Pizza franchises struggle to stay afloat

By Kwak Yeon-soo

Major pizza franchises here have been grappling with worsening profitability as more and more Koreans look for cheaper alternatives, according to industry analysts Monday.

The increasing wellbeing trend and soaring delivery costs, as a result of minimum wage hikes and higher raw materials prices, have discouraged many consumers from ordering pizza from large franchises, they said.

According to audit reports released by the Financial Supervisory Service, MP Group, which owns Korea's pizza franchise Mr. Pizza, saw its sales plunge 17 percent to 119.8 billion won ($101 million) in 2018 from the previous year. The company has been losing money for the last four years, recording a 380 million won operating loss last year.

A series of controversies involving former chairman Jung Woo-hyun, who was jailed for physically assaulting a company security guard, precipitated a downward spiral.

The incident adversely impacted the brand and the number of stores dropped from 411 in 2015 to 277 in 2018. The company's management troubles mounted and franchises expressed frustration.

MP Group is currently on the verge of being expelled from the second-tier Kosdaq bourse due to its snowballing losses.

The company vowed to take all possible steps to remain in the Kosdaq market, but market watchers predict that it is highly likely that the Korea Exchange's (KRX) corporate evaluation committee will decide to delist company shares.

Mr. Pizza has been on the bourse since August 2009.

“We will strive to increase profits and recover from losses by offering a buffet-style approach,” an MP Group official said. “We have seen sales go up by 130 percent in 24 buffet-style pizzerias that we've been operating since the second half of last year.”

Regarding the poor sales of pizza franchises, the official commented, “We are losing grip on customers as they're showing a growing appetite for a variety of food delivery services.”

Food delivery apps have emerged in Korea in the past few years, and this business segment is seeing a growing user base and fueling an investment boom.

Other major pizza franchises in Korea are also plagued by lagging sales.

Domino's Pizza sales dropped 3 percent to 213 billion won, and its operating profit fell 29 percent to 20.9 billion won.

Pizza Hut recorded 20.8 billion won in sales in 2017 compared to 89.3 billion won in sales in 2015. The company has not yet released the results from last year.

Korea's overall pizza franchise industry scale has dropped 10 percent to 1.8 trillion won in 2018 from 2 trillion won in the previous year.

“The declining sales is largely attributable to a poor consumer sentiment and diverse options for delivery apps and frozen pizzas at supermarkets,” another pizza franchise official said.

In fact, the frozen pizza market, which was 9 billion won in 2016, grew to about 100 billion won last year.