Pizza Inn (PZZI)

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Pizza Inn, Inc. (NASDAQ:PZZI) is restaurant chain and international food franchise, specializing in American-style pizza. The company headquartered in the Dallas area^[1] and offered consumers affordable, quality pizza since 1958, when the first Pizza Inn restaurant opened. ^[2] Pizza Inn, Inc. together with its subsidiaries, operates and franchises pizza buffet, delivery/carry-out and express restaurants in the United States and internationally.^[3] Pizza Inn Inc. offers three concepts: buffet (Buffet Units), delivery/carry-out(Delco Units)and express(Express Units).

Buffet Units offer dine-in, carryout and catering service and, in many cases, also offer delivery service.Buffet Restaurants generally located in free standing buildings or strip center locations in retail developments in close proximity to offices, shopping centers and residential areas. 

Delco Units offer delivery and carryout service only and are typically located in shopping centers or other in-line retail developments.

Express Unit serve the customers through a variety of non-traditional points of sale. Express restaurants are typically located in a convenience store, food court, college campus, airport terminal, athletic facility or other commercial facility.Express restaurants limited or no seating and solely offer quick carryout service of a limited menu of pizza and other foods and beverages.

Industry and Competition

Pizza Market

The pizza segment of the food industry represents 11.7% all restaurants and accounts for more than 10% of all foodservice sales. ^[4]The pizza industry experienced a loss of market share and sales during the recession as cheese prices and increase in the cost of wheat and other pizza essentials drove up the cost of pizza. Like McDonald’s and other fast food restaurants in the industry, they gained market share by offering the consumers who enjoy with value meals and some low price entrees. In order to keep the pizza’s market share, pizza business began offer promotions to customers through varied marketing channels such as social media sites, the internet and direct mall. Nationwide promotion helped the pizza seller regain some of the sales. This trend towards offering targeted discounts has proved a successful strategy as most pizza businesses have reported an increased in sales at the beginning of 2010.

Demographics

Pizza is enjoyed by people from all walks of life and eating out at restaurants is an essential part of the American lifestyle. According to the National Restaurant Association, 45% of adults consider that restaurants are still a major part of their lifestyle and that they will continue to frequent their favourite restaurants. According to a survey 93% of Americans eat at least one pizza per month. ^[4]Some young people purchase more times per months, but older generation eat less times.

Pizza Franchises

The 2010 Industry Report Estimates that Pizza sale totaled over $40 billion in 2010. Over 40% of the revenue was generated by the major Pizza Franchises. The largest Pizza Franchise, of course, is Pizza Hut. Pizza Hut with it's over 7,200 nationwide locations took over 14% of the total revenue. Domino's Pizza, with over 5,250 locations is the second largest Pizza Franchise, followed by Papa John's Pizza with over 3,100 locations.^[5] Pizza Inn has relative small market share in the US market, which does not show in the pie chart. Pizza Inn insists its franchise-oriented business model, but its economic scale is much smaller than other leading pizza companies, unlike the first three leading companies, Pizza Inn is not nationwide business. As the table shows that there are a lot more competitors who are more widely spread the business and build more locations.

Trends

Ingredient Price fluctuation

Average block cheese prices dropped more than a quarter at the April 2011, coming in at an average of $1.75, down from $2.01 the week prior. It's good news of price decline for the raw materials in food industry. The abundance of domestic dairy supplies should have pushed prices down sooner. A large part cost of pizza comes from the toppings base, which usually are the sauce and mostly from cheese. The price fluctuation makes companies hard to control their raw materials costs. For instance, increasing price of cheese last year posed significant impacts on pizza industry, because they can not raise the price immediately but still need to maintain their revenue. The influence on the small pizza companies are even worse because in order to attract penny pinchers , they already drove their prices lower than others.

Health Concern

Obesity is an acknowledged epidemic in the United States and is considered a major public health problem worldwide. According to the National Restaurant Association forecast for 2011 seven out of ten consumers said they are trying to eat healthier when dining out now than they did two years ago. Traditionally, pizza is very unhealthy food. It's hard to say that people become more awareness of their healthy problem that lead to sales decline in pizza market.

Competitors

Antico Pizza in Atlanta Ga. is the Number #1 pizza in America . Voted by Zagat in their " First ever. "Pizza Survay " . Owner Giovanni DiPalma and brother Giuseppe DiPalma who is Director of Operations . Pizza Inn has a bunch of competitors, but according to different business concepts. Pizza Hut, Cici’s, and Sbarro are much similar with Pizza Inn. For example, Cici’s competes the concentrated market share in Texas with Pizza Inn. Besides, the business scale is relative small as well. Cici’s also serves the penny pinching customers, has franchised restaurant and supplies food through own distribution unit. Pizza Hut has competitive advantage because of its scale, brand name and loyal customers. Can be said that it’s the bigger size of Pizza Inn? Pizza Hut offer a wide variety of menus and promotion strategies, provides dine-in, carry out and deliver service as well as their franchised business. Sbarro’s company-owned restaurant more than its franchised restaurants, and its international business is broader than Pizza Inn but filed bankruptcy protection in 2011.

• Pizza Hut ^[6]The unit of YUM! Brands operates the world's #1 pizza chain with more than 13,200 outlets in about 90 countries worldwide. The chain serves a variety of pizza styles, including its flagship Pan Pizza, as well as Thin n' Crispy, Stuffed Crust, Hand Tossed, and Sicilian. Other menu items include pasta, salads, and sandwiches. Pizza Hut offers dine-in service at its characteristic red-roofed restaurants, as well as carry-out and delivery service. About 15% of the restaurants are company-operated, while the rest are franchised. The world's largest fast food company, YUM! Brands runs KFC and Taco Bell in addition to Pizza Hut.

• CiCi's ^[7]pleases penny pinchers and pizzaholics alike. CiCi Enterprises operates and franchises about 650 CiCi's Pizza restaurants in more than 30 states that offer several types of pizza along with salad, desserts, and pasta at an all-you-can-eat price. Concentrated in Texas, Florida, and other southern states, many of the eateries are located in shopping malls and other suburban retail areas. About 15 of the restaurants are company-owned, while the rest are franchised. CiCi Enterprises supplies its franchisees through its JMC Restaurant Distribution unit.

• Sbarro ^[8] lends an Italian flavor to that great American innovation, the shopping mall. The company operates and franchises nearly 1,000 cafeteria-style Italian-food stands across the US and about 40 other countries. Serving pizza, pasta entrees, and salads, Sbarro's units are typically found in high-traffic locations, such as malls, airports, and toll-road rest areas. Roughly 500 of the locations are company-owned, while the rest of the chain is operated by franchisees. Weighed down by debt, Sbarro filed for Chapter 11 bankruptcy protection in 2011.

Business Overview^[9]

The company operates restaurants under Pizza Inn trademark. In 2010, it operated 312 restaurants domestically and internationally, including 3 company-owned restaurants and 309 franchised restaurants. The 235 domestic restaurants consisted of 151 buffet restaurants, 35 delivery/carry-out restaurants and 49 express restaurants.Domestic restaurants are located predominantly in the southern half of the United States, with Texas, North Carolina, and Arkansas accounting for approximately 35%, 14%, and 8%, respectively, of the total number of domestic restaurants.

The 77 international franchised restaurants consisted of 16 buffet restaurants, 52 delivery/carry-out restaurants and 9 express restaurants. The international locations throughout 9 countries, with a strong presence in the Middle East region. Pizza Inn plans to open new locations global wide. Currently, the company plans to open restaurants in China and other parts of Asia Pacific. ^[10]

Business Segments

^[9]

Food and supply

Pizza Inn, Inc. provides or facilitates food, equipment and supply distribution to the domestic and international system of restaurants through the Norco Restaurant Services Company division and through agreements with third party distributors.Food and supply sales by Norco include food and paper products and other distribution revenues.  Food and supply sales decreased 10%, to $33.9 million in FY 2010 from $37.8 million the prior year.  The decrease in food and supply sales was due primarily to the combined impact of Buffet Unit with a 9% decrease in cheese prices, an 8% decline in chainwide domestic retail sales resulting from an average of 12 fewer units, and Express Units with 8% lower domestic comparable store sales than prior year.

Franchise

The pie chart shows components of franchise revenue in 2010. The majority of franchise revenue comes from domestic royalties division, which contributes 80.6% revenue. Revenue from international development is the smallest part for franchise segments

Pizza Inn, Inc. have offered, to certain experienced restaurant operators, area developer rights in new and existing domestic markets. An area developer typically pays a negotiated fee to purchase the right to operate or develop restaurants within a defined territory and, typically, agrees to a multi-restaurant development schedule and to assist Pizza Inn, Inc. in local franchise service and quality control in exchange for half of the franchise fees and royalties from all restaurants within the territory during the term of the agreement.Pizza Inn, Inc. offers numerous training programs for the benefit of franchisees and their restaurant crew managers, and requires adherence to a variety of standards designed to ensure proper operations and to protect and enhance our brand as well. Franchise revenue, which includes income from royalties and franchise fees, decreased 3%, in FY2010 compared to the prior year.

Restaurant

Restaurant sales, which consist of revenue generated by the Company-owned restaurants, increased 53%, in FY 2010 compared to the prior year. The increase was primarily the result of sales generated by the new Company store in Fort Worth, Texas.

Business & Financial Metric

Compared with industry average, most data from Pizza Inn are lower than industry average. However, some data such as market capital, revenue, and EBITDA are far away from industry average which indicates that Pizza Inn’s business scale is relative small in the industry. There is a big gap between the Pizza Inn’s revenue and industry average level. Pizza Inn only has three company-owned restaurants, most revenue comes from their food and supply for their franchisee, and franchise. Gross margin ratio can indicate the portion of sales contribute to the income of a company. The gross margin of restaurant industry is 27.64%, which is not really high. The lower gross margin for Pizza Inn dues to its low revenue and inefficient cost management and controlling. Operating Margin relative close to Industry level, 5.29% compared to 8.20%. In the case of Pizza Inn, it does not need to spend a lots money on other expenses, such as payroll, advertising etc.

SWOT

Strength

• Since Pizza Inn offers three restaurant concepts, the overall configuration of each concept results in simplified operations, lower training and labor costs, increased efficiency and improved consistency and quality of food products.
• Feature crusts are hand-made from dough made fresh in the restaurant each day.
• Vertical Integration, provide food, equipment and supply distribution to domestic restaurants through their own Norco Restaurant Services Company division.
• Pizza Inn is a franchise-oriented business model, which allows its restaurant base with limited capital expenditures and working capital requirements.
• The Pizza Inn Advertising Plan is a Texas non-profit corporation that is responsible for creating and producing print advertisements, television and radio commercials and in-store promotional materials, along with related advertising services for use by its members. Its members contribute 1% of their gross sales to PIAP for marketing materials and expenditures. PIAP increases the competitive advantage of Pizza Inn’s Pizza franchise segment. As a result, they have low advertising cost.
• Clean safe and friendly atmosphere, family oriented.

Weakness

• Obviously, Pizza Inn’s domestic business is not nation-wide. Locations are limited to the northern U.S area.
• Its business scale is small so that they cannot gain a remarkable market share.
• Lacks customer loyalty, well differentiated products.

Opportunity

• Currently, Pizza Inn’s international franchised restaurants are mostly located in the Middle East region; the company can open its restaurants in different countries and have potential customers. For example, it only has two small restaurants in China, and Pizza Inn plans to open more in China and other parts of Asian Pacific area.
• Many companies come up with innovative Pizzas, new flavors and recipes with different sizes. Particularly, Pizza Inn plans to continue expanding its international territories, so the company has to come up with new flavors that adapt to local customers’ tastes.
• Traditional pizza is considered as unhealthy fast food, but nowadays, more and more customers are concerned about their health problems rather than simply satisfying their tastes. The company can introduce fresh food, low calorie and low-fat pizzas.
• Adding nutritional calculators, allowing consumers to gauge the calories, fat and sodium content, cholesterol, carbohydrates and more of their meals.

Threat

• The competition in the Pizza QSR industry is increasing, as some customers prefer and look for brand name pizza, such as Pizza Hut, which has a large market share and owns about one hundred times the number of restaurants as Pizza Inn. Pizza Inn does not take advantage no matter from international or domestic market, which is the biggest threat for Pizza Inn.
• The rising price of special ingredients like cheese used in pizzas
• International franchise varies with currency fluctuations, posing a threat to the company.

Porter's Five Force

Rivalry

Very High

Overall, rivalry in the industry is extremely high. It’s hard to describe the industry of Pizza Inn. Pizza Inn competes with some other large global pizza chains, such as Pizza Hut, Domino’s Pizza, and Papa John.Their business patterns are very similar, but the business scales are larger than Pizza Inn. They all engage in international business, fast food franchise, dine-in and delivery service, which creates intense competition. Pizza Hut claims the leading position in the US pizza QSR segment with 15% of market share. Fierce price discounting and coupons by these top three players also squeezed other pizza sellers. Except for those pizza companies, Pizza Inn competes with some small local pizza restaurants as well. They offer low price products and faster service, taking the competitive advantages of Pizza Inn. Besides, the pizza segment is made more challenging for traditional restaurants by other close substitutions, including supermarkets, which not only sell frozen pizzas, but ready to bake pizza, and warehouse clubs sell large size pizzas.

On the other hand, Pizza Inn specialized in American style pizza, which directly competes with American traditional QSR. Their raw materials are similar, always contains meat, vegetables, cheese and flour. Therefore, no matter pizza or other fast food, their menus have a wide range of combinations. However, most people choose fast food because of its quickness, convenience and price. The profitability of individual companies can vary, QSRs rely on efficient operations and high volume sales. Large companies have advantages in purchasing, finance, and marketing. Small companies can offer superior food or service with low price. The industry is labor intensive, annual revenue per workers are significantly higher, and labor costs are relative low. Industry is in fierce competition, and in the case of Pizza Inn, faces a broad variety of competitors which are constrained by the large companies’ scale and small restaurants’ pricing strategy.

Threat of Entrants

Low

Currently, pizza chains are dealing with the effects of a deep recession, because of higher ingredient prices,the slim margins and more competition from non-traditional channels. However, existing competitors keep lowering prices and discounting prices, and expanding distribution channels create barriers to entrants as well. Moreover, current competitors have first mover advantages, they have mature technology in specialty production, and a relationship with distribution channels, therefore if second mover doesn’t have innovation in the industry, they can hardly survive. Additionally, globalization makes exotic flavors QSR come into markets, leading Pizza QSR to become less attractive.

Threat of Substitute

High

For the quick-service pizza restaurants, it has a high availability of substitute products. Pizza Inn primarily provides pizza which has various substitutes focus on other fast food chains, such as sandwich chains, chicken fast food chains, family restaurants etc. In much the same way, other traditional food chains offer customers’ fast, convenient and cheap products and services as well. Further, another substitute for quick-service pizza is home cooking food. The threat of substitutes influence on the price competition, price is more elastic since customers have more alternatives.

Buyer Power

Medium/Low

The buyer bargaining power is low due to the fact that fast food customers are large in amount, and focus on individual customers. Every single customer is unlikely to purchase a large quantity of product, and it’s unexpected that each of them contributes a large proportion of sales. QSRs are in high demand, especially in shopping centers, residential areas, college campuses and offices. In addition, buyers are fragmented, with no particular effect on product or price. Therefore, they will not be hurt by losing a small amount of customers. In the industry, customers are less sensitive to price fluctuations, which is relatively inelastic, so that providers have large price controlling power. Since the QSR is still market demanding in the future because of its speed, price and convenience, buyer power is relatively low.

Supplier Power

Low

The major suppliers of the fast food industry are raw material suppliers. Suppliers are weak, first because raw materials for food components in the industry are commodity products, such as cheese and flour. They have many competitive suppliers. Secondly, as mentioned before, the industry is labor intensive. However, labor supply is abundant so usually companies are not concerned about their labor force. And last but not least, suppliers tend to keep a longterm relationship with the concentrated purchasers. At this point, suppliers are less powerful. Furthermore, many big fast food chain companies are vertically integrated with the supplier in order to maintain low costs and high quality products.

Human Resources

Management

^[11] Working Experience :

Charles R. Morrison-President and CEO

• Current President and Chief Executive Officer of Pizza Inn
• President for Steak and Ale and The Tavern Restaurants
• Vice President of Finance for Kinko’s, Inc.
• Director of Strategic Planning for Boston Market and Director of Strategic Planning for Pizza Hut.
• Board of Directors for the North Texas Food Bank.

Nancy Ellefson-Vice President of Finance and Principal Accounting Officer

• Vice President of Finance and Principal Accounting Officer of Pizza Inn
• Consultant for Apex Restaurant Group and Preferred Restaurant Services.
• Corporate Controller and Vice President of Finance for Furr's Restaurant Group, Inc.
• Buffet Partners, L.P., and Controller of Toscorp, Inc.

Madison Jobe - Senior Vice President & Chief Operating Officer

• Vice President of Development in February 2009.
• Vice President of Franchise Development for Stockade Companies, LLC
• Vice President of Franchise Development for Ruby's Diner, Inc.
• Chief Operating Officer for Shakey's Pizza
• Vice President of Red Robin Restaurants
• Senior positions in franchise development and operations for Fuddrucker's.

Dino Chavez-Director of Franchise Development

• Director of Franchise Development in 2010,
• An experienced franchise development executive with over 25 years of progressive franchise operations
• development experience with large restaurant chains including Sbarro's, Fuddruckers, Chuck E Cheese Pizza, and MooYah Burgers.

Kendra Shier - Vice President of Marketing

• Vice President of Marketing in 2010.
• Vice President of Brand Development for The Melting Pot Restaurants
• Regional Sales and Marketing Director for GameWorks, a subsidiary of DreamWorks.

Tony Kwok - Managing Director of Development, Asia Pacific

• Managing Director of Development for Asia Pacific in July2009.
• Regional Director of Development and Franchising for Domino’s Pizza.
• Executive positions with such brand giants as Papa Murphy’s International, Wendy’s International, Hardee’s Food Systems and Burger King Corporation, among others.

Director

^[12]

Mark E. Schwarz - Chairman of the Board

• Chairman, Chief Executive Officer and Portfolio Manager of Newcastle Capital Management, L.P.
• He founded a private investment management firm in 1993
• Chairman of the Board of the Company in 2004.
• Chairman of the Board and Chief Executive Officer of Hallmark Financial Services, Inc.
• Chairman of the Board of Bell Industries, Inc.
• Chairman of the Board of New Century Equity Holdings Corp.
• Director of Nashua Corporation, S L Industries, Inc. and Web Financial Corporation.

Ramon D. Phillips - Vice Chairman of the Board and Chairman of the Audit Committee

• Former Chairman of the Board, President, and Chief Executive Officer of Hallmark Financial Services, Inc.
• Chairman, President, and Chief Executive Officer of Hallmark from 1989 through 2000, and as Chairman through August 2001.
• Over fifteen years experience in the franchise restaurant industry
• Controller for Kentucky Fried Chicken, Inc.
• Executive Vice President and Chief Financial Officer for Pizza Inn, Inc..

James K. Zielke - President and Chief Financial Officer of F&H Acquisition Corp

• President and Chief Financial Officer of F&H Acquisition Corp., which owns and operates the Champps, Fox & Hound, and Bailey’s restaurant concepts.
• Chief Financial Officer, Treasurer and Secretary of Fox & Hound Restaurant Group.
• Senior Director-Tax for PepsiCo Restaurant Services Group, Inc., which provided services to the Kentucky Fried Chicken, Pizza Hut and Taco Bell restaurant chains.
• From 1993 through 1997, was employed by Pizza Hut, Inc., most recently as Director-Tax.
• A certified public accountant in Ernst & Young.

W.C. Hammett, Jr.

• Chief Executive Officer of iH3, LLC
• Chief Financial Officer and Senior Vice President for Dave & Buster’s, Inc.
• Board of Directors for Carreker Corporation from 2006 to 2007
• From 1992 to 1997, was the Chief Financial Officer/Senior Vice President Accounting & Administration for La Quinta Inns, Inc., a national hotel chain.
• He was employed by the accounting firm of PriceWaterhouseCoopers.

Clinton J. Coleman

• Vice President of Newcastle Capital Management, L.P., a private investment firm that is the general partner of Newcastle Partners, L.P., which is the largest shareholder of the Company.
• Chief Executive Officer of Bell Industries, Inc.
• Interim Chief Financial Officer of Pizza Inn, Inc. between July 2006 and January 2007.
• Analyst with Lockhart Capital Management, L.P.,
• An associate with Hunt Investment Group, L.P, a private investment group.
• Associate director with the Mergers & Acquisitions Group of UBS.
• Director of Bell Industries, Inc.
• Director of Nashua Corporation.

References

1. ↑ Wikipedia, Pizza Inn
2. ↑ Pizza Inn Investor Information
3. ↑ Yahoo Finance Pizza Inn Profile
4. ↑ ^{4.0 4.1} Pizza Franchise Industry Report
5. ↑ Pizza Franchise
6. ↑ Hoovers Pizza Hut
7. ↑ Hoovers Cici's Enterprises
8. ↑ Hoovers Sbarro
9. ↑ ^{9.0 9.1} Pizza Inn 2010 Annual Report
10. ↑ Pizza Inn International
11. ↑ Pizza Inn Investor Information-Governance, Management
12. ↑ Pizza Inn Investor Information-Governance, Director