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Current as of 19/09/14 07:40PM NZST

Christopher Adams

The Business Herald’s markets and banking reporter.

Stand by for the $2 pizza

Photo / Thinkstock
Photo / Thinkstock

In an environment where the big fast food players appear hell-bent on undercutting each other to offer the cheapest deals, the possibility of $2 pizzas isn't too far-fetched.

Pizzas are selling for as little as $4.90 every day at Pizza Hut and $4.99 on Domino's "Cheaper Tuesdays".

And Restaurant Brands chief executive Russell Creedy, whose company runs Pizza Hut, won't rule out the prospect of consumers getting the chance to wrap their lips around $2 pizzas.

"I've learned in this business to never say never," Creedy says.

"It's one of these businesses where pricing can be used strategically and sometimes a silly price like $2 pizza can be used for a day or a weekend."

Such cut-price offerings aren't restricted to the big pizza chains. After more than four years of economic stagnation, consumers seem to have become less willing than ever to open their wallets, prompting most of the big fast food players to offer lunch deals around or below the key $5 price point.

KFC is offering $5 lunchboxes, while McDonald's has gone 10c lower with a $4.90 cheeseburger, fries and drink combo. Burger King has a $3 burger and fries deal on its menu.

But are the offers sustainable for the companies involved?

James Bickford, New Zealand managing director of global branding agency Interbrand, says the sort of prices Domino's and Pizza Hut are offering are brand-damaging.

"Once you start getting into a price war, the brand value that you're trying to create will always suffer ... that's the bottom line," Bickford says.

Creedy also says such heavy discounting isn't healthy.

"I think it's bad for all retailers that they need to resort to those sort of levels [of discounting] to keep open and above water," he says.

Creedy says Pizza Hut isn't making any profit on the pizzas it sells for $4.90.

Such deals are offered to drive sales volumes, he says, which in turn contribute towards covering the fixed costs of the business, such as rent and wages.

"Any retailer has products out there to drive volume - whether they're The Warehouse, Briscoes or whatever, retailers need to pay the fixed costs," he says. "It's just about volume - it's a volume game, nothing else."

Restaurant Brands chief financial officer Grant Ellis says the $4.90 promotion also acts as a kind of carrot to get the punters into the store, in the hope they'll "trade up" to more profitable items.

"It's really the Domino's model," Ellis says.

But Janisa Parag, of retail marketing specialists IdeaWorks, says selling pizzas for less than $5 isn't a sustainable strategy.

"How low can you go? That's pretty low," Parag says. "There has to be something more than that."

She says Hell Pizza, the third biggest player in the market, has been elevating itself "above the pack" through innovation - rather than price - including the "pizza roulette" promotion it's offering, which involves a single pizza slice being drizzled with a super-hot chilli sauce.

Hell Pizza charges $17.50 for its large gourmet pizza range, while Pizza Hut's extra large stuff crust pizzas get close to $20 and Domino's premium range goes for $15.99.

Hell, however, operates in a different part of the market to the other two firms and doesn't resort to such deep discounting to drive sales, says co-founder and director Stu McMullin.

He says the company doesn't drop prices any lower than the $13 pizza promotions it runs on Black Fridays and the $13 pizza cards it gives to students.

"A Hell customer is not price conscious," McMullin says.

When it comes to the battle between Domino's and Pizza Hut, the former company's financial results suggest it could be winning.

ASX-listed Domino's Pizza Enterprises' Australian and New Zealand stores, most of which are run by franchisees, achieved same-store sales growth of 13.2 per cent in the 12 months to July 2011.

Pizza Hut's total sales in New Zealand fell $13.8 million, or 23.3 per cent, to $45.5 million in the year to February. Around half of the sales drop was the result of a sell-down of stores to independent franchisees.

Although Pizza Hut's same store sales were down for the year as a whole, there had been an improvement in the second half which is expected to continue, Restaurant Brands says.

Creedy says the level of competition between Domino's and Pizza Hut tends to get overplayed. Pizza, he says, doesn't just compete with pizza.

"Pizza Hut competes with McDonald's, KFC, fish and chips and everything else."

Retail analyst Tim Morris, of Coriolis Research, says Domino's has been "winning the war" against Pizza Hut internationally for the past 20 years.

The firm's franchised business model gives it its edge in the Australasian quick service pizza market, he says. "Franchisees control cost better and they don't really price their own time because they're mad entrepreneurs."

Restaurant Brands is gradually moving to a similar model with Pizza Hut - having franchised off 13 of its Pizza Hut stores over the past few years. But it still owns 71 of the 84 outlets in this country.

And while expansion for Pizza Hut in New Zealand appears unlikely, Domino's is planning more stores.

This year the company said it was looking to set up additional franchises in regional areas including Mosgiel, Mt Maunganui, Feilding, Tokoroa, Huntly and Queenstown.

Conversely, it's the provincial Pizza Hut stores that Restaurant Brands is reducing its exposure to through franchising.

Creedy says many of the big city Pizza Hut stores are strong operations and the company intends to hold on to around 40 of the best performing metro sites once the sell-down is completed.

Market watchers reckon the franchising of Pizza Hut stores and the company's plans to introduce its fourth brand to this country - US burger chain Carl's Jr - are positive developments for Restaurant Brands.

Paul Harrison, head of equities at BT Asset Management, says the Pizza Hut sell-down is "definitely the way to go".

"There's no benefit in scale with the smaller stores," Harrison says.

But he also says there's unlikely to be any near-term let-up in the pricing pressure facing fast food operators.

"The market has changed in terms of what people are prepared to pay for a meal," Harrison says.

"The consumer's attitude towards getting value is probably here to stay for a while."

- NZ Herald

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