Hard Pressed Pizza Chains Respond Differently to Downturn

The high cost of cheese is squeezing pizzerias so much that the industry now refers to it as "white gold." Richard Gibson of The Wall Street Journal reports that in 2008, the largest pizza chain, Pizza Hut, has lost 41 stores; medium-size Domino's has lost a super large size of 69 stores; and the smallest of the three giants, Papa John's, happily gained 32.

The giant pizza chains are taking different approaches to the economic downturn. Papa John's is cutting its royalties and negotiating lower cheese prices to give franchisees help. Domino's is pointing to poor performing franchisees and terminating them.

CEO David Brandon elaborates on the short-sightedness of some of the weakest links to the chain:

. . . some franchisees ramped up pricing too much when commodities prices soared last year, and the consequences were serious. "In many cases, we chased off that value-oriented buyer," he said at a recent investor conference.

As of the third quarter of 2008, 47 of the 247 franchisees the company felt weren't operating up to its standards had left the system and another 89 were planning to sell their stores and exit this year. The remaining 111 are working to improve their restaurants and remain, the company says.

The company's better-performing franchisees who are in a position to grow by buying or building new stores are getting help in the form of a short-term royalty reduction, Domino's spokesman Tim McIntyre says in an email. 

The different approaches of management so far are yielding different results.

Of the three systems, Domino's Pizza same-store sales has shrunk the most — down 5.6% in the first three quarters of 2008. It is down the most in disappeared stores. And it has now entered the sub sandwich wars. Analysts are listening to franchisees.

A survey taken by the Domino's Franchisee Association last summer indicated widespread dissatisfaction among its members over the return on their investments.

Morgan Stanley restaurant analyst John Glass, alluding to such feelings, recently told clients, "We're not convinced that the fallout from the strained franchisee system has yet to hit bottom. We would expect more store closures in 2009."