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Pizza dividends

08 March 2004 by
Pizza dividends

The news that pizza chain Domino's sold £142m worth of pizza last year - that's about 14 million items - may come as a shock to some. As the financial results from Britain's biggest pizza delivery firm were published last week, both national and local press reports were also full of our concerns over health, rising levels of obesity and the ubiquitous Atkins diet.

But if you thought that any of these factors might have had any impact for the worse on the take-away pizza market, think again. Pizza is big business and, Atkins or no, it's about to get even bigger.

The last time the home-delivery food market was valued, in 2002, it cashed in at £1.06b, a 56% rise on 1997. Today, pizza is 36% of this market, making it the single biggest player. By 2010, home-delivered pizza alone is forecast to be worth £800m.

Take-away pizza, it seems, has for some time been the sleeping giant of the hospitality industry, but it's now wide awake, with its future firmly in franchising.

Franchising is key to the expansion of the industry because it's the only way operators are able to tap into critical local market knowledge, and find the capital to do so. Moreover, although the take-away business can be profitable, it's also both labour- and time-intensive. As operators such as Pizza Hut have discovered, brand awareness alone isn't enough to generate serious growth.

Furthermore, the market is still young. "The home-delivery sector is still showing massive compound growth, year-on-year," says Howard Nunn, franchise operations director at Pizza Hut. "The fact there are still so many unbranded units on the market demonstrates its immaturity. Pizza penetration is still relatively low."

Pizza Hut currently has 117 company-owned delivery units, but aims to add a further 45 to its 64 franchised operations this year. Meanwhile, Domino's is opening at the rate of 50 a year. "Ten to 15 years ago we needed about 40,000 households per unit to make a store profitable," says Chris Moore, sales and marketing director at Domino's. "Today, we only need 20,000."

So, while public attention seems to be focused on diet and health concerns, we're still eating more pizza than ever before. And the main players in the market, including the big three - Pizza Hut, Domino's and Papa John's (which also owns Perfect Pizza) - are working hard to profit from this.

Since bringing its brand to the UK in 1990, Domino's has expanded its franchise empire to 318 units, and the company sees no end to this growth. After learning from the mistakes of its US counterpart, its focus has been on the quality of the product rather than an obsession with delivery time.

Arguably, its main competitor at the moment is Pizza Hut, which, despite 96% brand awareness, is fairly new to the franchising game. The company opened its first franchise delivery operation in 2001.

"We've had slightly slower growth than anticipated," Nunn admits. "At the beginning, we tried to recruit franchisees looking to open five to 10 units in five years, and who needed around £250,000-£500,000 to do so. Now we've realised that franchises are so work- and labour-intensive that, to be successful, we need hands-on franchisees and to work on a slightly smaller scale."

Third among the big players is Papa John's Pizza, another US brand which is relatively young in the UK but the third-biggest pizza player globally. Papa John's arrived here in the late 1990s and bought Perfect Pizza for £20m in 1999. Plans to expand through unit conversion faded with the realisation of the strength of Perfect Pizza's name and the relative weakness of the Papa John's brand.

A new management team was assembled last year, and with it came a rethink of the company's direction. Now, with 73 Papa John's and 134 Perfect Pizza units, the group's aim is to grow brand awareness and work on differentiating its product.

But while the demand for pizza is clearly growing, the explosion has been stifled by two major barriers - property and people.

Difficulty in finding the right sites, with the right licences, and at the right price, continues to restrict growth. And as in the rest of the hospitality industry, finding the right people to run a business is a constant challenge. While the big three all receive plenty of interest from potential franchisees, the interview process is rigorous and conversion rates are low. "For every store available, we are about 15%-20% oversubscribed, and from around 3,000 enquiries each year, only 20-25 people are successful," says Moore at Domino's.

The final challenge facing the pizza market of the future is differentiation and the perception of pizza. Pizza, many would argue, is pizza and variations on the theme are limited. Not so. The big three are already working hard on strategies which will not only differentiate their brands, but also tempt ever more consumers to eat their wares.

While Domino's continues to pursue a fairly ambitious marketing campaign, with TV advertising and sponsorship of broadcasts of The Simpsons, it's also pumping money into projects such as flying delivery bikes (yes, really) and GPS-location systems which lock on to computer chips installed in delivery drivers' shoes, to help further speed delivery times. It has also had success with online and interactive ordering.

Papa John's, meanwhile, has decided to upgrade the image of its units, believing this will not only reflect and advertise the quality of the brand but attract more passing trade.

Pizza Hut sees product innovation as the future, with more offerings along the lines of stuffed crusts or its rectangular Sicilian pizza.

Despite all this, none of the big three has attempted to change the perception of pizza, as tiny London pizza company Basilico has.

Pizza, in the public mind, is cheap and usually comes at a discount. Discounting is the golden rule of the pizza market - except at Basilico, where prices range from about £10 to £15.50. "When we started, nobody believed we would survive without discounting," says Basilico co-founder Asher Svirsky. "But our product is about quality, and discounting goes against that. Now we can rely on a loyal customer base." n

### Franchisors The established brand: Domino's www.dominos.co.uk](http://www.dominos.co.uk) Number of stores: 318 Total start-up cost: about £210,000 - franchisees require about £80,000 of liquid equity Company cut of weekly sales: 9.5% (5.5% royalties, 4% advertising) Average annual earnings of franchisee: £70,000 Average weekly unit turnover: £10,000 Minimum franchise contract: 10 years (although some buying and selling of franchises does happen) Ongoing staff training provided? Yes Internet and interactive ordering? Yes Note: Dominos now counts 15 millionaires among its 120 franchisees in the UK. Challenger brand: Papa John's [www.papajohns.co.uk](http://www.papajohns.co.uk) Number of stores: Papa John's 73, Perfect Pizza 134 Total start-up cost: £175,000-£200,000 - franchisees require liquid assets of £60,000 Company cut of weekly sales: 9% (5% royalties, 4% marketing) Average annual earnings of franchisee: £60,000 Average weekly unit turnover: £8,000 Minimum franchise contract: five years Ongoing staff training provided? Yes Internet and interactive ordering?Yes Note: The Papa John's brand is relatively new to the UK but is planning major expansion. It claims to bring quality to the mass market and looks likely to be a close competitor to Domino's. Big: Pizza Hut [www.pizzahut.co.uk](http://www.pizzahut.co.uk) Number of stores: 64 delivery franchises (117 company-owned) Total start-up cost: £160,000-£180,000 - franchisees need about £50,000 cash equity Company cut of weekly sales: 8% (6% royalties, 2% advertising) Average annual earnings of franchisee: £50,000-£75,000 Average weekly unit turnover: £10,000 Minimum franchise contract: 10 years Ongoing staff training provided? No - managers are trained to train staff after initial start-up Internet and interactive ordering? No Note: Pizza Hut is relatively new to the world of franchising but is keen to profit from its extensive brand recognition and to expand across the UK. Small and beautiful: Basilico [www.basilico.co.ukNumber of stores: four (aims for 12 by the end of the year) Total start-up cost: £171,000 - based on 990sq ft shop-fit Company cut of weekly sales: 10% (6% royalties, 4% marketing) Average annual earnings of franchisee: £61,000 (before financing) Average weekly unit turnover: £10,000 Minimum franchise contract: five years (option for further five years) Ongoing staff training provided? Yes Internet and interactive ordering? No, but it is planned Note: Basilico is a small, quality-focused operation. The company uses only wood-fired ovens (operating at 500¼C) and fresh ingredients, which means pizzas cost slightly more but are more difficult to produce operationally. Units also offer alcohol.
### Opportunities Take-away pizza may not yet be perceived as the sexiest industry to work in, but the opportunities are undeniable. Moreover, if you've always wanted to start your own business but don't quite have the confidence or cash to do it alone, franchising is an ideal way of exercising your entrepreneurial spirit with a degree of both operational and financial support. Don't be fooled into thinking this is an easy option, however (see panel opposite:Could you be a franchisee?). Franchising can pay large dividends, but it's seriously hard work. On the plus side, while some food service or restaurant experience is a bonus, it's not obligatory. All the companies quoted in this article will find you a site and cover all building or refurbishment costs. Franchisees are normally required to work in a local store for training and then go on a management training course. The cost of this is normally included in the start-up fee.
### The franchisee Colin Wilson (below), 33, used to be a health club operator in Glasgow, but last March he opened his first pizza take-away franchise with Domino's. "I used to run health clubs, but it got to the point where I could no longer compete with the big companies, so I decided to get out of the business. "I first encountered Domino's from a menu leaflet through the door, so I phoned them and told them I was interested. In the meantime, I looked at other franchise companies and the market at large, and decided Scotland was relatively untapped. "Domino's had sites ready to go, but I had an idea of where I wanted to open so they waited with me, took on all the expenses and were very supportive. "I had no experience in food, but it seemed a good product. There was a lot of dialogue and many meetings with the company before I was accepted. I did feel nervous at the time, but I never saw it as a huge gamble. I'd spoken to other Domino's franchisees in Scotland and it's a close, supportive community. "Domino's have been doing this a long time and they've got the systems and processes in place. It's not rocket science, you just need to work along the guidelines they set out. It's hard work and I'm very hands-on. It would be hard not to be, although some franchisees do employ managers. It's fairly rewarding to be your own boss, but there's always someone to guide you if you need it. "Starting this franchise cost me £200,000, and I should pay the money back within three years, even in this fairly unprofitable part of Glasgow. "It's important to do your background research on the area and make sure you have good family support around you. It's pretty stressful on the family at first, but the hours do pay off. Make sure you've got the location and marketing done correctly. I over-marketed when we first opened, and then we had queues of people outside which, operationally, we weren't able to deal with. It was disastrous. "Don't underestimate the time it takes to get off the ground, either. Getting staff in and trained, and sorting out proper marketing, took me three months. "I've got to do two years before I can open another unit, but I'm already looking. I recommend it to anyone with a bit of life in them."
### Could you be a franchisee? Energy: Franchising isn't for the faint-hearted - the average weight loss among nine new Domino's franchisees was two stones over two years. Self-reliant: Running a franchise is much akin to running your own business, so you need to want to be your own boss. Gregarious and outgoing nature: Marketing to your local community is a huge part of making a franchise successful. Be prepared to get out there and sell yourself. And don't be mean about it - if someone complains about the food, give them their money back. Good under pressure: 70% of business in a take-away pizza operation comes from 30% of the week. Say goodbye to your Friday and Saturday nights, because you'll be working - hard. Good with people: Managing a franchise involves managing a small army of people, from telephone operators to delivery drivers. What happens if 10 of your 30 drivers don't turn up on a Friday night? Remember also that the average delivery driver is male and aged between 18 and 22 - typically, not the most reliable group of employees. Willing to give up a year of your life: The first year is going to be a slog. Be prepared to not see your family and to give up holidays. It will be worth it eventually. Attention to detail: Domino's, Papa John's and Basilico's all use fresh dough, and most operators use fresh toppings. Dough is an extremely delicate product that needs careful handling and proofing. A realist: Don't expect a quick fix. Despite considerable support, it will be you who has to grow the business, and overnight success is rare.
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