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Is the pizza industry in trouble or normalizing after a long pandemic?

Both Papa Johns and Domino’s are struggling with sales and traffic, though Pizza Hut’s traffic has spiked recently: is anyone really winning the pizza wars?

Pizza — the unofficial food of the COVID-19 pandemic — experienced an explosion of sales growth in 2020 and 2021 as the go-to delivery food of choice. But what goes up, must come down and by 2023, two of the pizza industry giants — Domino’s and Papa Johns — are now struggling with faltering traffic and sales.

At the end of 2022, both Papa John’s and Domino’s reported just-barely-positive same-store sales (around 1% each), with negative traffic boosted mainly by increased menu prices. With tales of food inflation woes, delivery driver shortages, and lack of demand as people head back to dine-in restaurants, the pizza high has come back down to Earth. But does this spell trouble for the pizza industry in the long-run, or is it just a normalization after a period of unusual activity?

“The big pizza players got a lot of same-store sales growth in 2020 and 2021 and they’re trying to hang on to it as much as they can,” Peter Saleh, restaurant analyst at BTIG (which works directly with Domino’s Pizza) said. “As the economy normalizes and consumers get back to their regular routines and start going out to eat more [things will change]. I think that’s what we’re dealing with rather than a function of ‘something is wrong in the pizza space.’ They had really strong gains for two years and maintaining that is challenging.”

Looking at the big picture, the major pizza players have all seen major growth since the start of the pandemic: Papa Johns saw the most change at 30% same-store sales growth over the past three years, Domino’s was up over 14% since the start of the pandemic, and Pizza Hut’s sales grew more modestly at approximately 8% on a three-year basis, despite the brand’s comparatively strong fourth quarter in 2022.

Though it’s likely too early to tell, it’s not out of the question that Domino’s status as top dog could eventually slip, especially since Pizza Hut had relinquished its market share as top pizza chain to Domino’s only six years prior. The process of Pizza Hut slowly losing market share to Domino’s digital omnichannel capabilities occurred over the course of nearly a decade.

Over the past several quarters, Domino’s former CEO Ritch Allison and new CEO Russell Weiner have pointed toward delivery driver shortages as one of the top concerns for the company. Domino’s has historically differentiated its brand from competitors by resisting the urge to partner with third-party aggregators: a decision that has resulted in slower delivery times, overworked stores, and a renewed company focus on carryout (like the early 2022 deal that offered customers $3 back on their next visit if they picked up their pizza rather than option for delivery).

But now, Domino’s is not just blaming the staffing shortages: During the company’s fourth quarter earnings call last month, Russell Weiner pointed to softened delivery demand, and rolled back the company’s earnings and growth expectations for the rest of the year, which analysts did not take a good sign of the company’s near-future.

“It was incredible and somewhat surprising when I saw that Domino's had pulled back its earnings and new unit growth projections,” John Gordon, founder of Pacific Management Consulting Group said. “[…]It was a very large shift, but in some ways a logical conclusion, looking at some of their trends over time.”

If Domino’s delivery woes continue in future quarters, could they bite the bullet and start partnering with aggregators? The jury is still out on that and analysts appear to be split on the issue.

“Domino’s made a strategic decision not to partner with aggregators but I think they remain open to changing their minds,” Sara Senatore, securities analyst with Bank of America (which has worked with all three pizza chains) said. “[…] There can be no question that aggregators have been one of the best solutions for operators. It’s a model that works so well.”

Both Papa Johns and Pizza Hut have touted their third-party delivery partnerships as a boon to their financial performance. Quarter after quarter, Papa Johns CEO Rob Lynch has credit third-party aggregators with helping to boost some of the post-pandemic staffing shortages and helping them to keep up with delivery demand. However, just like Domino’s, Papa Johns traffic has been struggling recently, even as sales are bolstered by menu price increases. This could simply be a case of Papa Johns settling into a new normal after successfully climbing out of the John Schnatter-sized hole in 2018 and 2019.  

In fact, Sara Senatore thinks that right now, Papa Johns might be “winning” the pizza wars, even though all three brands are in it for the long-haul.

“Papa Johns has done a great job of partnering with aggregators,” Senatore said. “Cumulatively, they seem to be the one with the most assets and are staying abreast of where the consumer is. […] The momentum of Papa Johns has faded a little bit now as the third year-removed from their comeback story.”

But what about Pizza Hut? Although Yum Brands’ U.S. performance is typically bolstered by the strong Taco Bell, Pizza Hut’s Q4 same-store sales were up 4%. The boost in sales and traffic for the third-place brand could be tied at least indirectly to Pizza Hut’s expansion of its third-party delivery partnerships and delivery promotions through aggregators in Q2 and Q3, which gave Pizza Hut a much-needed boost.

“Aggregators serve two purposes: they are helpful in getting operators to meet demand, especially when the labor market is tight, but it’s also a marketing platform,” Senatore said. “The customer ordering on aggregators is different than the customer going straight to the mobile app or website. The aggregators bring in new customers.”

However, one successful quarter is not long enough to tell if Pizza Hut is taking back share from Domino’s. In fact, it is too early to tell what the long-term successes or failures of all three brands will be, especially given the current macroeconomic uncertainty. If the U.S. heads into a recession, as predicted, we could be right where we started with pizza reigning as king. Instead of people staying home because of a pandemic, they might be staying home and ordering pizza delivery to save money by dining on (relatively) cheap comfort food.

If Domino’s wants to keep their crown as number one pizza in the U.S. moving forward, they probably should focus on two things: value and menu innovation. Last year, Domino’s raised the price of its iconic $5.99 Mix and Match deal to $6.99 and changed its $7.99 carryout deal from 10 wings to eight and made it online-only.

“That’s not a very attractive price point, and the carryout $3 tip deal is great advertising for their carryout business, but the $3 is only given to you on your next visit,” John Gordon said. “For a deal like that, the customer should have gratification immediately.”

The other crucial aspect of keeping consumers’ interests alive is both menu and tech innovation, the latter of which had been Domino’s differentiator for a long time. According to Sara Senatore, Domino’s has been pretty candid about not investing in menu innovation as much as they could, while their competitors have been thriving with new pizza categories like Papa Johns Papadias and Papa Bowls, and Pizza Hut’s launch of Melts last fall—a new menu category meant to lure younger customers and compete with Papa Johns. Though, that could be changing with Domino’s new loaded tater tots (similar to “totchos”), which just launched this quarter and have already been popular with customers.  

“The pizza game in the United States has always been a zero-sum game,” Gordon said. “You’re essentially just trading market share from one player to another.”

Whether the pizza industry is normalizing or real change is afoot, it might soon be time for Domino’s to swallow their pride and make the call to DoorDash.

Contact Joanna at [email protected]

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