Monday, February 18, 2008

Restaurant Brand's Pizza Hut faces further increase in competition

A very interesting article in the New Zealand Herald yesterday(see below my preamble) about the cut throat pizza business in New Zealand.

I have been ranting and raving about this for years, in respect to Restaurant Brands(RBD) and their badly run Pizza Hut brand.

More competition from the likes of great fast food companies like Hell and Dominos Pizza are continuing to make the going for Pizza Hut as hard as the crust on their flat crust dough and it is only going to get worse because management at RBD continue to flounder.

Hell and Dominos are rapidly expanding while the Pizza Hut business falls away.

The next profit announcement for RBD will be sometime in May and sales figures should be out for their 3 different Brands: KFC, Starbucks and the aforementioned Pizza Hut, soon.

Profit is likely to be better this year because of a slightly recovering KFC but Pizza Hut is likely to drag on overall profit, again.


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Pizza war to enter next battle

5:00AM Sunday February 17, 2008
By Chris Daniels
The cut-throat pizza business in New Zealand is gearing up for a new round of hostility, as market heavyweight Domino's and Hell try to hold on to slipping profit margins in a world of soaring cheese.

Domino's - which pitches itself as the "value" end of the market - is tomorrow launching a new, healthier pizza, hoping its fat-free crust will attract punters watching the kilos as well as sport on the TV.

It is also staging a push into the "premium" side of the market, where it will find itself in a more direct fight for customers from local pizza heroes, Hell Pizza. A new push to online ordering is also under way, with Domino's this month rolling out its new internet ordering process.

Statistics New Zealand last week reported a 14.7 per cent jump in butter and cheddar cheese prices - prices difficult to pass on to pizza buyers taking advantage of fierce competition between Hell, Domino's and once-dominant Pizza Hut.

Pizza Hut used to command the biggest slice of the market but has been in steady decline for a few years, slugged on one side by the popular iconoclastic Hell brand and on the other by the cheaper Domino's.

"Pizza Hut continued to experience tight trading conditions in a competitive market, which had meant a continuing short-term sales decline," said the stock exchange-listed owner Restaurant Brands in December.

Total sales for the quarter were down 13.4 per cent, with same store sales falling by less than 9 per cent. Year-to-date sales of $56.5 million were down 9.7 per cent, and down 6.6 per cent on a same-store basis.

"Marketing strategy changes, which started to be implemented towards the end of the quarter, were expected to deliver better sales in the last quarter of the year," the company said.

Pizza Hut store numbers fell from 105 in the third quarter last year to 98. Restaurant Brands is progressively closing its "red-roofed" restaurants as leases expire or the "opportunity arose to exit a store".

Despite sales heading through the floor at its Pizza Hut rival, the fast-food industry is in good shape, says Colin Mellar, general manager of Hell in New Zealand. Hell enjoyed some huge sales increases in a record two weeks over Christmas, he says. "That was a bit out of the bag. We were ready, not so much to 'batten down the hatches', but expected the Christmas period to be patchy. But we got a couple of nice surprises."

Domino's is now increasingly looking to "come and play a little in their market", says Mellar.
"They are the cheaper end. We are not of a mind to play too much in that market, but sometimes it's interesting to have a look over the fence.

"We need to continue to grow. We need to grow top lines. We can't just sit in the niche market all the time. Our marketing itself is going through some changes."

Growth last year was reasonable, says Mellar, with a period of "checking the foundations later in the year. But over the Christmas period, same-store sales were up by 15-17 per cent.

What about its rivals, particularly with Domino's moving this week to more healthier fare? Is Hell concerned more health-conscious consumers may start looking elsewhere?
"At the end of the day of the day, pizza has got cheese on it generally, and people want cheese," says Mellar.

"We do have a healthier pizza, but trying to pretend we are lettuce and tomato is, I believe, a joke. We serve good food, but we will never pretend to be a healthy option."
Domino's, says Mellar, will end up seeing that the pizza is the main thing, not the healthier food options. And in the true style of a business rival, Mellar suggests a less benevolent reason for Domino's new-look healthy image.

"If anything this may distract them from their main strategy," he says.
"But I think their main strategy isn't working any more - because [of] their margins. Margins get tight, we know that commodity prices have gone through the roof. The price of cheese is ridiculous - walk into the supermarket and it's nine bucks for a small block.

"Because they are charging so little for their pizzas, they have to look for an alternative, because their franchisees will be screaming at them - saying, 'we're getting no margin with this current pricing strategy'."

The failure of fast-food chain Georgie Pie in the 1990s showed this, says Mellar. Georgie Pie sold pies for $1 each - but the price of inputs went up "and it kills them".

"This is probably a more desperate move by Domino's rather than one of proactivity," says Mellar.

Margins in the business are coming under real pressure, with fuel, commodity and labour prices all going up.

Peter Jones, Domino's New Zealand general manager, backs up the reports of rising pizza sales coming from his rivals at Hell Pizza.

"We have had a really good last 12 months, in fact the best 12 months in our short history over here."

Domino's arrived in New Zealand in mid-2003 and now has 67 stores, with plans for eight more.

This week it's launching what it calls the "superlite thin pizza", a push into healthier food. It's served on a "Lebanese style bread", which has no sugar and is 98 per cent fat free.
But it hasn't gone all health store on the customer. Salads, available in its Australian operation, are yet to appear on this side of the Tasman.

Jones says: "Realistically the message we're giving is that 'we don't condone you should eat any sort of food, let alone pizza, seven days a week'. You should combine it with healthy meals, a good balanced diet and exercise, and pizza should be a treat.

"We really can't go out on a limb and say we stand for a complete healthy food.

"However, we do look for a balance. We should never be arrogant about the fact the world is becoming more focused on eating healthy."

So is Domino's trying to move into better profit territory by selling more premium products?

"We have talked about this, but not just for the dollars either, because the more time goes on, we are seeing our consumers getting more mature in their palate as well," says Jones.

"While we'll never niche ourselves as gourmet pizza, we are examining pizza such as 'seven meats' and about to come out with a range of pizzas called the 'big taste', which is a premium product.

"We don't deliberately try to gain market share as such. What we're trying to do is build same-store sales for all of our franchisees."

The company has also just launched a full online ordering system, which it hopes will make things easier for customers and franchise owners, with more accurate orders and less hassle phoning a noisy store during busy periods.

Domino's biggest rival is probably fish and chips, says Jones, because like pizza, it is a shared meal. Burgers, by comparison, are more individual.

"But having said that, whenever someone is buying a burger or fish and chips or even a pizza from a rival, they're not buying a pizza from us.

"Domino's is a value alternative. It doesn't mean we're cheap and nasty. It means you're getting a good pizza for a good price."

Regardless of whether Domino's is moving up the value chain, its presence in New Zealand has increased the pizza slice of the fast-food sector.

Jones says Domino's research in 2003 showed an average US consumer ate pizza once every 11 or 12 days, an Australian every 29 days, while New Zealanders only once every 50 days. "There's no doubt that has changed."