Has “pizza fatigue” set in for consumers? BTIG analyst Peter Saleh believes there’s evidence one of the industry’s early COVID stars has begun to dim a bit. The category, as reports suggested, absorbed the pandemic’s disruptions better than peers. Pizza witnessed the largest per-dollar order jump in limited service out of the gate, according to Sense360, with figures per transaction increasing 11 percent. This was a common theme throughout, but definitely in pizza. Customers made fewer trips, yet ordered more.
As then-Domino’s CEO Ritch Allison said (he retired in April) at the time, “While we certainly brought new customers into the brand over the last year, the story of 2020 was more about the frequency and loyalty of our existing customer base. Our customers ordered more often. And when they did, they also ordered more items.”
In the April 2020 depths, Sense360 showed quick-service transactions as a whole to be down 26 percent. Pizza, however, fell 14 percent. Coupled with the higher checks due to trip consolidation, pizza was tracking only 5 percent lower in sales, while the broader limited-service world was 20 percent below.
Looking at a set of data that did not include third-party delivery, there was a decline of nearly 40 percent for credit and debit sales industry-wide. Transaction volume plunged by almost half, but average check sizes grew 16 percent compared to the same week in 2019.
The reason pizza chains embraced a tailwind wasn’t a gray one. Customers had no adoption gap to cross when it came to accessing pizza brands off-premises. Pizza, and Chinese food, were native to delivery long before the proliferation of the space. Also, comfort categories made a comeback in 2020 as chaos entered consumers’ spending habits. Two in three Americans, according to a national survey by OnePoll for Farm Rich, reverted back to childhood food favorites.
So pizza had a combo-effect working in its favor that was hard to rival. Those results came to bear quickly. Papa Johns’ 2020 same-store sales rocketed 17.6 percent in North America. AUVs crossed $1 million for the first time in company history (they were about $850,000 18 months earlier). Median unit profits and margins were some of the highest in the company’s history, and the biggest gains came from the bottom quintile of stores.
Domino’s domestic fiscal 2020 comps rose 11.5 percent as the brand posted net U.S. openings of 116 in just Q4 (229 for the year). Pizza Hut began to fire up figures in Q3 2020 as its U.S. division generated 2 percent same-store sales growth, or 8 percent on a two-year view. Off-premises was up 17 percent and the company, over the previous year, went from negative net expansion to opening nearly 200 net venues in Q3, or more than 300 better than the prior calendar.
Of late, however, the climate has tightened. Pizza Hut’s comps declined 6 percent in its most recent report, year-over-year. Domino’s fell 3.6 percent—its second negative turn in the past three quarters after 41 straight of positive gains. Papa Johns was the lone “Big 3” public chain in the green with Q1 comps 1.9 percent higher against a lap of 26.2 percent.
Part of this, naturally, is measuring against a unicorn peak where dine-in fell off the map. But there are broader pressures to consider.
Saleh recently conducted channel checks with Papa Johns to get a sense of where this conversation is headed. Driver availability and slowing sales trends “as consumers experience pizza fatigue more than two years into the pandemic,” led Saleh to reduce estimates for Q2 and the full year.
Saleh now believes Papa Johns will produce comps of 0.2 and 1.1 percent, respectively, down from 0.8 and 1.9 percent. He predicts Q2 and full year EPS of 77 cents and $3.38, which is a slight slide from 79 cents and $3.46, respectively.
Conversations with franchisees indicated sales have continued to soften sequentially in recent months, Saleh noted. Yet the “fatigue” of the category isn’t something Papa Johns will sit back on. As it has since Rob Lynch took over as CEO in late 2019, Saleh expects Papa Johns to introduce menu innovation to spruce up activity.
Going back to 2020, Papa Johns launched six new products in the pandemic’s first year, a path that began with garlic parmesan crust about 90 days after Lynch joined. It marked the first time Papa Johns added to its six-ingredient, never-frozen original pizza dough in company history.
And given what’s followed since, from Epic Stuffed Crust (last January) to Epic Pepperoni Stuffed Crust, Papa Johns will likely court transactions this route versus dangling value as a carrot for guests. Lynch told QSR in May these introductions weren’t value plays. “These are premium products that we’re promoting and that’s a very different model than some of our competitors, who promote the absolute lowest price point that they can and tie their advertising to those low price points.” It’s a strategy, Lynch believes, helped Papa Johns combat inflationary realities. Simply, consumers didn’t have to take much of a price leap from, say, $13 to $14.
Earlier in the year, Domino’s decided to raise the price of its $5.99 Mix and Match deal by $1 for delivery customers as food cost inflation was expected to be 10–12 percent higher in 2022, up from a previously projected 8–10 percent. And CEO Russell Weiner didn’t rule out a future price lift.
For perspective on the driver challenge in particular, because of staffing challenges in Q1, Domino’s store hours were reduced, phones weren’t answered, and online orders were restricted, the company said. It added up to lost operating hours equal to the entire U.S. system being closed for six days.
Still, one out of every three pizzas in the U.S. is delivered by Domino’s, the company said. So much of its aims are about meeting demand rather than creating it. The chain opened a net of 213 restaurants in Q1, including 37 in the U.S. and 176 internationally. It’s going to continue fortressing markets and pushing volume through value.
In perhaps a sign of what’s to come, Domino’s, from June 6–12, offered customers a 50 percent-off deal when they ordered online. It was the first time in more than two years the brand did so.
Across Q1, carryout comps rose 11.3 percent last quarter due to increases in average ticket, order growth, and Domino’s decision on January 31 to move its national $7.99 carryout deal to online only. Top and bottom-performing stores saw little difference in carryout sales, which fits considering the relatively low labor intensity associated with carryout.
Restaurants in the top percentile are positioned in those highly fortressed markets, which bring better delivery service times and incremental carryout customers.
Domino’s said 2,500–3,000 stores would leverage call centers in some capacity by mid-May—a number that could grow depending on need. Alongside franchisees, corporate stores would also test phone center options. Boost weeks returned over the summer as well, and will likely continue in the same cadence as they did prior to COVID.
Papa Johns, too, is investing in the call center route with a “PapaCall” initiative it unveiled last August. The company brought artificial intelligence into its call center with an engine designed to feed call center agents information when customers place an order by phone. Papa Johns worked with Cognizant to implement AI and machine learning so employees could answer phones less and aid customers more. It also offers a more personalized experience with a cloud-based telephony system that recognizes repeat customers’ phone numbers and greets them by name. It stores preferences as well.
“The number of dropped calls and lost orders that we used to experience during our peak times have gone down dramatically,” Lynch told QSR. “And that’s a sales driver, not just a productivity driver.”
Yum! Brands CEO David Gibbs echoed Pizza Hut was working to prioritize operations, improve staffing levels, restore operating hours, increase online ordering availability, and more effectively leverage the use of the company’s overflow call centers.
Continued strength, and the rise of third-party delivery
With Papa Johns, even as sales temper, they remain 30–35 percent above pre-pandemic levels, “aiding unit economics, and those improved economics are leading to accelerating development with the pace of new unit growth expected to reach 6–8 percent over the next three years,” Saleh said. The brand is targeting 1,400–1,800 net new stores by year-end 2025. (On a quick growth side, Little Caesars recently said it has room for 1,000-plus additional stores).
But again, the news to come for Papa Johns will almost surely concern menu innovation. Saleh believes the brand has a “wealth” of ideas in the pipeline it’s ready to launch to drive traffic and mix growth. Checks suggests that following tests in several states, including Oklahoma, Georgia, Ohio, Maryland, Illinois, Louisiana, and Texas late last year, Papa Johns could unveil “Papa Bowls” in the near future. These are oven-baked combos of toppings, sauce, and cheese without the crust, “targeted at customers who are more carb sensitive,” Saleh said. And they could be priced similar to, or slightly higher, than Papadias at about $8.
“Our checks suggest the new item performed well in tests, garnering franchisee enthusiasm and support, and could launch later this year,” Saleh said. “Franchisees are excited about this product because of the operational simplicity, as the product is cooked at the same temperature and speed as other items.”
Additionally, conversations with operators appear to show a sentiment shift when it comes to third-party delivery. Many franchisees who were skeptical of aggregators before, Saleh said, are now claiming it as a “lifesaver” given the driver shortage. Saleh said he’s hearing third-party is mixing as high as 22–23 percent of sales for some franchisees, with DoorDash accounting for 90 percent of transactions. When transactions originate through DoorDash’s platform, franchisees are content, Saleh added, as the roughly 17 percent fee is offset by the elimination of discounts.
“However, when franchisees are forced to utilize DoorDash drivers for orders originating on their native platform, the transaction generates a loss,” he said. “Additionally, franchisees indicated that while drive pay and benefits are in-line with those offered at DoorDash, Papa Johns cannot compete on flexibility, which leads us to believe that first-party delivery is going to have to pay up to own the driver.”
This is an arena that’s stirred within pizza for years. Papa Johns has an undeniable headstart on competition given it got on board some three years ago. It spent nine months building out integrated systems to connect its POS to aggregators’ ordering systems.
Long an antagonist of the movement, Domino’s in its recent update mentioned it could, potentially, begin exploring third-party to alleviate some of its labor woes. Pizza Hut faced a similar story, with CFO Chris Turner predicting “more and more [franchisees] are going to be choosing to move in that direction.” One operator who did tap third party, he shared, was tracking about 4 points ahead of the system’s negative 6 percent comp.
Saleh said Papa Johns’ franchisees, even when sustaining losses (using DoorDash drivers on orders from the native platform), the brand itself retains the customers and their data, which otherwise would have gone to a competitor. Also, franchisees lamented Dashers weren’t using heated hot bags similar to those required by Papa Johns’ delivery drivers. While the chain’s franchisees can request Dashers use the bags, they cannot require them, Saleh said, which in many instances leads to a poor quality pizza being delivered.
“In our view, third-party delivery has become a necessary evil for pizza operators given the driver availability,” he said. “The key in our view, is minimizing the damage to product quality, delivery times [customer experience] and margins.”
Saleh’s franchisee contacts feel it’s inevitable Domino’s will eventually partner with third-party aggregators to boost its supply of drivers and fulfill customer demand. One operator said he believed Domino’s franchisees were lobbying the company to make a deal, “and that a partnership is likely by year-end.”
Saleh’s talks also led him to assume a solution to more rigid driver scheduling at Papa Johns and/or Domino’s simply “does not exist.”
“Franchisees indicated that they just cannot run their operations without knowing exactly how many drivers they have on any particular day or shift,” Saleh said. “… if you cannot compete on flexibility, then you must compete on benefits, and more likely, pay.”
So how can Domino’s navigate the use of third-party delivery given its dependence on value offerings such as its $6.99 Mix and Match deal? The concern, Saleh said, is how the brand will minimize profit degradation from customer orders (from $6.99 Mix and Match) that originate on the chain’s native digital channels but are delivered by an aggregator.
Saleh said it’s “highly unlikely” the Mix and Match architecture, which has been the core of Domino’s menu and marketing strategy for more than a decade, will be available through third-party marketplaces if the chain does, indeed, decide to take this road. “Again, we believe third- party partnerships are a necessary evil, which may force Domino’s to either significantly hike driver wages [and in-turn, menu prices or delivery fees], or compromise on its values, allowing another party to access customer data and deliver their product,” Saleh said. “Threading the needle between the two, allowing Domino’s to have its cake and eat it too, is seemingly impossible.”