Thin crusts arent the only trend in the pizza industry these daysso are thin margins.


Though pizza sales in the Spokane area remain hearty, rising costs and increased competition are making those in the industry wonder whether the pie is big enough to support all of them.


Theyre counting on pizzas popularity with consumers to buoy business as product and gasoline costs increase, Washington states minimum wage rises, and new players emerge.


Everybody loves pizza, asserts Sandy OHagan, a franchisee here of Oakhurst, Calif.-based Pizza Factory Inc. But the price of goods and gasoline is affecting all of us, and the minimum wage is hitting us pretty hard.


Nationally, pizza sales rose slightly to $30.3 billion in 2004, up 1 percent from the year-earlier period, according to the latest available figures from PMQ Pizza magazine. Diet trends and rising gas and product prices were some of the primary reasons behind the industrys sluggish growth that year, the magazines Web site says. Sales figures for last year arent available yet, but PMQ Pizza editor-in-chief Tom Boyles says he expects pizza sales rose by about 1 percent.


OHagan and her husband, Joe, who own a Pizza Factory restaurant in Deer Park, recently opened a second outlet at 123 S. Broad, in Medical Lake. They have operated the Deer Park restaurant for the past 11 years, and since that time have seen demand grow steadily even while margins continue to shrink. Additionally, as the labor market here tightens, it has become difficult to attract quality workers to the minimum-wage positions that are so prevalent in the industry, she says.


The cost of doing business just gets higher and higher, OHagan says. It all depends on how you handle your business, and if you dont handle it as you should, you wont survive.


Trends in the labor market are a major concern for Dallas-based Pizza Hut Inc., says Darin Freeman, area manager for Pizza Hut outlets in this region. That chain tries to maintain a difficult balance between keeping labor costs down while providing quality service, he says.


We have a heavy focus on trying to make sure we maximize the employees we have, because the company has a high set of expectations for margins that stores must meet, Freeman says.


Shane Anderson, a franchisee of Ann Arbor, Mich.-based Dominos Pizza LLC who owns eight outlets in the Spokane area, says that pizza sales have been rising steadily here, despite cost pressures. Anderson says he worries, though, that even if sales continue to increase in the next few years, the growth wont be enough to keep his business afloat.


Business has been OK, but in four more years well be insolvent, even with higher sales, Anderson says.


Sales per-outlet are up roughly 5 percent to 7 percent so far this year compared with the year-earlier period, he says. Demand has been healthier here this year than in late 2004 and early last year, when the U.S. economy was stronger and more consumers chose to eat at full-service restaurants rather than order pizzas, he says. Sales also have been curbed by diet trends, but business was helped last spring when Dominos promoted its thin crust selections heavily, he says.


People are buying the family deals now, so theyre buying more food, which is good, Anderson says.


The biggest factors tightening margins at the Dominos outlets are minimum-wage and insurance increases, Anderson says. Washington state, at $7.63 an hour, has the highest minimum wage in the U.S., and it will increase 30 cents an hour on Jan. 1, according to the Washington state Department of Labor and Industries. Meanwhile, combined annual insurance costs for Andersons eight pizza outlets have risen by 560 percent, from $10,000 to $56,000 since the end of 2003, he says.


Product costs also are rising. A case of soda-beverage ingredients now costs $7.88, compared with $4.32 a few years ago, Anderson says. Meanwhile, pizza prices havent changed much in recent years. Medium-sized, single-topping pizzas industrywide typically range in price from $6 to $15. Pizza vendors often are reluctant to pass on product cost increases to consumers in the form of higher prices, because the pizza industry relies on reasonable prices and special deals to attract customers, he says.


Competitive pricing is a huge issue, Anderson says. Now, we have a new competitor that were expecting to have a pretty big fight with.


That competitor is Little Caesars Pizza Enterprises Inc., which re-entered the Spokane market last month after a nearly decade-long absence by opening an outlet at 6101 N. Division, says franchisee Rob Murphy. The Detroit-based chain says its one of the top four pizza chains in the U.S. and the largest carry-out chain internationally, but declines to disclose sales figures or its number of its franchise stores. Last spring, it announced plans to expand aggressively this year by adding hundreds of franchisees worldwide.


A Little Caesars Pizza station already was operating inside a Kmart store here, but that outlet is owned by Kmart, not by a Little Caesars franchisee, Murphy says. About eight years ago, a franchisee who owned Little Caesars stores here shut down those outlets.


Demand has been strong so far at the new Little Caesars outlet, which employs 36 workers, Murphy says. He says he plans to open an outlet in Spokane Valley soon, and hopes to open four more outlets in the Spokane area in the next two years.


Little Caesars Pizza offers ready-to-eat pizzas and doesnt deliver, which helps keep costs down, he says. The chain competes primarily with other ready-to-eat pizza companies, such as Pizza Hut and Dominos, he says.


Take-n-bake


Meanwhile, Vancouver, Wash.-based Papa Murphys Take-N-Bake Pizza has carved a niche in the industry by offering pizzas that are prepared at the store but left uncooked so customers can bake them at home. Sales have been strong at Papa Murphys outlets here, although diminishing margins are a concern, says franchisee Patrick McCabe, who owns two of the Papa Murphys stores in the Spokane area.


Weve definitely had positive growth over the last couple of years, McCabe says. With minimum-wage increases, though, its getting difficult to keep prices lower.


Although customers cook Papa Murphys pizzas at home, McCabe says the chain competes directly with ready-to-eat retailers, rather than makers of frozen pizzas that are sold in grocery stores.


Freezer shelf space devoted to frozen pizzas by grocery stores expanded a few years ago, and new brands, seeking to exploit the convenience that such products offer, came on the market.


Sales of frozen pizzas increased strongly for a time, but now are growing at a slower pace, says Don Whittaker, director of grocery at Spokane-based Rosauers Supermarkets Inc. The strongest selling brands at Rosauers are those made by Kraft Foods Inc., he says.


Frozen pizza sales have been pretty consistent lately, Whittaker says. Theres no erosion, but theyre not the next big hula-hoop, either.


Nationally, the top-selling frozen pizza brand last year, at $515.6 million in sales, was DiGiorno, according to figures from AIB International, a Manhattan, Kan.-based association that collects statistics for the food industry. Tombstone, Red Baron, and Freschetta also were top-selling brands last year, AIB International says. Both DiGiorno and Tombstone brands are sold by Kraft Foods.


Contact Emily Brandler at (509) 344-1265 or via e-mail at emilyb@spokanejournal.com.