OPINION:
Is the day of reckoning finally here for the pizza industry?
A few years ago, when Papa John’s International was boasting of greatly increased sales and profits — an obvious direct result of the COVID-19 lockdowns — I warned that those inflated numbers were built on a house of cards that would eventually crumble after the lockdowns were lifted and life returned to some level of normalcy.
The correlation between COVID-19 lockdowns and massive paydays for pizza purveyors is now obvious. In 2020, major pizza chains in the U.S. saw a 6% increase in sales, with Papa John’s seeing same-store sales rising over 17% in North America.
In 2022, however, what some have called “pizza fatigue” began to set in, and Pizza Hut, Domino’s and finally Papa John’s began to see declines in comp sales as the year went on. And although Pizza Hut and Domino’s saw increases in their comp sales in the first quarter of this year, Papa John’s sales remained flat.
What seems clear is that the major pizza delivery chains will likely struggle just to keep sales flat, much less see the kind of growth they experienced at the peak of the pandemic.
The reason for this decline, according to most observers, boils down to three main factors. First, the lifting of lockdowns allowed people to leave their homes, depriving the big three pizza delivery chains of what had literally been a captive customer base. Second, the big players in pizza have been hit with increasing labor shortage issues. Third, inflation has driven up the cost of ingredients.
But while the “Big Three” national pizza chains may be struggling to come to terms with — and adapt to — the post-COVID climate, is it really true that American consumers at large are suffering from some sort of “pizza fatigue”? Could it really be possible that hungry customers across the country are turning their backs on what is easily one of the greatest culinary creations of all time? (Not that I’m biased or anything.)
Well, no. In fact, there is data available that suggests the precise opposite.
According to a recent Technavio report, the global pizza market will increase by $51.38 billion through 2026, growing at a compound annual rate of 6.1%. North America, according to the report, will account for 43% of that growth, or over $22 billion.
So, if the pizza market is expanding so quickly, why are major chains like Papa John’s and others struggling to maintain profits and see a slice of that explosive growth? Rather than growing with the market, they’re struggling to such an extent that at least one publication has seen fit to claim that they are “on the decline.”
The truth, I believe, is not that American consumers are suffering from “pizza fatigue,” but that they are suffering from poor-quality fatigue. “Better Ingredients. Better Pizza” wasn’t just a slogan — it was the core of the Papa John’s product and business strategy and is a literal recipe for success for anyone in the restaurant industry.
Unfortunately, it is a recipe long forgotten in the kitchens of the largest pizza chains. The Technavio report shines some light on this: “The increase in the price of raw materials not only increases manufacturing costs but also reduces the profit margins for vendors. This has led several vendors to experiment with cheaper substitutes to remain competitive.”
We have seen this with Papa John’s (PZZA), the company I founded in 1984 in the broom closet of my dad’s tavern. Since I stopped running the company day-to-day in late 2016, management has abandoned its commitment to quality and has now commoditized the brand, competing on price instead of continuing to differentiate its product on quality. Going so far as changing the recipe that was the backbone of the success of Papa John’s for decades.
While experimenting with cheaper — and by extension less tasty and healthful — substitutes may help a pizza business remain competitive in the short run, it will not lead to long-term growth. In fact, it will lead to eventual decline and failure, which appears to be what we’re seeing now.
Because in the past three years or so, something else happened. A trend that was already growing exploded dramatically. That trend? Americans are caring more about the quality — both in taste and nutrition — of the food they eat.
A 2022 report from McKinsey noted that the COVID pandemic accelerated the trend of consumers seeking fresher, healthier food. One could even argue that more Americans care about food quality than at any point in our nation’s history since industrialization. And while pizza may not be considered “health food,” the trends noted above demonstrate consumers are increasingly more aware of the quality of the ingredients going into the food they eat.
At Papa John’s, for example, our product went from superior quality to mediocre. The pizza doesn’t taste the same because they changed the recipe, and are now less stringent about quality procedures and making the pizza. Even though comp sales have increased over the last three years, customer counts have decreased significantly. The truth is that despite a number of marketing gimmicks, including $6.99 national pizza offers, customers have left Papa John’s in droves.
Yes, at the end of the day, in a major pizza chain’s battle for customers with its competitors, value wins in the short term and quality always wins in the long term. But if that company and its competitors are offering products that customers don’t deem as tasty or desirable, they’ll be fighting over a shrinking non-quality customer base while quality-conscious customers seek out alternatives. Papa John’s anemic traffic count proves this.
Perhaps today’s consumers simply don’t want what some major pizza chains are currently selling, and the day of reckoning is upon them.
• John Schnatter is the founder and former chairman and CEO of Papa John’s International.
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