The Dallas Morning News

DALLAS – Pizza lovers might remember 2005 as the year of the real deal.

Domino’s Pizza Inc., the nation’s No. 2 pizza purveyor, offered up its “555 Deal,” with three medium one-topping pizzas for $5 each.

Dallas-based Pizza Hut, the No. 1 chain, and Papa John’s International Inc. countered with their own sweet deals.

The moves came in a year in which each of the three major chains had something to prove, and in a middle-aged industry where growth, if there is any, is measured in the low single digits.

But the deal-making left the three stealing market share from one another, said experts, who questioned what that means for the nearly $30 billion industry long-term.

“You’re seeing lots of pricing (promotions) now,” said Tom Boyles, editor in chief of PMQ, a pizza industry trade publication based in Oxford, Miss. “It makes you wonder, what kind of standard are they setting? Is it a low-price standard or a new product standard?”

For Pizza Hut, in particular, bargain shoppers’ gains were not great news in 2005.

Both Domino’s, based in Ann Arbor, Mich., and Louisville, Ky.-based Papa John’s posted better numbers than Pizza Hut in a key measure of chain health – same-store sales, or sales at restaurants open at least a year.

Analysts said that’s in part because of the competitors’ success in targeting deal-hungry consumers.

“Although the category rebounded from its Atkins (diet)-induced losses of 2003, Pizza Hut lost share to Domino’s and Papa John’s as their value message proved more compelling to the consumer,” said Peter Oakes, a restaurant analyst with Piper Jaffray.

Pizza Hut, part of Louisville-based Yum Brands Inc., slipped in the last half of the year to end 2005 with flat same-store sales. That compares with a 5 percent rise in 2004.

Pizza Hut recorded the weakest 2005 same-store sales of the three major Yum properties, which include Taco Bell and KFC. However, Pizza Hut’s stronger showing in 2004 made for tougher comparisons in 2005.

Analysts had wanted to see the chain build on 2004’s sales growth.

“Pizza Hut has had a difficult time driving two years in a row of significant positive same-store sales growth,” said David Palmer, a restaurant analyst with UBS.

Pizza Hut has had a harder time than some of its key competitors “sustaining momentum,” he said.

Same-store sales at Papa John’s – which got a new chief executive last year – rose 5.1 percent on the year, with gains of 3 percent or better in seven of the last eight periods.

And same-store sales at Domino’s in 2005 – its first full year as a publicly traded company – rose 4.9 percent, including an 11.2 percent bump in the first quarter.

Wall Street took notice.

Papa John’s stock price entered 2006 at $31.20 a share, up 84 percent from the year-ago posting and up 86 percent in the last two years.

Domino’s stock gained 41 percent last year and is up about 75 percent since the company went public in July 2004.

Meanwhile, Yum’s stock price was down about 0.15 percent at the start of the year compared with January 2005, but up 39 percent over two years.

Pizza Hut officials declined to be interviewed or to respond to e-mailed questions.

In mid-2005, Yum Chairman and Chief Executive David Novak described Pizza Hut’s performance as “a short-term bump in the road,” adding that he expected to see momentum improve “with more marketing excitement coming up in the fourth quarter.”

Same-store sales for the quarter slipped by 1 percent.

In a prepared statement, Pizza Hut President Peter Hearl said, “We recognize you can’t win the Super Bowl every year; however, we plan to win more than not.

“We’re optimistic about 2006 given the proven pipeline of new product innovations we’ll be introducing this year, along with our value offerings.”

For 2006, the offers already have begun, just in time for the Super Bowl, when a chain’s sales can be 40 percent higher than a typical Sunday.

Pizza Hut announced on Jan. 20 a new Cheesy Bites Pizza that places 28 cheese-filled bites at the edge of a large $11.99 pizza.

The company will spend nearly $50 million to market the limited-time offer, which includes ads on Super Bowl Sunday.

The heavy promotions are a sign that pizza, like the hamburger, is in what analysts call a “mature” category.

That’s code for a segment with lots of established players, some of whom are reaching middle age, where it’s harder to generate substantial sales growth.

Pizza Hut, founded in 1958 by two Kansas brothers, turns 50 in two years.

And, much as retail consumers have been conditioned to shop largely during sales, diners are becoming resistant to pitches that don’t involve new products or great deals.

“That’s the way it is in fast food as a whole,” said Jonathan Waite, a restaurant analyst with Keybanc Capital Markets. “Since they’re a mature part of the industry, they have to rely more on (special offers) to get people in the door.

“And advertising becomes more important,” he said.

Chris Sternberg, a spokesman for Papa John’s, listed innovation and limited-time offers as being among the key drivers of last year’s sales growth at his chain.

In October, the company debuted its pan pizza, which was the largest product launch in the company’s history.

The company also introduced dessert-style pizzas, which have since become permanent menu offerings.

Sternberg, too, conceded that the pizza category has become largely promotion-driven.

“Clearly, if you throw enough marketing dollars at a good offer, you can move the sales needle,” he said. “I don’t know if it’s sustainable or not.”

Palmer of UBS foresees a stronger 2006 focus at Pizza Hut based on its value offerings, which in 2005 included a pan pizza for 25 cents with purchase and two medium pizzas for $6.99 each.

“I would not be surprised to see a value offer become … permanent,” he said.

Waite, of Keybanc, echoed others’ concerns that the chains all need to look beyond the price tag.

“If they’re just competing on price, they’re just going to grab share from each other,” said Waite.

“If they want to break themselves out from the crowd, they have to come out with newer, fresher products that we haven’t seen before.”