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Snapshot of the Pizza Franchise Industry 2009

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

Pizza SignGiven 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

 Company Name  Founded
Units Service Type
 1. Pizza Hut  1958  14,759  Family Style
 2. Domino’s Pizza  1960  8,641  Take-out/Delivery
 3. Papa John’s Pizza  1985  3,238  Take-out/Delivery
 4. Little Caesars  1959  2,000  Take-out/Delivery
 5. Noble Roman’s Pizza  1972  1,400  Take-out/Delivery
 6. Papa Murphy’s Take ‘N’ Bake Pizza  1981  1,073  Take-out only
 7. Sbarro’s Italian Eatery  1956  1,040  Quick Serve
 8. Godfather’s Pizza  1973  656  Quick Serve
 9. CiCi’s  Pizza  1985  631  Buffet
 10. Hungry Howie's Pizza  1973  575  Take-out/Delivery

Source: Adapted from PMQ’s Pizza Magazine September 2008

 

Trends

  • Healthier Options

Yummy PizzaThere 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.  

Initial investment fees and costs  Average  Low  High 
Initial franchise fee  $25,000  $1,000   $52,000
Leasehold improvements  $110,000
 
 $9,500   $2,000,000+
Fixtures & equipment  $130,000    $11,000    $1,000,000
Signs  $7,000   $2,000   $44,000
Opening inventory  $10,000   $2,500   $89,000
Expenses while attending training  $6,000  $0  $76,000
Deposits, prepaid expenses (can includeproperty security payments, three months lease of real estate, utility co. deposits, insurance, license fees)  $10,000   $2,000   $42,000
Additional funds (includes payroll, food costs)  $30,000   $2,000   $100,000
Grand opening  costs  $9,000   $1,000   $26,000
Total initial investment  $350,000 
 
 $100,000   $3,000,000

(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:

Royalty (% gross sales) 5%
Advertising fund (% gross sales) 3%
Additional training Ranges from $150- $1,000 per day plus expenses
Transfer fee $5,000
Renewal fees $2,500 -$5,000 (some franchises do not charge renewal fees)
Costs and attorneys’ fees Varies according to circumstances
Accounting & audit Cost of audit plus expenses and/or  interest on underpayments
Late charge 1.5% per month or $100 per violation  payable on overdue amounts
Interest 1.5% per month or 18% per annum  or highest legally permitted rate
Indemnification Varies
Interim management $100-$500 per day plus expenses in the event of owner death/incapacitation
Penalty assessments Variable charges apply for failure to comply with standards/policies
Reimbursements Varies
Liquidated damages Can be average monthly franchise fee, 3 year projected royalties or other specified fee.

 

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.

Franchise Direct's Disclaimer

Pizza Franchises...

Noble Roman's Take n Bake Pizza We'll put our 40+ years of experience behind you with our delicious, affordable take-n-bake pizza franchise! Min. Cash Required:
$100,000.
Noble Roman's Take n Bake Pizza Franchise.

Red’s Savoy Pizza Why Red’s Savoy Pizza is a great franchise opportunity? Red’s Savoy Pizza is poised for the future and is now... Min. Cash Required:
$60,000.
Red’s Savoy Pizza Franchise.

Little Caesars Partner with the fastest growing carry-out pizza chain. Little Caesars' proven system WORKS! Min. Cash Required:
$100,000.
Little Caesars Franchise.


Vocelli Pizza Not just another pizza chain; Vocelli Pizza is part of the community. Open one in your community! Min. Cash Required:
$100,000.
Vocelli Pizza Franchise.

Persona Neapolitan Pizzeria Serving award-winning, authentic Neapolitan (thin crust) pizzas, crisp salads and rich gelato! Min. Cash Required:
$100,000.
Persona Neapolitan Pizzeria Franchise.

Marco’s Pizza Join the Pizza franchise started by a real Italian. Fresh, delicious, authentic pizza! Min. Cash Required:
$100,000.
Marco’s Pizza Franchise.




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