Cheaper pizzas take bite out of big brands

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Cheaper pizzas take bite out of big brands

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Large and small pizza chains are battling for a bigger slice of the pie in Korea.

Lower-priced local chains and supermarkets selling large, price-competitive pizzas are eating into the profit of traditionally popular franchises like Pizza Hut.

Pizza Hut, the largest pizza chain in the United States, once boasted the largest sales in Korea until the early 2000s, positioning itself as the go-to place for family gatherings and special occasions.

Since then, however, the global pizza chain has seen a shrinking market share and declining sales, as it lost favor with Korean diners from stiff competition from independent operators, big supermarkets and its rival Domino’s.

Pizza Hut generated over 30 billion won ($25.7 million) in 2004, but that was reduced to 11.4 billion won in 2014, while operating losses stood at 700 million won in 2014. The franchise declined to reveal its earnings for 2015.

Local brands such as Imsil Cheese Pizza, Pizza Etang and Pizza School are losing popularity due to relatively high prices.

The Korea National Council of Consumer Organizations noted that large pizza chains including Pizza Hut offer standard pepperoni pizza for the average price of 20,100 won, 2.8 times higher than the average of local pizza chains.

Big retailers like Costco and E-Mart sell their signature combination pizza for less than 15,000 won.

For those looking for more novel tastes, a number of independent Italian restaurants have popped up, offering Italian-style thin pizza fired on a brazier at comparable or lower prices than Pizza Hut.

“The big pizza franchises become less attractive, since there are a number of other alternatives,” said Kim Se-ran, a 29 year-old customer. “Independent restaurants offer more refined pizzas. And when I just want standard pizzas, I can go to big supermarkets and cheaper local brands.”

Pizza Hut has recently embarked on a low-price campaign to attract more consumers and boost sales. But the initiative triggered a backlash from store owners since the pizza chain was accused of passing on the additional costs of the promotion to each Pizza Hut restaurant.

The relationship between restaurant owners and Pizza Hut Korea has already soured as the chain is working to transform Pizza Hut stores directly managed by the unit into franchised units.

When a store becomes a franchise, it is obliged to pay more commission fees per month. But the Korean association representing the owners of Pizza Hut stores, objects to the move, saying it is a bid to get more commission fees from the stores.

Despite the falling popularity, Pizza Hut still sees an opportunity in Korea.

“We still think of Korea as a promising market,” Steven Lee, CEO of Pizza Hut Korea, was quoted as saying in an interview with Yonhap News Agency in March this year. “[Pizza Hut] will continue to expand business by opening more stores or through different channels.”

Pizza Hut is not alone in suffering the downbeat performance in the fast-changing industry landscape.

Mr. Pizza, a local pizza franchise operated by MPK Group, beat Domino’s and Pizza Hut in sales in 2010, but Domino’s took over the brand afterwards.

Industry watchers said that Domino’s focus on delivery will increase its profit margin, while Mr. Pizza had to pay a large sum of rental fees for its sit-in restaurants.

Domino’s is the only major pizza franchise that posted constant two-digit growth. It became the country’s largest chain in 2014.

In the face of a crowded domestic pizza market, worth around 1.3 trillion won, franchises are seeking to find different revenue streams. MPK ventured into new food businesses such as muffin brand Manofin.

Domino’s changed its Korean corporate name last December, a move that industry watchers see as a prelude to expanding its business portfolio.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]
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