Still-expanding UK pizza market offers profit, serious insights for global operators

With nearly £2 billion (US$3.1 billion) in annual sales, the high-growth, high-value UK pizza sector offers serious opportunity for operators, as well as real insight into the global pizza market’s possible evolution.

Combining a strong chained sector with a high proportion of full-service restaurant operator, pizza in the UK has evolved towards a two-tiered market, with increasingly high-end chained and independent FSRs battling it out with more value priced casual dining and 100% home delivery/takeaway outlets.

With the largest global pizza chains facing strong competition on the low end from low-priced independents and fast food operators while also struggling to break out of the casual dining niche in many developed markets, the UK example offers a potential way forward for operators looking to grow share in more developed markets.

The Gondola Holdings Pizza Empire

Accounting for nearly 30% of chained pizza sales in the UK, good for £390 million (US$620 million)in 2008, Gondola Holdings has edged ahead of YUM! Brands with a multi-tiered offer, combining multiple full-service dining formats.

The group operates no fewer than three pizza full-service restaurant brands, from the casual dining PizzaExpress to the more-upmarket ASK and Zizzi brands. Regardless of price point, however, it is notable that all of Gondola’s pizza brands have a distinctly premium feel to them, with fresh ingredients and a notably “traditional” presentation emphasised throughout—while all pizza chains in the UK tend to offer simpler pizzas with a thin crust, closer to the traditional Italian pizza than the heavier varieties found in markets like the US, PizzaExpress, ASK, and Zizzi all make freshness and simplicity a central focus of their marketing, while strongly emphasizing their Italian influences, offering an array of pastas to complement the central offer of pizza.

The success of Gondola Holdings’ brands—all three have posted steady growth over the last five years, taking share from pizza full-service market leader Pizza Hut—offers lessons on the possible evolution of pizza in more developed markets.

There is a growing constituency for a more premium offer—beginning with independents, often offering a more self-consciously traditional pizza, often prepared in wood-fired ovens and so on—and working its way up to chains. While pizza lends itself well to more premium ingredients, its simplicity makes it an especially compelling choice for chains requiring consistent product quality across multiple locations.

What’s more, for pizza full-service restaurants, a more premium offer is fast becoming a necessity—quality continues to improve through both 100% home delivery/takeaway outlets and in chilled/frozen pizzas, while a number of fast food chains in markets like the US and elsewhere have begun to offer high-quality thin-crust pizzas through fast casual formats, putting further pressure of full-service operators, particularly at lunch time.

Domino’s Pizza Takes on the Chiller Case

While full-service restaurants still account for more than half of pizza foodservice sales in the UK, sales slowed in 2008 as cash-strapped consumers cut back on eating out. Overall pizza sales continued to expand, however, fuelled by strong growth in 100% home delivery/takeaway outlets as well as through supermarket sales of chilled and frozen pizza.

For the year, pizza 100% HDTA sales grew 8% to reach £800 million (US$1.47 billion), while together frozen and chilled pizza sales expanded more than 4%, to approach £760 million (US$1.2 billion). Among 100% HDTA operators, Domino’s Pizza led the way with 11% growth, further cementing its 30% share of sales in the sector.

This growth has carried over into 2009, with company officials announcing same store sales growth of 10% in the third quarter of this year. Illustrating the advantages of scale, much of Domino’s growth has been the result of intense spending on marketing, with company officials noting that lower advertising rates have allowed the Domino’s to heavily promote limited-time price promotions. Likewise, the company has invested heavily in online ordering, with online sales accounting for 26% of UK delivery sales in 2009, up from 20% in 2008.

With packaged chilled/frozen pizzas increasingly competitive from a price/quality standpoint, convenience has become the primary tool in any delivery chain’s arsenal, with targeted price promotions and rapid-fire online ordering combining to attract impulse sales.

UK Market Points the Way

With the exception of Italy, the birthplace of pizza and a market radically different than any other, the UK offers several insights into the likely evolution of pizza foodservice in the more-developed markets of North America and Western Europe.

Pizza in the UK is a market with significant chained presence as well as a multi-tiered structure, with more-premium full-service operators increasingly distinct from value-priced 100% HDTA operators and supermarket pizzas.

Securing a niche in this kind of environment is expected to become the first order of business for many pizza operators in North America and Western Europe over the next five years, with pizza full-service operators moving to differentiate themselves with higher-quality presentation focused on fresher ingredients and a more upmarket ambiance, while pizza 100% HDTA operators are expected to double down on convenience-oriented measures such as online and mobile phone ordering, pressing their key advantage relative to packaged frozen and chilled pizzas.

Casual dining operators such as Pizza Hut are expected to face pressure on all sides, increasingly undercut by decent-quality delivery and packaged pizzas, while lacking the quality to compete with higher-end chains such as ASK or Zizzi, as well as independents offering a simpler, fresher, more traditional take on the pizza.

While pizza fast food remains underdeveloped in both the UK and elsewhere, this remains a sector where a fast casual presentation can prove effective, and is projected to emerge over the forecast period—as noted, pizza is well-suited to the fast casual model, combining a limited number of ingredients with significant versatility.

Particularly when tied to a fresh, simple “traditional Italian” positioning, pizza can be sold as a high-quality and even a relatively healthy option, as evidenced by PizzaExpress’s new Leggera line, combining 500-calorie thin crust pizzas with a portion of salad. For a glimpse at what a significant portion of the future global pizza market could look like, one need look no further than the UK.