continue their patronage of restaurants. It is expected that quick service, take out and delivery style restaurants will benefit at the expense of upscale and casual dining. It is predicted also that moderating gas prices and other commodities will mean that consumers may have more disposable income in 2009.

The US pizza market is a mature, developed market and highly competitive. Franchised pizza chains account for around 60% of the market. It is estimated that there are around 150 well known pizza franchises in operation and an unknown number of local and regional pizza franchises. While the pizza market experienced growth until 2007 when it reached a value of $34 billion, the financial downturn resulted in flat sales in 2008, a trend which is expected to continue for 2009. As well as moderating sales, franchise operators are facing a minimum wage increase from $6.55 to $7.25 per hour effective July 24, 2009.  On a more positive note, commodity prices are falling. The price of cheese, wheat and most pizza toppings has fallen in 2009. Also, the trading down by cash strapped consumers from casual and upscale dining to less expensive alternatives is expected to benefit pizza franchise operators.

 

Top 10 Pizza Franchise Chains

Source: Adapted from PMQ’s Pizza Magazine September 2008

 

Trends

• Healthier Options

There is increasing demand among consumers for healthy meals and healthy kids meals. Consumers are also more interested in where their food comes from and how it is produced, with a growing demand for locally produced and organic ingredients. Pizzeria operators are responding by producing dough with healthier fats, offering whole wheat pizza crusts, healthier vegetable based toppings and salads.

• Value

As consumers increasingly look for value, pizzeria operators are expected to respond with lower prices and promotions. Falling commodity prices will enable more aggressive pricing. Consumers have less to spend, but they still want to dine out for convenience and enjoyment. By responding with value pricing, specials and combo-deals, pizza franchises will meet this ongoing consumer need. 

• Technology Trends

The major pizza players are offering online ordering and some are now offering text ordering from mobile phones, PDAs and other web enabled mobile devices. Major pizza chains are using social networking sites like Facebook and MySpace as platforms to build a loyal customer base and to facilitate ordering directly from the sites.

With an increased focus on green initiatives in the restaurant industry as a whole, pizza operators are introducing energy efficient equipment such as high speed ovens. 

Pizza Franchise Fees and Costs

Given the current economic conditions, the franchise option as a route to market is considered to be more attractive than entering the market with a stand-alone restaurant. The support offered by the franchise system and its proven business model reduces the risk involved.

Initial Franchise Fee

The average franchise fee for a single unit pizza franchise is $25,000.  Fees for carryout/delivery pizza units are generally lower, ranging from about $5,000, while fees of $50,000+ apply to some larger full-service restaurant units.

Estimated Initial Investment

There is significant variation among initial investment estimates for pizza franchises.  Costs vary widely depending on the location, size of unit and whether the restaurant is takeout/delivery only or dine-in.  

(1) Leasehold improvement costs will vary depending on whether a new franchise location is developed or an existing franchise location is purchased. When developing a new franchise location there is wide variation in construction and remodelling costs. These depend on the location, size, configuration and condition of the premises.

(2)  The average unit size ranges from 1,000 - 3,000 sq ft. The average monthly lease payment is $1.50 - $1.70 sq ft. 
 
Ongoing Fees

The average fees and payments that apply in the ongoing operation of the franchise include royalty payments on sales, advertising, transfer and renewal fees.

The typical recurring fees and payments for pizza franchisees are outlined in the table below.

 

Typical ongoing fees and payments:

Territory

The majority of pizza franchises come with a protected territory although some franchisors reserve the right to open outlets within a given territory in certain circumstances.

Earnings Claims

It is difficult to predict what the future financial performance of a franchise unit will be.  Earnings claims are contained in about 25% of franchisors’ FDD. They are accompanied by so many disclaimers that they only give you a very general indication of what money you might make. In our sample of pizza franchises, one small family style pizza franchise gave a potential revenue estimate of $800,000 and a net income of $160,000.

Outlook

The pizza franchise sector, like most industry sectors, faces the challenges of a weak economy and stagnant or declining sales in 2009.  Tight cost control, falling commodity prices and management efficiencies will help offset the intense pressure on margins from price competition and flat or declining sales. There will be positive outcomes for franchise operators who enhance their levels of service and food quality while delivering value to the consumer.

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