According to the NPD Group, the restaurant segments which are experiencing the most severe traffic declines in the March-May 2008 timeframe are the full-service restaurant categories and those dominated by independents. The pizza category is one such category that is dominated by independent players. Domino’s highlighted in a recent presentation that small chains and independents accounted for 54% of pizza delivery dollar share in 2007, and in line with NPD’s comment, the QSR pizza category has faced significant traffic declines with negative YOY traffic trends in the last 5 quarters and down again through May in 2Q08.
- On DPZ’s 2Q08 conference call earlier this week, when asked about independent closures, the company’s CEO David Brandon said:
“Our belief, and it’s more anecdotal than it is statistical, is that the pressure that’s happening out there is clearly creating closures. I mean we’re seeing a few of them and we’re stronger and we can buy cheaper and we’ve got a better brand, and a 47-year track record. We are in a position where we feel the pressure with our weaker operators. We can only conclude and we’re witnessing that same pressure translating in an even bigger way to a number of the smaller operators out there. But it will take a couple of quarters for that to show up in some of the data that we can share with you and certainly when it’s available we will be talking about it.” - DPZ management has stated in the past that overly aggressive pricing actions across the industry are to blame for the fall off in traffic. Although more disciplined pricing should help traffic trends (but not necessarily margins), a reduction in supply could only help as well. I don’t want to root against the small players, but if more independents are forced to close their doors as a result of their not having the scale necessary to deal with both lower consumer spending and higher commodity costs, the bigger chains should emerge as winners.
