The next big slice of the fast-casual restaurant market is expected to come from an Italian American staple: pizza.
The success of the fast-casual trend is best evidenced by Chipotle Mexican Grill, which since September of last year has seen its stock rise more than 55 percent, an upsurge driven primarily by same-store sales growth. At the same time, sales at fast-food behemoth McDonald's dropped for the third straight quarter, while a recent survey of McDonald's franchise owners showed the highest level of pessimism in a decade.
Consumers want better food, but they still want it quickly. That's makes fast-casual pizza a compelling proposition for franchises. Chipotle, Buffalo Wild Wings and Smashburger are among the existing fast-casual chains investing in the pizza concept. Why? The fast-food pizza market is a $32 billion annual industry, according to NPD Group's food service unit, Crest. And it's fair to say that in a landscape dominated by Domino's, Papa John's, Papa Murphy's, Little Caesers and Pizza Hut, there is room for food-quality improvement.
"Each year, a new fast-casual segment is being added, and now we are hearing more about fast-casual pizza," said Bonnie Riggs, NPD Group restaurant industry analyst who has covered the industry for three decades. Fast casual has grown into a $21 billion annual industry, according to NPD Group data for the one-year period ended June 2014.
There may be as many as 2,000 fast-casual pizza joints opened over the next five years by the major players in the space, according to a recent report from boutique broker Telsey Advisory Group.
Here is a look at the biggest fast-casual pizza makers and some facts supporting why this franchise business model is betting it will deliver—not pizza to your door, but returns to owners and investors.
(Source for franchise numbers and expected growth, company data. Source for franchise investment costs, company data and franchisechatter.com analysis of public documents.)
—Nicholas Duva, special to CNBC.com
Posted 5 Oct. 2014
- Number of franchises: 6
- Locations: California, Colorado
- Initial franchise investment cost: $416,500 to $618,700
Description: Created by Smashburger founder Tom Ryan, Live Basil cooks its pizzas in a gas-fired oven, often clocking times under 3 minutes. Like Pizzeria Locale, the chain attempts to use higher-quality ingredients whenever possible; San Marzano tomatoes are used for the red sauce.
Live Basil's footprint so far is a limited one—it has five franchises in Colorado and one in Los Angeles. That's because it is not actively franchising yet, but unlike Chipotle's plans to own and operate more pizza places, Live Basil will eventually begin franchising restaurants.
Slicing up the pizza market: A recent survey by Consumer Reports found that out of the 11 "worst" fast-food chains (using metrics including food quality, cleanliness and price), five were pizza restaurants.
- Number of franchises: 19 (13 company-owned), 29 planned
- Locations (including planned): California, Minnesota, Texas Utah; (coming soon) Missouri, Nebraska, South Dakota
- Initial franchise investment cost: $518,500 to $918,500; franchise fee $30,000 for first restaurant, $25,000 for each subsequent location
Description: PizzaRev, co-founded by music industry executives Irv Zuckerman and Rodney Eckerman, is based in Los Angeles. It is partly owned and operated by sports-bar chain Buffalo Wild Wings. The chain has a staunch formula: The 11" pizzas all clock in under $8 and are cooked in less than 3 minutes at 900 degrees. Toppings are free, and consumers have their choice of sauce and crust as well.
Slicing up the pizza market: The business models in the fast-casual pizza space are generally similar: made-to-order, brick- or gas-oven personal pizza, usually with a diameter of 10 or 11 inches, generally ready within 5 minutes and costing between $8 and $12.
- Number of franchises: 26 (40 planned by year-end, 200 in pipeline)
- Locations: Florida, Kansas, Maryland, North Carolina, Tennessee, Texas, Utah, Virginia; more planned in 14 additional states and Washington, D.C.
- Initial franchise investment cost: $343,500 to $479,500 (does not include real estate); franchise fee is $20,000 per location, plus development fee of $5,000 per store
Description: Pie Five is a sister chain to the considerably larger Pizza Inn. Like its larger parent company, Pie Five is centered in the Southeast. The 9" pies generally cost $6.49; gluten-free runs an extra $2. The chain also offers a variety of salads.
Wunderlich Securities analyst Robert Derrington said Pie Five is geared toward families, and franchise developers have found it to be a very efficient package that works very well in suburban locations.
Slicing up the pizza market: Like other fast-casual concepts, the focus is on the in-store experience and the same kind of chic, industrial design that characterizes chains like Chipotle.
- Number of franchises: 13 (20 planned)
- Locations: California, Colorado, Nevada, Texas, Philippines
- Initial franchise investment cost: $294,500 to $533,000
Description: Project Pie is the only one of these chains to have expanded outside the U.S., opening several locations in the Philippines. Like the others, it focuses on customizable pizzas with a broad choice of topping. The chain was rated #1 among all emerging fast-casual pizza brands in a study of Yelp users conducted by predictive analytics company Czar Metrics.
"The fast-casual pizza segment is really hot right now," said Michael Lukianoff, Czar Metrics CEO, in a press release. "Project Pie tops the charts on Yelp in terms of perceived quality, showing us that right now it's one of the most exciting brands from a consumer standpoint."
Perhaps this is due to Project Pie's offering of "Other Good S#*!" which includes a Nutella and Banana pizza.
Slicing up the pizza market: Lunch is the busiest time for these franchises; therefore, they compete with existing fast-casual and casual chains, trying to siphon off consumers looking for a fast and generally healthy lunch option.
- Number of franchises: 25 (10 planned, over 200 in pipeline)
- Locations: Alabama, Arkansas, Colorado, Florida, Georgia, Kentucky, Nebraska, North Carolina, North Dakota, South Carolina, Tennessee, Texas, Virginia
- Initial franchise investment cost: $400,000 to $600,000 (franchise fee is $25,000 per store plus royalties of 5 percent of net sales)
Description: Uncle Maddio's, based in Atlanta, was created by Moe's Southwest Grill co-founder Matt Andrew. Much like Moe's, it has a relatively broad menu, offering not just pizzas but paninis and salads as well.
Slicing up the pizza market: "If someone can't go down the line, customize the pizza to their preference and get it served to them within 5 to 7 minutes, the restaurant will be behind the eight ball," Wunderlich's Derrington said.
- Number of franchises: 21 (16 planned)
- Locations: Florida, Georgia, South Carolina, Tennessee
- Initial franchise investment cost (excluding real estate costs): $255,000 to $436,105
Description: The first Your Pie was opened in the college town of Athens, Georgia—the birthplace of REM, too—in April 2008 by Drew French. It's since expanded across the southern U.S., with most of its locations still concentrated in northern Georgia. Pies are made at 800 degrees in under 4 minutes. Certain toppings are free, but others (mostly meats) cost $0.90 extra. Customers have the option of making their own, customized pizza, calzone, panini or bread bowl salad.
Slicing up the pizza market: Traditional pizza concepts make most of their money vis-à-vis large and individual deliveries, which are often made in the later hours of the day. While older, delivery-based brands may not be impacted in the near-term, there is a risk that these fast-casual pizza chains will cut into the business of a Papa John's or Domino's if pizza becomes more of a lunch meal and consumers begin to forgo it for dinner, Telsey Advisory Group stated in its recent report.
- Number of franchises: 32 (10 company-owned), over 50 by year-end, near 400 in pipeline
- Locations (including planned): Arizona, California, Colorado, Ohio, Minnesota, Nevada, Oregon, Texas, Utah
- Initial franchise investment cost: $458,500 to $839,500 (excluding real estate purchase costs); royalty fee of 5 percent, company declined to disclose its one-time franchise fee
Description: Pieology's thin, 11.5" pizzas focus on their customizable quality—customers can choose from a variety of sauces and toppings, all included in the $7.50 price. Cook time is approximately 4 minutes in open-flame, 800-degree deck ovens. Founded in 2011 by Carl Chang in Fullerton, California, the chain's initial success was buoyed by hungry college students at nearby Cal State Fullerton.
Slicing up the pizza market: Consumers, especially younger, budget-conscious members of the coveted 18 to 34 age group, respond well to the focus on a limited menu with customization options and generally healthier options than traditional fast food.
- Number of franchises: 22 (at least another 10 planned by year-end 2014, more than 100 by year-end 2015)
- Locations: Arizona, California, Colorado, Oregon, Texas, Washington
- Initial franchise investment cost: $384,500 to $698,000; franchise fee of $30,000, royalty of 5 percent of sales
Description: Toppings on MOD's 11" pizzas are free; like many of the other chains, it offers a gluten-free crust at a $2 surcharge. Cook time in its 800 degree ovens is usually under 5 minutes. Based in Seattle, most of MOD's locations are presently in the Pacific Northwest and Southern California.
Slicing up the pizza market: Cooking time has always been a big reason why pizza has been late to the fast-casual craze. Simply put, it takes more time to make a pizza than a sandwich or burrito. But that's changing due to new oven design and the preference for thinner, smaller pizzas. Cook times are now down to as little as 2 minutes, according to Telsey Advisory Group.
- Number of franchises: 40 (125 by-year end 2015, 315 in pipeline)
- Locations: California, Idaho, South Dakota, Wisconsin, Illinois, Indiana, Ohio, Michigan, Kentucky, Tennessee, North Carolina, Washington D.C., Louisiana, Florida, Maryland, New Jersey, New York, Connecticut
- Initial franchise investment cost: $319,800 to $858,000
Description: This chain was founded by Rick and Elise Wetzel, the eponymous founders of Wetzel's Pretzels, a nationwide pretzel chain. Their crusts are generally thicker and chewier than competitors'. Toppings are unlimited, and salads are offered on the side.
Slicing up the pizza market: Fast-casual is the only segment of restaurants that has been able to drive traffic since the recession, growing traffic between 5 percent to 8 percent annually since 2010, during a period when the restaurant industry has been flat to negative, according to NDP Group.
- Number of franchises: 15 (13 under construction)
- Locations: Alaska, Arizona, California, Idaho, Kansas, Minnesota, New York, Utah, Washington, D.C.
- Initial franchise investment cost: $225,000 to $560,000 (per restaurant, expects financial resources to develop minimum of 10 new restaurants); royalty fee is 5.5 percent of gross sales, and brand fee of up to 2 percent
Description: The first Pizza Studio was founded by New York native Samit Varma only last year near the campus of the University of Southern California. It's already expanded to the East Coast, opening a store in the Bronx.
The 11" pies cost $7.99 with unlimited toppings; certain stripped-down "Starving Artist" specials are $5.99. Pizza Studio claims a cook time of 2 minutes in a double convection, high-temperature oven.
Slicing up the pizza market: Southern California and Denver (thanks in part to to Chipotle) have been the hubs for the rise of the pizza fast-casual trend. Colorado has been a leader in fast-casual restaurant adoption generally, according to a 2013 survey from NPD Group, with the top three metro areas for fast-casual restaurant density in the U.S. all Colorado metro areas.
- Number of franchises: 2 (one more opening in Denver this week)
- Locations: Colorado
- Initial franchise investment cost: Like Chipotle, Pizzeria Locale has no plans to franchise at this point, but Chipotle's moved into this sector shows that a big company is betting on doing for pizza what it did for the burrito.
Description: Chipotle co-CEO Steve Ells partnered with restaurateurs Bobby Stuckey and Lachlan Mackinnon-Patterson to launch Pizzeria Locale, a Denver-based fast-casual pizza location based on a more traditional Italian restaurant in Boulder. The emphasis at Pizzeria Locale is on a traditional, Neapolitan style. Their 11" pizzas run from $5.75 up; toppings are $1 to $2 each. Three locations total are planned for Denver. Chipotle's plans also speak to one of the most important aspects of this niche in its early days: There is a divergence between business models that can be easily franchised and others that are likely to remain company-owned.
Slicing up the pizza market: The big question in a market expanding this quickly: Is it a boom, or a bust in the making?
"The proliferation of fast-casual pizza chains looks to be at a breakneck pace," Wunderlich's Derrington said. He compared it to the growth of bagel chains in the mid-1990s.
In 1994, there were 1,500 chain bagel stores. By 1997, there were 7,600.
"Ultimately, as with the bagel chains, there will be too many stores," Derrington said, adding that revenue per store will drop precipitously for the losers. "But at this point, this is a quickest-to-market thing; everybody wants to be the incumbent. It will ultimately be a bloodbath."
NPD Group's Riggs is less pessimistic, or in the least, says it's too early to make a call. "Everybody asks if there is point of saturation with fast-casual. I don't know," Riggs said. She added, "They are new and creative and on target with meeting consumer needs. The overall restaurant market isn't growing, but they are stealing visits from other concepts."