Pizza-Pizza or Win-Win? Little Caesars, A Slice Above The Rest

In the war for pizza, Little Caesars has found a way to expertly address the challenges faced in the highly competitive pizza market.

Hot-N-ReadyIt’s Friday night after a long week and the marketing final just made you question all of your life decisions, and to celebrate, you feel like ordering a pizza. How about Domino’s? They have over 34 million pizza combinations, pasta, sandwiches, chicken wings and even several types of dessert. If you think that as the owner of a Domino’s this would be a disaster to try and ensure product quality and optimize your production, you would be right. On the other hand, another pizza chain, Little Caesars, expertly aligns their business and operating model to the benefit of both their customers and their stakeholders.

Little Caesars is a global pizza chain with the popular $5 HOT-N-READY and $8 DEEP!DEEP! Dish Pizza. They have a very limited menu comprised primary of simple pizzas, breadsticks and wings with customized options available at higher prices. This limited menu translates into much better prices on the limited menu items vs. competitors. In an incredibly competitive pizza market, this is a significant differentiator and has allowed Little Caesars to be voted best value pizza in the US for the last 8 years. Along with the limited menu, a number of other items demonstrate the alignment of their business and operating models including:

Ability to Build-Up Inventory to Meet Demand:

  • Who wants to wait in a store for 10-15 minutes for a pizza to be made? The industry up to this point has gotten over the time required to cook a pizza by encouraging customers to call ahead. This, however, requires customers to plan their pizza purchase in advance and limits the attractiveness of pizza as a spur of the moment or on-the-go purchase. Little Caesars has overcome this issue by making pizzas ahead of time and storing them in an oven so they are fresh when you enter the store. This also allows them to build up a large number of ready to sell pizzas in advance of the lunch/dinner rush to meet demand and become the pizza of choice for customers in a rush. Customers also know that whenever they go into a Little Caesars, they will be able to walk in, grab a pizza and leave the store in only a few minutes.

Standardized Sizing & Limited Product Offerings:Little Cesars Menu

  • Little Caesars offers one size of deep dish pizza and one size of non-deep dish pizza. For their high volume / low price pizzas, only cheese and pepperoni is available. This allows them to hold very low levels of pizza ingredients and experience virtually no inventory spoilage as they can immediately use pizza inputs. The lack of variation also helps ensure product quality from store to store.
  • Also, since volumes are much higher given the lower price, Little Caesars is able to procure pizza ingredients with additional scale and at lower prices giving another meaningful benefit over competitors.

Simple Pricing:

  • With only a few products sold, the pricing model is incredible easy to understand and convey to customers. Similar to dollar stores which advertise their value with everyday low prices, so does Little Caesars advertise their value with rounded dollar amounts ($5 for a normal pizza, $8 for a deep dish) and catchy product names.
  • This simple pricing with limited product offerings also allows for minimal training required on the part of employees. This helps to keep wage costs down and combat high employee turnover (a big issue for fast-food and fast-casual restaurants) since new employees can be brought up to speed quickly.
  • Lastly, the simple business model allows strong visibility into future demand to plan employee hiring, inventory ordering and optimize profitability.

Small Store Size:Little Cesears Store

  • When people come in for convenience and you have a simple product offering, you do not need a flashy, large store with significant room for customers to linger and eat. Also, when you only make a handful of products, you do not need a large kitchen or storage facility. This saved space translates into cheaper rent and lower start-up costs over their competition.

Summary:

  • So what does this business / operating model translate into? Low prices for consumers, quality pizzas and profits for the Little Caesar store owners / operators. If I was Domino’s, Pizza Hut, CiCi’s or even Pinocchios, I’d sleep with one eye open as Little Caesars has an advantage that will be tough to replicate and even tougher to compete against.

 

Sources:

https://biz.dominos.com/web/about-dominos-pizza/fun-facts

http://littlecaesars.com/OurMenu/Pizza.aspx

http://www.crainsdetroit.com/article/20090426/FREE/304269954/hot-n-steady-renewed-focus-on-value-keeps-little-caesars-cooking-at

http://archive.freep.com/article/20130625/BUSINESS/306250105/Top-7-pizza-chains-Little-Caesars-moves-up-a-notch

http://littlecaesars.com/AboutUs/IntheNews/News/tabid/206/Token/Info/ArticleID/30/Default.aspx

 

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8 thoughts on “Pizza-Pizza or Win-Win? Little Caesars, A Slice Above The Rest

  1. Very interesting, this is quite a competitor to our favorite pizza place, Domino’s. They seem to have similar operational layouts, small box with conveyor belt of repeatable consistency with little variation. They even both offer a $5 pizza! I wonder if this is a race to the bottom industry and would be concerned about product differentiation and changing customer tastes.

    1. It’s a great question Tony and love the comparison to Domino’s!

      Thought about the issue of whether this is a race to the bottom or not. Spoke with both a Little Caesars franchise owner and Domino’s franchise owner and interesting the EBITDA margins on $5 pizzas is drastically different. For Little Caesars, it’s ~20-30% vs. break even for Domino’s. As a result, I think this mitigates a lot of the risk for a race to the bottom given higher costs for Domino’s. As to product differentiation and changing customer tastes, this is definitely a serious risk and a risk that all fast food/ fast-casual experience.

  2. Great article, Thomas. I’ve never had Little Caesars before as they don’t have any locations in Manhattan (they’re smart – there is actual good pizza there and they probably wouldn’t survive). Jokes aside, I have a couple concerns about their business model. First, I wonder how profitable a $5 pizza is to franchisees. When you factor in labor, ingredients, rent, etc, and then add in a royalty (assuming this is a franchisee business model) how much margin is actually left? Second, I would guess that pizza sales are declining nationally. Some fast food chains have revamped their menus or added items to allow for healthier choices. Based on your analysis, such changes would go against the company’s operating model.

    1. Vitali, great concerns raised. Interestingly, given the items I highlighted above, EBITDA margins to franchises is actually in the 20-30% range. The payback to franchises is also ~1.5 years which compares favorably to ~2.0 years for Domino’s/Pizza Hut and ~2.5 years for Papa Johns.

      On your second point, pizza consumption in the US is declining. Despite this, Little Caesars has been able to grow Revenue/EBITDA/Store Count by taking market share from others.

  3. Thanks for sharing Thomas. A few questions:

    1.) Do you feel the everyday low price strategy conveys a reduction in quality, and do you think customers care more about quality or price?

    2.) Do you think there is business risk associated with anchoring on a flat price (i.e. $5) like dollar stores while labor and ingredients continue to rise over time. Will they be quick to lift the price when squeezed on margins?

    3.) Have you ever negotiated the price of a Little Caesar’s pizza down from $5? If anyone can do it, its you!

    1. Hey Sam,

      Awesome questions. On one, EDLP definitely portrays lack of quality but low price has more than made up for this perception. Similar to McDonald’s Dollar Menu, customers see the value as a compelling reason to buy.

      On the second question, definitely. Little Caesars has experienced challenges trying to raise this price to keep margins.

      On the third question, not yet but I now know what I am doing over break!

  4. Great article, Thomas!

    I’ve never been in Little Caesars and now am very interested to try it! However, qulaity concerns me a little bit: you say they make pizzas ahead of time and store them in an oven so they are fresh when you buy them… Does it affect the quality of pizza? Is the qulaity important for customers – or you expect that quality for $5 pizza is not the top priority?

    Another concern I have is whether I can find the same value proposition in another places. Business and operating models look quite simple and replicable. Can I compete with them entering the store tomorrow in Cambridge?

  5. Thomas, very well done analysis.

    As I was reading, I was thinking about how they are basically moving their inventory holding from raw materials to a finished good inventory. While I agree that they have less opportunity for spoilage on the raw materials side, there must be some amount of spoilage of the pizzas that have already been cooked (finished goods). I’m assuming they have some sort of model for helping plan anticipated demand to keep this at a minimum. Did you find any evidence of this?

    Also, with respect to your comment on their waiting area, it indeed has to be almost minimal due to their ability to move customers in and out relatively quickly. In response to Vitali’s comment, I think they probably occupy lower rent locations to help keep this cost down. The way I see it, they are comparable to a pizza by the slice restaurant that you see in NYC or other large cities. The value proposition they have that those don’t is the affordability of the entire pizza which makes them a more viable to families when times are busy and planning is limited.

    On the supply chain side, did you find evidence that they have extensive supply from a company-wide distributor? It seems like having these relatively simple perishable ingredients, they could be purchased in bulk somewhat locally. That would leave them with a lower requirement for supplying ingredients from the company (like dough ingredients, canned sauces, and the branded paper products for serving). Not real sure if this is viable in their industry, but could see a scenario where they could minimize costs to allow for the margin Vitali was inquiring about.

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