Pizza Pizza establishes Alberta beachhead
Widens focus from saturated Ontario market to western hot spot with booming population and economy
TAVIA GRANT
June 15, 2007
Canada's pizza wars are heating up. Regional players in the industry are stepping into each others' turf, with Western Canada the most lucrative prize in the country.
Pizza Pizza Ltd. said yesterday it's expanding west to oil-rich Alberta, agreeing to buy Edmonton-based Flying Pizza 73 Inc.
In the other direction, Abbotsford, B.C.-based Panago Pizza Inc. expanded into Ontario this spring, while Richmond, B.C.-based Boston Pizza International Inc. is also marching eastward.
Companies are vying for a slice of Canada's $2.3-billion pizza market, and that means opening new stores and expanding their menu choices to capture consumers' appetite for convenient, fast food.
"I would like to see us national," said Curt Feltner, Pizza Pizza's chief financial officer, in an interview. He sees his company expanding both east and west through acquisitions and organic growth.
Pizza Pizza, which is Ontario's largest pizza chain, and Pizza Pizza Royalty Income Fund are paying $70.3-million for Pizza 73, whose owners worked at Boston Pizza two decades ago. The Alberta-based company, which takes its name from its phone number, will keep its brand.
Western markets continue to be the hot spot in the pizza world because of a booming population and growing economy, and because the market isn't as saturated as in Ontario, Mr. Feltner said.
Analysts agree. Among restaurant trusts, those with a strong presence in the West are most attractive, said Walter Spracklin of RBC Dominion Securities.
"We expect western-based restaurants to continue to outperform their peers in the near future," he said in a note, citing high employment levels, personal disposable income and economic growth.
Boston Pizza, which got its start back in 1964 in Edmonton, when Greek immigrant Gus Agioritis opened "Boston Pizza and Spaghetti House," has about 265 restaurants in Canada. Most are in the West, but it has opened new restaurants across Atlantic Canada, Quebec and Ontario in the past year or two.
As for Pizza Pizza, it sees the West as its main growth area, while Atlantic Canada appears to be the "underperformer" in the country, Mr. Feltner said.
The Alberta market is not without challenges: labour shortages abound in the food services industry, driving wages higher. And the cost of delivering pizzas has risen in recent years, putting pressure on margins.
The move comes as Pizza 73's revenue is booming. Sales at restaurants open more than a year were 26.1 per cent higher in April than a year earlier, on top of a 27.5-per-cent jump in 2006. While Pizza Pizza expects same restaurant sales to keep growing, it won't likely maintain that rapid pace, the company said.
It expects the deal will immediately boost Pizza Pizza's distributable cash and will hold a special meeting of unitholders in late July to approve the transaction.
It will finance the deal through credit facilities and by issuing 2.6 million new subscription receipts for units of the company.
Pizza Pizza first said it plans to expand west in 2005, as part of its initial public offering.
The company, which was founded in Toronto in 1967, operates 532 restaurants, mostly in Ontario and Quebec, which are largely owned and operated by franchises. It's in the midst of repositioning itself as a "restaurant with delivery," rather than strictly a takeout service.
As for Panago, in April the company said it plans to open at least 150 new restaurants in Ontario. About 90 of its restaurants are now in B.C. and more than 50 are in Alberta.
Sharing the pizza pie
We expect western-based restaurants to continue
to outperform their peers in the near future. RBC Dominion Securities analyst Walter Spracklin
Top five chains by sales:
Boston Pizza $513-million
Pizza Pizza$341-million
Pizza Hut$300-million
Domino's$122.8-million
Panago$111.5-million
Source: Kostuch Publications,
all figures U.S. dollars, 2005
Notes from Pizza Pizza's recipe book: Management estimates that the pizza quick-service restaurant (QSR) segment in Canada generated sales in 2004 of about $2.3-billion, with around $1.1-billion made in Ontario.
In 2004, the pizza QSR segment represented 18 per cent of the total QSR segment, based on sales. Most of this segment is served by branded chains, which account for two-thirds of sales.
Over the past 10 years, the number of meal "occasions" in which pizza has been purchased from a QSR has remained relatively stable, while the average cheque per occasion has increased throughout the decade.
Three-quarters of pizza is consumed for dinner and 83 per cent is eaten on a takeout or delivery basis.
