These flowers are call Fox and cubs.
How Tech is
Killing Off Independent Pizzerias
Aaron D. Allen
Technology is killing off independent pizzerias in the
United States at the rate of roughly 2,549 locations per year (in 2015 alone).
The pizza category is being reshaped by both big new tech deployed by chains
and fresh threats from sophisticated emerging brands that are taking slices
of the pie from tens of thousands of ill-equipped and
low-tech independent pizzerias.
A few highlights
of our findings:
In the last decade, independent pizzerias in America have
lost 21 percent market share
in terms of sales and 19 percent market share in terms of
units to chains.
Put more plainly, that’s about 7,800 restaurants that
have closed-up shop.
Domino’s price per share has grown more than 3,000
percent since 2008, from $3.86 to $132
(as of March 2nd, 2016). Its market capitalization was
less than $300 million then,
to now $7.42 billion (a fantastic fortune was made
accurately forecasting and betting on tech).
New ordering platforms including UberEats, Caviar,
Postmates and DoorDash are growing
from collectively posting $400 million in revenue in 2014
to an expected $1.6 billion this year
(to put this in perspective, in a year, they’ll grow
revenue 10 fold what it took Shake Shack,
2015’s much-heralded IPO, more than a decade to reach. In
other words, food delivery is
about to dramatically change and redirect billions in
restaurant revenue).
Digital and online ordering is growing 300 percent faster
than dine-in ordering (again, this means billions of dollars in the U.S. alone
will shift from dine-in to delivery in the years ahead).
The gap between independent average unit volumes (AUVs)
and chain AUVs correlates almost directly to the volume of sales that chains
are processing on the digital platform – about $328,500.
America’s three (3) largest pizza chains process nearly
15 percent of all of the pizza industry revenue via their digital platforms
(this equates to roughly one-third of the total industry market share shift
that has occurred in the decade since the big guys first started processing
orders online).
51 percent of all mobile searches on Google are for
restaurants,
yet by some estimates as few as five percent of
restaurants have mobile-compliant websites.
A closer look at 2015’s sales figures shows that, while
pizza might have been the year’s
most photographed food item on Instagram, the pizza
players with the widest smiles
are the executives at tech-savvy chains.
SALES ARE FALLING FOR THE PIZZA CATEGORY AS A WHOLE…
Last year, the U.S. pizza industry generated roughly five
percent of the total U.S. restaurant revenue ($38.5 billion), despite the fact
that America’s near-75,000 “pizza” establishments account for
7.5 percent of all U.S. restaurants. 2015’s revenue was,
in fact, a 0.05 percent decrease from 2014’s figures, with segment AUVs
dropping to $514,679 (a 2.34 percent decrease over last year).
During this same period, the overall U.S. restaurant
industry saw 3.8 percent growth.
… BUT NOT FOR THE CHAINS, THEY ARE GROWING
The decrease in overall U.S. pizza revenue doesn’t mean
everyone is down in the dumps – particularly if you’re dominating like
Domino’s, up +9.2 percent in year-over-year (YoY) sales in 2015, on top of 12.5
percent growth in 2014. Little Caesars and Papa John’s are in pretty cheery
moods, too, with +5.31 percent and +7.59 YoY increases respectively.
In fact, during 2015, chain pizza brands (companies with
10 or more units) saw a 3.38 percent increase in sales and a 3.82 percent climb
in AUVs (now $655,846).
Independent pizza companies (those with less than 10
units), on the other hand,
saw a 5.01 percent decline in YoY sales and a 3.21
decline in AUVs (now $384,524).
The rate of new openings is, perhaps, most telling.
During 2015, chain operators collectively saw a 7.33 percent increase in unit
count, while independent operators’ total units dropped 1.85 percent. Yes, the
hard fact of the matter is that while U.S. consumers still show a high demand
for pizza, they’re ordering from the big boys, and mom-and-pop shops are
closing down because they
can’t compete on equal terms. Despite the fact that chain
pizza shops only account for
48 percent of all pizza restaurants, they’re pulling in
61 percent of the revenue.
THE DOMINO’S TECH TURNAROUND
One of the best modern examples of tech enabling an epic
foodservice company turnaround
is that of Domino’s. Sure, some of the recent success
stems from advantages of systemization, standardization, scalability and
standard operating procedures (SOPs) – the processes, designs
and training that enable rapid and profitable growth.
Another element is brand recognition and awareness – with over 5,000 units and
a series of tremendously successful publicity campaigns, Domino’s had an
enviable platform from which to launch its turnaround.
With product improvements, a renewed and reinvigorated
company culture committed
to industry-leading innovations and strong leadership,
Domino’s has restored its brand to one
that everyone not only recognizes but has started to
trust again; consumers and investors alike.
Technology was unquestionably at the heart of the
Domino’s turnaround. The CEO went so far
as to say, and I’m paraphrasing a bit here, ‘We don’t see
ourselves as a pizza company.
We’re a technology company that sells pizza.’ Domino’s
put its money where its mouth is –
and the results of this new mantra have grabbed enough
market share to help them
and a handful of other big chains to absorb an additional
11 percent of segment sales
that were previously going to independents.
Domino’s pushed the limits on brand revitalization and
started by acknowledging they had
some problems. Between driverless vehicles and drone
deliveries (at least one of which sounds like science fiction), the company
made a commitment to not just to digital/social/mobile and other tech advances,
they sought to instill the commitment to pursuing disruptive innovation into
the company culture. It’s clear that the mandate wasn’t just to swing for the
fences, but to fly a drone over it with a pizza attached.
THE COST OF INCONVENIENCE A HEAVY PRICE FOR INDEPENDENTS
Across the entire U.S. restaurant industry, fewer than 25
percent of restaurants
have their own mobile app (some say this number is as low
as 16 percent).
When it comes to
the pizza industry, the big players in this segment have been faster t
han most to realize that you can never make it too easy
for guests to make a purchase.
After a quick review of the 50 U.S. pizza chains with the
highest 2014 sales, we found that
an unsurprising (or astonishing, depending on how you
look at it) 62 percent have a dedicated mobile app, and a further 88 percent
have online ordering platforms.
These 31 chains with in-house apps together account for
36 percent of all U.S. pizza restaurant units and 54 percent of segment sales.
But what’s happening to the independents as mega-chains
like Domino’s carve out a bigger share
of the pizza pie each year? With some estimates calculating
that as much as 95 percent
of independent U.S. restaurants do not even have a
mobile-optimized website
(we’re not talking apps here, just a website that will
work on your phone),
it’s no wonder the chains are growing at a faster pace.
DOMINO’S IS NOT THE ONLY ONE DOMINATING AT DIGITAL
In a ‘Who wore it better?’ kind of way, the big pizza
chains are parading
their digital accomplishments to woo over investors and
media alike. It’s a triple whammy really,
if you score big with a digital innovation, not only will
you see the business benefits in terms
of dollars and sense, it often comes with the add-on
perks of free ‘earned media’
(a fancy way to say publicity or marketing you didn’t
have to pay for), but also the confidence
and cash of investors looking for the kinds of returns
such innovations can deliver.
While Domino’s probably wins ‘Who wore it better?’ in
recent years, Papa John’s can’t be overlooked on the subject of digital
innovations and market share gains. One of their badges
of honor can be found circulating on business and
investor sites as well, touting their history of being an early adopter (note,
the headline in the infographic below is their own, not ours):
THE SALES GAP IS FOUND IN DIGITAL
With an AUV of $657,000 (on par with the segment
average), Domino’s now sees over 50 percent of its sales generated by online
platforms (though, in some region’s like the U.K., that number is higher, with
75 percent of the company’s 2015 pizza orders made through digital channels).
Take away these sales, and you’re left with an AUV of
$328,500.
If that number looks familiar, it absolutely should –
it’s only $56,000 less than the AUV
of your typical independent pizza restaurant. The
evidence is pretty plain that,
in the case of the plummeting mom-and-pop pizza profits,
the failure to get with the program
and get online, once categorized by consultants and
onlookers as a “highly recommended” strategy, is now requisite, not just to
compete but to stay in business.
DIGITAL ORDERING GROWING AT AN ASTONISHING RATE
Back in 2010, roughly 1.39 billion delivery orders were
made via phone. Last year, in 2015, only 1.02 billion guests called in an order
(a 27 percent decrease in just five years). In this same period of time, online
orders grew from 403 million to 904 million – 124 percent growth,
with 47 percent of Americans ordering food online.
Even more telling, digital ordering is now estimated to
be growing at a rate 300 percent faster
than dine-in restaurant traffic.
If this trend continues, by the end of this year, online
ordering will (most likely) overtake phoned orders – especially given the money
major players are throwing at developing online programs.
As of May 2015, estimated investments into the
development of these programs were anticipated
to be $1.2 billion (which is, in our view, conservative –
particularly with companies like Uber, via UberEats, entering the market).
DIGITAL AND DELIVERY GO TOGETHER LIKE PEPPERONI AND
CHEESE
Uber recently announced that its hoping to generate $1.5
billion in its next round of funding.
And while not all of this will be going to the UberEats
program, it’s a clear sign that high-profile companies like Uber have a hefty
chunk of change to throw toward making it easier for consumers to buy from them
(and you can never make it too easy) through digital, social and mobile
advances.
In 2014, UberEats, Caviar, Postmates and DoorDash
together processed $400 million in orders.
By 2016, that number is expected to grow to $1.6 billion,
and it’s all thanks to the investments
made to digital, social and mobile platforms.
REDEFINING SPEED AND CONVENINECE IN THE RESTAURANT
INDUSTRY
The game-changing innovations UberEats, Domino’s, Yelp
and Amazon are making in delivery
is just one more example of how seismic shifts in
technology can reshape an entire industry.
Digital innovation is the modern face of convenience
engineering, and guests (and, for that matter, competitors) are not going to
wait for a lagging business to get with the program.
Look at the (now defunct) Blockbuster, which was bought
by Viacom for $8.4 billion in 1994,
$1 billion in debt by 2010 and sold to DISH Network for
$234 million (less than three percent
of the company’s 1994 value) in 2011 – all because the
folks at Netflix imagined video differently.
Companies like Uber, Amazon and Google are thinking the
same way – and view investing in these technologies as part of the future of
their companies, not as a line item or nicety of the marketing budget, but
rather a necessity for the survival of their business. And those business have
transformed their industries and the way that we all live today, essentially by
providing us
with a new way to get the things we want faster and more
conveniently.
So why wouldn’t executives in the restaurant industry be
asking similar questions as these companies? How do we make it more
user-friendly and use technology to make our product
and brand more convenient and relevant?
The numbers all add up to one clear conclusion, pizzerias
not investing in digital, social and mobile are becoming irrelevant faster than
users can type “pizza” into Google
and get their instant local listings.
ABOUT THE AUTHOR:
Aaron Allen is a global restaurant consultant and
the founder/CEO of Aaron Allen & Associates, a leading global restaurant
industry consultancy specializing in growth strategy, marketing, branding,
design and concept development. Aaron has personally lead
boots-on-the-ground assignments in 68 countries for clients ranging from
startups to multinational companies posting in excess of $37
billion. Collectively, his clients around the globe generate over $100
billion annually and span six continents and more than 100 countries.
https://www.linkedin.com/pulse/how-tech-killing-off-independent-pizzerias-aaron-d-allen?trk=pulse-det-nav_art
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