Pizza Franchise Outlook Cautiously Optimistic

Pizza Franchise

The past few years have been extremely challenging for the pizza industry. First, soaring gas prices were squeezing deliveries, while rising costs of cheese, wheat, and other pizza essentials sliced into operators’ profits. Then, as if things weren’t tough enough, the economic meltdown hit and nervous consumers closed their wallets.

The good news today is that things have gotten better. Of course the economic roller coaster ride isn’t quite over, and pizza franchises still face plenty of challenges. But for smart operators, there are also plenty of opportunities.

In a tough economy, affordability is key with consumers. And as Americans have settled into being more frugal, pizza franchises have benefited from diners trading down from upscale restaurants to pizza delivery or takeout. To capture budget-minded consumers, franchises are using tactics such as value meals and rebates. Some are also adding menu items, such as sandwiches, pasta, hot wings, and appetizers, to become “one-stop” eateries.

Pizza Hut is doing just that with its WingStreet concept. Within a couple of years, the franchise hopes to have WingStreet outlets in 85 percent its domestic Pizza Hut stores. “Each WingStreet addition to our Pizza Hut stores delivers incremental sales to our restaurants,” says Chris Tanco, a franchise business coach at Pizza Hut.

Some of the bad news is that gas prices are expected to rise this year, which will impact pizza restaurants’ delivery costs. Commodity costs will increase as well, though mildly. And last July, the federal minimum wage rose to $7.25. Still, the National Restaurant Association’s 2010 forecast predicts that the industry will show gradual improvement this year, whereas in 2008 and 2009 it experienced negative growth. However, cost containment is still crucial in 2010.

Brian Leipold, program leader of franchise recruitment and sales at Domino’s Pizza, says, “Domino’s has continuous resources focused on increasing unit economics, thereby reducing costs [and] increasing profitability.”

At Boston Pizza, vice president of marketing Jack Civa says, “We are currently assisting our franchisees by reducing operational costs and securing long-term contracts to assist in cost control.”

Though the recession may be coming to a close, finding financing for a pizza franchise will continue to be a challenge. To help, Papa John’s has launched its 25th Anniversary U.S. Development Incentive Program. New franchisees who sign up under the program pay no franchise fee (a $25,000 value), a reduced royalty for 12 months, and receive a $10,000 opening award under certain conditions. The program is valid for all approved franchisees who sign a development agreement before November 21, 2010. “We see the current economy as an opportunity for growth,” says Jude Thompson, Papa John’s president and chief operating officer.

At Marco’s Pizza, chief executive officer Jack Butorac says the company is trying to offset the money struggle in several ways. Marco’s has introduced a private equity fund that can invest $50,000 to $100,000 per store to help with store down payments. It is also developing a new $50 million private equity fund that can finance up to $250,000 of a new store’s costs. Through its captive leasing company, Marco’s offers franchisees the opportunity to lease complete stores, and can provide up to $200,000 in financing for a new store. And Marco’s is developing a leasing program that can provide up to $125,000 of equipment-only financing per store.

In addition to these tools, Marco’s helps arrange loans for 60 percent to 80 percent of the cost of a new store. A new loan loss guarantee subsidiary will guarantee up to 20 percent of the loan amount, making it easier to find lenders.

As consumers become choosier about where they spend precious dollars, getting involved in the local community is more essential than ever for pizza franchises. Boston Pizza is adding local store marketing programs to help franchisees target their communities more effectively. And Marco’s has enlisted the help of Pitney Bowes MapInfo and its Smart Site Solutions software to evaluate new locations. The information takes into account factors such as customer demographics and lifestyles, competition, and more to determine potential demand.

These days, “community” means more than just the neighborhood — it means the world online. Large pizza franchises have used online ordering for some time to increase per-check averages and volume. The next step in leveraging the Internet is taking advantage of social networking. Social media and e-mail marketing were hot topics at last year’s Pizza Executive Summit, and according to Pizza Marketplace (the Summit’s sponsor), social media is crucial to success going forward. Franchisees can build on the marketing edge of their brands with personalized marketing using tools like e-mail, Facebook, and Twitter.

Smart franchisors work to keep franchisees on top of the challenges the future will bring. “We rate our franchisees four times a year across several key success factors,” says Tanco of Pizza Hut. “We spend a lot of time engaging with franchisees and working on their growth.”

“Domino’s provides a franchise support team to each franchisee consisting of an area leader focused on sales and profitability, a development leader focused on franchisee store growth, and a marketing leader focused on local store marketing strategies,” says Leipold. “In addition, Domino’s provides operational support and ongoing training classes on how to become and remain a successful franchisee in today’s competitive pizza category.” In this environment, continuous improvement is the key to a pizza franchisee’s success.

For a complete list of pizza franchises, visit the Pizza Restaurants section of the EveryFranchise.com Franchise Directory.

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