KEY POINTS:
The intense price wars among pizza retailers over the past two years is easing as high commodity prices put the squeeze on profits.
New Zealand's largest operator, Pizza Hut, and fast-rising rival Domino's concede that prices will have to rise at some point as the cost of raw
materials - cheese in particular - skyrockets.
While pizza operators have the advantage of better buying power and locked-in supply contracts, they are not immune to major price shifts, which has seen the retail price of cheese soar 60 per cent in the past year.
"I think price increases in this inflationary environment are probably inevitable. There's no free lunch unfortunately. Or free pizza," said Russel Creedy, chief executive of Pizza Hut's New Zealand operator Restaurant Brands.
"We have the advantage of being able to tap into some of the [franchise brand owner] Yum! International agreements so that has helped, especially on the international side, get us favourable pricing.
"And we're also the biggest pizza brand in the market - substantially bigger than anybody else - so our leverage on good pricing in the supply chain has always been an advantage and will continue to be."
Creedy said competition in price had eased. "Anybody who buys pizza would have seen the wild discounting that was going a year ago, or two years ago, has certainly been tempered.
"Our observations of the market are that our competitors are starting to feel the effects of lower sales and higher costs.
"It's going to come home to roost, because a discounting product policy is not sustainable ongoing and at some point in time, prices are going to have to lift to meet the true costs of supplying pizza." He concedes that Pizza Hut's retail prices will have to rise too, but that is cushioned by new operational initiatives that would allow it to sustain a profit at lower sales levels.
Its value-end competitors, which operate on smaller margins, need higher volumes to sustain profits - a difficult scenario as high interest rates and fuel costs cut into consumers' discretionary dollar.
"Everybody's getting hit with cheese prices and it's just the relative volume differences between ourselves and our competitors that make our position a little bit more favourable."
Rival chain Domino's, which has taken a slice out of Pizza Hut's pie since it arrived in New Zealand in mid-2003, has a five-year cheese supply deal with Fonterra.
New Zealand general manager Peter Jones said the current pricing for cheese was fixed until September.
"We are actively managing commodity prices and in six months' time we will have a revised outlook.
"It is inevitable that at some point our prices will have to increase to cover the rising commodity prices. However, Domino's owns the value proposition and we will continue to offer great quality pizzas at a good price."
Its weekly value coupon specials would continue, said Jones.
ON THE MENU
* Soaring cheese prices have hit pizza makers
* Aggressive discount pressure has eased
* Price rises are forecast
