How Pizza Chains Are Affecting the Rest of the Fast-Food Industry

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Research firm Food Genius recently revealed that pizza is now featured on 40% of all restaurant menus in the U.S. Yum! Brands' (NYSE: YUM  ) Pizza Hut and Domino's Pizza  (NYSE: DPZ  ) are the top two chains but make up just over 15% and 9% of sales, respectively, of the highly fragmented and expanding $37.3 billion American pizza-restaurant market.

The rise of fast-casual restaurants and a weak economy have often been scapegoats for the recent struggles of fast-food chains like McDonald's (NYSE: MCD  ) . However, the growing popularity of pizza -- both domestically and worldwide -- may also be negatively affecting the rest of the fast-food industry.

Credit: Domino's presentation.

Technology driving pizza growth
Ordering a pizza has never been more convenient for consumers. Digital orders now contribute to more than one-third of all sales for both Pizza Hut and Domino's. Both chains have mobile apps compatible with at least 95% of all smartphones.

Pizza Hut in recent months has taken convenience further by becoming the first quick-service restaurant to use gaming consoles for ordering. Pizza Hut recently revealed it surpassed $1 million in sales through the Microsoft Xbox 360 in less than four months.

Similarly, Domino's has teamed up with Ford to allow drivers to execute hands-free ordering through the Ford SYNC AppLink, which connects to users' smartphones.

Capitalizing on technology has helped all pizza shops separate themselves from the fast food industry -- whether it is a mobile app or just an online presence that allows quicker ordering execution. In contrast, ordering fast food hasn't evolved as much and still involves going through either a drive-thru or walking in the restaurant itself.

Being able to order a pizza while you are playing your favorite video game, or while on your way home from work through your car's sound system, has seemingly redefined 'fast food.'

Credit: Xbox homepage.

The perception of pizza
In December the research firm YouGov released a poll showing the value perception for different types of fast food. While burger chains are still believed to offer the best bang for your buck by a narrow margin, pizza has surpassed both Mexican and chicken to now rank second. Rising beef prices and aggressive marketing strategies by Pizza Hut, Domino's, and even Papa John's have also helped change consumers' value perceptions among fast-food choices.

There is also a cultural perception at play regarding pizza.  This past Sunday's Super Bowl will undoubtedly prove to be the biggest day of the year again for many pizza chains. In particular, Domino's expected to sell more than 11 million pizza slices throughout the day, which represents an 80% increase from the typical Sunday.

Other events throughout the year also drive pizza sales like birthday parties, work celebrations, and even national holidays like the Fourth of July. Furthermore, if consumers prefer to eat traditional fast-food items like hamburgers or hot dogs during these same events instead of pizza, they will still skip the local fast-food joint and will often BBQ the items themselves.

The future of traditional fast food
With more than 35,000 locations in more than 100 countries, McDonald's is not going anywhere. However, future growth remains uncertain. Struggles with a menu that now has ballooned to more than 180 items, and menu addition failures like the Mighty Wings, resulted in sluggish fourth-quarter 2013 earnings that showed overall comp sales declining domestically and globally 1.4% and 0.1%, respectively.

On the other hand, Wendy's had a successful 2013 driven mainly by its popular pretzel bun and key management initiatives to franchise 425 existing locations. While the progress of franchising the chain will continue, it is still hard to tell if the company can introduce menu blockbusters like the pretzel bun on a consistent basis.

Wendy's has also had several menu setbacks. It attempted to create a breakfast menu with little success more than once, tried to compete with Subway with Frescata deli sandwiches, and even had boneless wings like McDonald's back in 2009.

In contrast, pizza chains have consistently added menu items that complement their existing menus. In particular, Pizza Hut and Domino's generally tweak what they have so that there are no unexpected setbacks like when Domino's debuted its handmade pan pizza in October 2012.

Credit: Domino's and Pizza Hut webpages.

Bottom line
Despite the threat of fast casual restaurants and a weakened economy, pizza could be an even bigger threat to the rest of fast food. It is estimated that 10% of all restaurant openings in the U.S. are now pizza concepts. Furthermore, pizza is catching on globally. Pizza Hut is a bright spot for Yum! Brands in China, with same-store sales increasing an estimated 5% last quarter, and Domino's has seen international same-store sales growth between 4.3% and 6.9% since 2007.

As ordering a pizza increasingly becomes faster and easier, generating sales growth among major fast-food chains like McDonald's may become slower and harder.

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Michael Carter

I graduated with honors with a B.S. in Mechanical Engineering from Virginia Tech and later got my MBA from the University of Pittsburgh. I'm a Licensed Professional Engineer (P.E.) for the state of Pennsylvania. As an experienced equities investor and Motley Fool member since 2006, I try to show that investing is not only for the pros.

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