What Killed This Pizza Chain Star?

Source: Sbarro

Pizza chain Sbarro has just filed for bankruptcy protection for the second time in less than three years. The economy and bad weather certainly participated, but maybe there is a list of other culprits that contributed to Sbarro's demise. Video killed the radio star, but did digital kill this pizza-chain star?

Culprit No. 1 -- the Mexican grill
Did Chipotle Mexican Grill (NYSE: CMG  ) play a role? The lineup is similar. Start at one end of a Chipotle Mexican Grill line. Give your order. Slide on down and pay. It's a similar concept to Sbarro, only Chipotle Mexican Grill makes the food fresh.

Michael Whiteman, a restaurant consultant, stated about Sbarro: "Its biggest shortcoming is that it sells food that has been sitting out for a while, and more people want food made to order." No wonder Chipotle's revenue, same-store sales, and earnings have been exploding every quarter.

Culprit No. 2 -- the anti-mall crowd
No doubt the 15% drop in mall traffic this holiday season had an enormous impact. Many of the company-owned Sbarro units are located knee-deep inside many of the country's malls. Starbucks (NASDAQ: SBUX  ) CEO Howard Schultz pointed out that this holiday season saw the biggest shift yet out of the malls and into online shopping.

Source: Starbucks

Starbucks as a result actually saw a 4% increase in guest traffic at its stores. It sees this as the start of a new fundamental shift. Many quick-service restaurants such as Starbucks are becoming the go-to place rather than just a spot to consider while in the mall. And if you're going to make a trip specifically to a pizza restaurant, you're probably going to want fresh food. The Sbarro model may not work anymore.

Culprit No. 3, No. 4, and No. 5 -- digital delivery guys
Papa John's International  (NASDAQ: PZZA  ) , Domino's Pizza (NYSE: DPZ  ) , and Pizza Hut of Yum! Brands (NYSE: YUM  ) have started to crush the regional players.

Papa John's has logged more than $5 billion in digital sales. It believes ordering pizza via digital has reached "a pretty quick pivotal point." It's at the point where Papa John's is seeing more than 40% of its sales come from digital orders. Customers are ordering more often and spending more each time when using digital or mobile ordering.

For Domino's Pizza, it's the same thing. More than 40% of sales are now digital...and climbing. Mobile ordering increased more than 102% in the last year. Domino's Pizza CEO J. Patrick Doyle explained that much of the reason for the gains by Domino's, Papa John's, and Pizza Hut is because they've taken market share from regional pizza chains that are missing the same digital capabilities or popularity. Sbarro certainly would qualify as a smaller chain.

Source: Domino's Pizza

Doyle added, "We're effectively competing against smaller players that either don't have digital ordering or certainly don't have the same kind of robust platform that we're operating on." He credits this for Domino's Pizza's growth.

Meanwhile, Pizza Hut of Yum! Brands is also seeing more than 40% of sales derive from digital. CEO David Novak said that digital is a "huge opportunity," and he mentioned Yum! Brands is "opening new channels with digital." Pizza Hut and Papa John's were even included by Domino's Pizza among the three players receiving the vast majority of digital orders. Sbarro seems like the odd man out.


Maybe in our digital age, ordering at Sbarro involves too much direct human interaction. What's bad for other pizza chains such as Sbarro is good for Domino's Pizza, Papa John's, and Pizza Hut. Look for this trio to continue to take market share at the expense of the little guys such as Sbarro that are stuck in the malls with a stale-fold business model.

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