Inflation and consumer shifts take a bite out of pizza demand

Quick-service pizza delivery chains like Domino's and Papa Johns have reported weaker sales and traffic as consumers look for other options, or simply decide to stay home.
pizza delivery sales
Inflation may be taking a big bite out of pizza delivery sales at chains like Domino's. / Photograph: Shutterstock.

Pizza delivery chains were among the biggest beneficiaries of the pandemic. Concepts like Papa Johns and Domino’s provided consumers stuck at home with a relatively low-cost respite from preparing meals and doing the dishes, and their sales took off. So, too, did their stock prices.

But that tailwind is gone. On Thursday, both chains reported sales data that reveal a shift toward other options. Consumers, it appears, are opting to simply cook at home rather than order delivery, largely because of inflation.

Domino’s, which once counted growth as almost a birthright, finished its most difficult sales year in more than a decade. U.S. same-store sales rose 0.9% in the fourth quarter and were down 0.8% for the full year. But on a three-year basis, same-store sales slowed 4.5 percentage points due to what CFO Sandeep Reddy called “clear evidence of softening demand from delivery customers.”

“Delivery moves with the economy,” CEO Russell Weiner told analysts. “We expect the economy to be a headwind for our delivery business in 2023.”

The company’s stock was down 12% on Thursday. Since hitting a high of $564 per share in 2021, Domino’s shares have lost 45% of their value. The Ann Arbor, Mich.-based pizza chain has since overhauled management and is working on “solutions” to its delivery demand problem.

Papa Johns, meanwhile, reported moderately better numbers. Its same-store sales in North America rose 1% in the fourth quarter, as well as the full year. But that came even with pricing up 7% to 9%, meaning the chain similarly lost traffic during the year. Profitability at company locations was also down by more than 2.5 percentage points and CEO Rob Lynch called 2022 “one of the most challenging years” in its history.

The company’s stock was down 8% Thursday and has lost well over a third of its value since 2021.

“The pandemic did help this company get on a strong footing,” Lynch said. “Last year was a very tough year, with the cost structure. But we had the second highest operating income in the company’s history. We’re building on all that. We’re just now stabilized and in a normalized growth pattern.”

Yet Lynch also noted that the company’s same-store sales are up 30% over where they were three years ago. Papa Johns is in a different spot than it was before the pandemic, and in an interview he noted that the company has kept those sales. It was the only one of the major publicly traded pizza chains to report full-year same-store sales growth in 2022.

“I’m really proud of the fact that we’ve been able to hang onto those sales,” he said.

Several pizza chains saw weak sales last year. Same-store sales at Papa Murphy’s declined in the low single digits and the take-and-bake chain closed locations. Pizza Hut’s U.S. same-store sales declined 1% for the full year, though that chain ended 2022 on a stronger note than its competitors with a 4% increase, thanks to its newfound use of third-party aggregators and the introduction of its new Melts product.

The performance of those chains is an almost direct contrast to the performance of another pandemic darling, Wingstop, which appears to have weathered the consumer normalization just fine. Same-store sales rose 8.7% in the fourth quarter, due almost entirely to transaction growth.

Still, much of what might be causing challenges in the pizza sector is a simple normalization of consumer behavior. People have shifted some traffic away from the convenience-focused channels they flocked to during the pandemic, back toward dine-in options.  

Domino’s executives on Thursday, citing data from NPD Group, said demand for quick-service-restaurant delivery—not just pizza—declined last year. Company executives said that the expense of such orders is preventing people from ordering that way.

With pizza, they said, consumers are simply putting their phones down and looking at their refrigerators. “Our research shows that a relatively higher delivery cost during inflationary times leads some customers to prepare meals at home instead of getting them delivered,” Weiner told investors.

“The pizza delivery category was down,” he added later. “Domino’s actually gained share. So it’s not the prettiest way to gain share.”

The dynamic was such that Domino’s lowered its outlook for sales growth over the next two to three years to 4% to 8% from 6% to 10%. The company expects to come in on the “low end” of that range.

On a three-year “stacked” basis, Papa Johns’ same-store sales are up nearly 26%, compared with just more than 13% for Domino’s. Lynch noted that much of his chain’s challenges right now are simply due to difficult comparisons. A year ago, he said, the company was the beneficiary of consumers staying at home due to a surge from the omicron variant. “As we get closer to the end of Q1 we will definitely be back to a more normal run rate with more normal comps,” he said.

And he cast a far more upbeat outlook than his Michigan-based counterparts. While pizza delivery might be difficult in an inflationary environment, consumers who are watching their budgets may be more likely to get pizza because of its fundamental value.

“We’re actually a little bullish,” Lynch said. “We feel great about this environment right now. 2023 is going to be a good year for us.”

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