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The Honolulu Advertiser
Posted on: Monday, December 17, 2001

Pizza sales not delivering for some

By David Goetz
The (Louisville, Ky.) Courier-Journal

In less than a decade, Papa John's International Chairman John Schnatter led the company from a small, regional player with 30-odd stores to the nation's No. 3 pizza chain. He didn't know that was going to be the easy part.

As employees sprinkled cheese on a pizza at a Papa John's outlet in Louisville, Ky., company officials were trying to figure out why sales at company-owned stores were down in the third quarter. Systemwide sales, which include franchises, were flat.

Associated Press

These days the pizza business has Schnatter scratching his head, wondering what it's likely to do next.

"A smart guy told me one time, when things don't add up, all the cards aren't on the table," Schnatter said. "We just don't have all the information yet."

What perplexes Schnatter is a run of sluggish sales that brought an end in the second quarter to more than eight consecutive years of same-store sales growth at Papa John's.

Sales at company-owned stores were down again in the third quarter, and systemwide sales, which include franchisee-operated stores, were flat. Then came Sept. 11. Last month saw a 4 percent drop in comparable sales for the 2,700-store system, including an 8 percent decline at company stores.

"You've got an interesting dynamic," Schnatter said. "You've got Starbucks selling a cup of latte or cappuccino for five bucks, and we're in a slowdown charging $8 for a delivery pizza."

Whatever's eating Papa John's, it's nibbling at the category as a whole. For the 12 months ending in August, customer traffic in the quick-serve pizza business was off 4 percent compared with the same period a year before, according to the research group NPD Foodworld. Sales were essentially flat.

Even Pizza Hut, the 8,000-store gorilla of the category, has felt pain. After a 2 percent same-store increase in the third quarter, the pizza division of Tricon Global Restaurants suffered a 10 percent drop in October.

Pizza Hut President Mike Rawlings laid the blame on the terrorist attacks and the company's success last year in introducing its Insider pizza.

"September 11 kept us virtually off the air for about three weeks, and ... we lost a little momentum in the business," Rawlings said. "We'd been running along pretty nicely. Second quarter we were leading Tricon with 3 percent same-store sales, and then, because we're so media-sensitive, when we were off air we got soft."

The Insider debuted in autumn 2000, which Rawlings said resulted in a 10 percent increase in same-store sales. "We're overlapping the most successful product launch we had since the Big New Yorker," he said.

He said the company expects the sales slump to be short-lived and is planning on finishing the year with sales growth. It will continue its "best pizzas under one roof" strategy.

Rawlings acknowledged some overall softening of the pizza business and gave a nod to the economy.

"We track the consumer confidence index with the pizza market, and they're somewhat correlated," Rawlings said.

But that doesn't explain why Tricon's other brands tracked positive for same-store sales in October. A Pizza Hut spokeswoman said marketing comparisons with the other Tricon brands are not relevant.

Schnatter is inclined to blame the economy as well, but he also sees some contradictions there. Late-night pizza orders are off, for one thing, which doesn't seem related to the economy.

And pizza should benefit from the recession, he reasons, because it's keeping more young core pizza consumers at home, where they can order a pizza and watch a video instead of going out.

Take-out sales of alcohol are up. So are sales at Blockbuster, "yet we're soft," Schnatter said. "Maybe it's frozen pizza."

Could be. Sales of frozen pizza have benefited from product improvements such as a self-rising crust. According to supermarket monitor Information Resources Inc., sales of the top 10 frozen pizza brands rose more than 6 percent in the year ended Oct. 7, reaching $2.55 billion.

There's also evidence that independent pizza restaurants, the mom-and-pop stores found in towns of any size at all, are taking their bite of the pie. Pizza Marketing Quarterly reported in September that average yearly sales at independent stores were up 4 percent in 2000, while the average for stores of the top 25 chains remained flat.

And what about Domino's? The nation's second-biggest chain has reported positive comparative sales for the first three quarters of 2001 and says the trend has continued even after Sept. 11.

Rawlings said the free cinnamon sticks Domino's gave away in the first quarter and the free cheese bread in the third might have had something to do with it.

"I don't know how profitable that is, but it does help from the same store-sales standpoint," Rawlings said.

Domino's spokesman Tim McIntyre said the promotions generate some customer awareness, but they don't explain positive sales for the whole year. He gave credit to improvements in operations and product quality that the company has stressed in the past two years and to the brand's "Get the door, it's Domino's" advertising campaign.

"We've got a marketing message that's on strategy that we didn't have before," McIntyre said. "It emphasizes our strengths, a quality product delivered to your door."

McIntyre also took a swipe at Pizza Hut's promotional pricing. "I think $8.99 (for a pizza) feels like giving something away."

For his part, Schnatter isn't about to get into a price war with Pizza Hut and Domino's. "I don't think the value of the customer experience is completely or even majorly driven by pricing," he said. "We just don't believe in sending cash out the door with every pizza."

He said he will concentrate on quality and service issues, to wait out the recession and see what develops in the next six months or so before making any strategic decisions. His response will depend on whether the situation looks like a dip or a trend.

"If it's a dip, you hold the rudder firm and focus on your fundamentals," he said. "If it's a trend and the behavior of the consumer's changed, that's a whole different approach."