Pizza Hut Is Ready to Be Sliced and Diced

Fast-casual pizza may be hot, but the concept may have gone as far as it can.

Apr 4, 2014 at 6:30PM



Pizza is going flat. After years of strong growth, pizza sales are expected to widen just 2.3% in 2013, down from the more robust 3.7% expansion it enjoyed the year before. The market researchers at NPD Group anticipate we'll see growth of less than 2% this year. Pizza, it seems, has peaked.

The timing could be problematic for Yum! Brands' (NYSE:YUM) Pizza Hut chain, which is facing an onslaught of competitors trying to remake the segment in the image of fast-casual giant Chipotle Mexican Grill (NYSE:CMG). By infusing the concept with a greater choice of toppings, adding in gourmet, fresh ingredients, and catering to the made-to-order fad that's swept over burgers, Chinese food, and sub shops, pizzerias are trying to go upscale to create a new taste sensation.

I'm not sure they're not too late to the (pizza) party. Yum!, which already dominates the fast-casual pizza niche, reported that same-store sales at its U.S. Pizza Hut division fell 2% for the year, and were down 4% in the fourth quarter. Just last month, mall-based pizza joint Sbarro filed for bankruptcy, even though it had big plans to develop a mid-level concept called Sbarro Brooklyn Fresh.

Pizza meets the consumer's need for quick, cheap food. Technomic found that 75% of consumers eat pizza at least twice a month, and report they have on average 3.4 "pizza occasions" per month. That comports well with an Agriculture Department study issued in February that says on any given day, 13% of the U.S. population is consuming pizza somewhere.

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Why that data is important, though, is that it shows it's primarily a food niche catering to young males, ages 6 to 19, a demographic important for the corner pizzeria, less so for these swank Chipotle wannabes. Indeed, Chipotle itself has had enough of pizza shops wanting to be the "next Chipotle"; it's partnered with Pizzeria Locale to create its own fast-casual chain.

Fast casual is undoubtedly hot at the moment, one of the few dining segments showing consistent growth even though it comprises just 14% of the total $223 billion limited-service restaurant segment. Whereas Technomic says all limited-service restaurant growth will expand at a compounded annual rate of 4.5% through 2017, they expect fast-casual restaurants to grow at more than double that pace, or 10% on average during the same time frame. NPD also says that fast-casual chains are the leaders in adding new restaurants.


My preferred pizza investments are those that mix the best qualities of the corner pizza-by-the-slice joint with the desires of consumers. As part of its continuing makeover, Domino's Pizza (NYSE:DPZ), for example, has added the fresh ingredients consumers are looking for while maintaining the delivery and discounting components that brought them success in the first place. Global sales were up 5% last year, with domestic company-owned and franchised stores enjoying a 3.4% increase in sales, outpacing the larger industry numbers. Similarly, Papa John's (NASDAQ:PZZA) witnessed a 4.5% increase in domestic sales year over year, with total revenues up more than 5%, as well.

Pizza may have hit a plateau, but that doesn't mean investors still can't grab a slice. I'd avoid those that seek to simply cash in on the latest craze and stick with those that have proven they can build on what's already established rather than trying to hang curtains on some new, fancy concept.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill and Papa John's International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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