Industry Analysis Paper

Introduction ……………………………………………………………………………………… 3

The Industry's Dominant Economic Features………………………………………………….. 3-8

Porter's Five Forces…………………………………………………………………………... 8-12

The Drivers of Change in the Industry and Impact They Will Have………………………. 12- 13

Companies in the Strongest/Weakest Positions……………………………………………... 13-16

Key Success Factors for Competitive Success……………………………………………… 16-17

Industry’s Attractiveness and Prospects for Long-Term Profitability……………………… 17- 18

Sources Used………………………………………………………………………………... 19-20

Introduction

Frozen Pizza has been a staple in American homes for almost seventy years. The frozen pizza industry is comprised of firms who produce pizza using raw ingredients, freeze them, and then sell that frozen, final product. There are two buyer segments in this industry. The first set of buyers are the retail grocery store chains like Publix, grocery wholesalers such as BJ’s, convenience stores, larger stores like Target and Walmart as well. The final buyer of this product is the everyday individual consumer who purchases their item from an available store. It is important to note that this industry excludes pizza that is refrigerated. It only includes pizza that is sold to both the grocer and consumer as a frozen product.

Typical firms who compete in this industry are large food manufacturing firms, most of whom do not only specialize in frozen pizza. For example, Nestle, one of the industry’s most successful firms, is also one of the largest food production companies in the world. The frozen pizza segment of their business is only a small portion of their total capacity.

Many frozen pizza industry reports, including the frequently referenced 2019 report in IBISWorld, have been completed before corona virus. However, recent early reports point to large, widespread increases of purchasing and sales, in response to the pandemic. This is because Americans are staying home, eating out at restaurants less, and “stockpiling” frozen food, especially frozen pizza. The pandemic had an unexpected, yet positive impact on this industry.

The Industry's Dominant Economic Features

In 2019, the industry annual revenue was 4.91 billion. Reports from last year, pre-Coronavirus, predicted that revenue was expected to grow continually from 2019-2020, although only at a moderate growth rate. For example, revenue was predicted to be 4.96 billion in 2022 and 4.98 is 2024. These are not huge increases, but any predicted revenue growth is a positive for the industry. These figures, however, have not considered the large spike in frozen pizza purchases during the pandemic. “Americans have bought approximately $275 million worth of frozen pizza since the start of the Coronavirus pandemic in March. That’s an increase of 92 percent compared to the same time last year.” (CBS Detroit, 2020). That is a very sharp and unexpected increase in purchases. It is likely to level out as the economy and daily life begin to return back to normal, but the increase has been hugely beneficial to frozen pizza (and all frozen food) firms.

Despite favorable figures in terms of projected growth, the 2019 report by Amir in IBIS World suggested that the industry is in decline in terms of its life cycle. However, the corona virus may have saved the industry from that declining stage. The spike in frozen pizza demand has been both unexpected and incomparable to anything the industry has seen in the past. “I’ve been in this business over 25 years, [and] I’ve never seen a spike like this across the country,” said Newman’s Own president and COO Dave Best, who says sales of his company’s frozen pizzas have spiked 190 percent since the Coronavirus crisis began.(CBS Detroit, 2020). It’s unclear exactly how much the total revenue of the industry has increased over 2020, but early reports prove that it has been staggering.

In terms of competitive scope, I am only considering rivalry within the United States for this analysis. Although some firms do sell frozen pizza overseas, most competing firms are incorporated or headquartered in the United States. Their focus and attention are on the American consumer, as is my focus when analyzing this industry. There are three main firms in the industry that capture roughly 50% of market share, while smaller firms capture the rest. The rivalry between firms within the United States is moderate and will be covered in detail later in the analysis. Additionally, “trade in this industry is very low and does not affect the industry. This is due to protection of domestic food industries as well as localized palettes and preferences.” (Amir, 2019). So, the scope of rivalry is measured on a purely national scale.

The major players in this industry are Nestle with a market share of 30.7%, Schwan’s with a market share of 13.5% and General Mills which accounts for 5.6% market share. The remaining 50.2% market share is shared with other, smaller, competitors. While there are three firms who hold half of total market share, there are a number of smaller firms who do provide solid competition and have their own loyal customer base.

Frozen pizza firms focus on two types of buyers. The first line of buyers are the grocers and other retail stores that carry the product in their store. The final buyer is the individual who shops and purchases the item at said store. Firms first sell to the grocers, who then sell to final end consumers. Although one major firm is an exception, this is the typical downstream selling process. Therefore, firms are very dependent on their first line buyers for their total products sold and final revenue.

Recently, distribution channels have had to respond to changes in demand during the pandemic. First, their internal activities needed to change to adhere to CDC health guidelines and social distancing practices. Also, because consumers were purchasing pizza in such large quantities and at such a fast rate, many retail stores sold out. Many even had to limit the number of frozen pizzas one customer could buy at a time. This extremely sharp demand change from final-end consumers affected the activities of first line buyers, and in turn, the activities of firms as well. The corona virus has been a black swan event that’s affected all industries, and positively for frozen pizza.

There is some backward integration that can occur. For example, buyers (like grocery stores or other retail carriers) can create their own, in-store, brand of frozen pizza. That in-store brand becomes a competitor to other firms’ pizzas that they already sell.

 Like many industries, frozen pizza production is reliant on technology for its value chain activities. For example, “improvements in flash-freezing, packaging and dough-processing technology will help frozen food manufacturers preserve flavor, consistency and nutritional content more effectively” (Amir, 2019). These are essential for manufacturing and distribution. Additionally, the industry has been positively affected by the introduction of online grocery purchases, especially during the Coronavirus outbreak. Ordering frozen grocery items from home has added more convenience and increased the number of frozen food purchases since this time last year. (Redman 2020).

However, not all technological advancements have been beneficial to the industry. Delivery app services like Ubereats and Grubhub have cut into some frozen pizza consumption by making the purchase and delivery of direct substitutes, fresh pizza, easier to obtain.

The product (pizza) in this industry is generally similar across the board between firms. Although. firms have been adding and experimenting with flavor combinations and different dough and crust types (like thin crust, rising crust, etc.). Many players in the industry are also trying to increase their perceived value, by making their pizzas healthier. Firms try to differentiate themselves with dietary options such as vegan, gluten free, keto, and cauliflower crust. Although there are variety in types, frozen pizza is generally similar between firms.

As recent events have shown, there are definitely learning curves that competitors have had contend with throughout the year. First, the taste preferences of consumers is in constant change. For example, consumers have become increasingly more health conscious. In response to that, companies have adapted by offering organic and all-natural options. They also have adapted existing recipes to include less sodium and excess fat. Firms competing in this industry must constantly adapt and experiment to change along with changing consumer likings. Additionally, firms have had to learn quickly in the heart of the pandemic, as the demand for frozen pizzas went up as much as 190% (for Newman’s Own). They have had to change their production and distribution processes to keep up with high demand all over the country.

Historically, levels of profitability have been rising each year since 2005. In the year 2005, annual revenue was 3.61 billion. The revenue grew to 4.91 billion in 2019, which was a 1.36% increase (Amir,2019) Although not a huge increase, it is impressive considering the increased competition between rivals and external substitutes such as local restaurants and fresh options (Amir, 2019). The past six months have also been a historic year of profitability for firms in this industry. Demand has gone up at an unprecedented level, increasing firm profitability along with it.

Profit as a share of revenue, according to IBIS world, has also been increasing from the year 2014 to the year 2019. During that period, decreased cost of important inputs caused the profit margin to rise for frozen pizza manufacturers. For example, the cost of wheat decreased, which allowed firms to make their dough at a lower cost. Firms also focus on selling “premium pizzas” and a higher cost than their standard versions, which increases profit margin as well (Amir, 2020). As more consumers prefer healthier, and pricier, pizzas, margins will continue to increase.

Profit margins also increased during key months of the pandemic because American demand was so high. One study from Supermarket News suggests that profits and demand may stay at this level for a while. One “study suggests frozen will remain a category heavyweight for months and years ahead, as the category attracts new and returning customers who are relying on a variety of frozen foods to provide much-needed convenience and satisfaction,” according to Alison Bodor, president and CEO of Arlington, Va.-based AFFI.(Redman, 2020)

There is also some segmentation when it comes to frozen pizza. The three main segments are regular and thin crust with classic toppings (46.9%), specialty (30.7%) and deep dish and thick crust varieties (22.4%) (Amir, 2020). Each of these segments have a direct effect on firms’ strategy, competition, and levels of profitability.

The regular or thin crust pizza with classic toppings captures the highest share because many people prefer the toppings that they are familiar with. In addition, the choice of thin crust with classic toppings appeals to the healthy buyer. For firms to capture more market share, they need to have a wide variety of options, including options from each segment to appeal to the range of customer desires.

Porter's Five Forces

There are two buyers that firms in the frozen pizza industry need to consider. The first set of buyers are the first-line buyers which include grocery store chains, wholesale grocers and other retailers who sell frozen pizza. These buyers are important to firms because they buy their product in bulk and are the ultimate connection with the final buyer- individual consumers.

The question of “who is buying frozen pizzas” has been affected recently by Coronavirus. “Of more than 1,200 U.S. adults polled online from April 10 to 14, 86% have purchased frozen food — such as frozen pizza, vegetables, or entrees — since early March, when the COVID-19 outbreak began to escalate.” (Redman, 2020). “This includes an equal share of frequent frozen food buyers, as well as consumers who don’t consider themselves regular purchasers,” observed Anne-Marie Roerink, founder and principal of 210 Analytics.” (Redman, 2020). The pandemic has not only affected the amount that buyers are purchasing, but also increased the number of individual buyers. Frozen pizzas have captured a larger reach.

The power of buyers is high when there are few buyers, and each buyer purchases large quantities relative to the size of a single seller. Their power is also high when the industry’s products are standardized or undifferentiated commodities, buyers face low or no switching costs, or buyers can credibly threaten to backwardly integrate (Rothaermel, Strategic Management, 4th Edition).

Traditionally the first-line buyers (stores) would have much more buying power than the downstream individual consumers. Because the frozen pizza firms are so reliant on grocery stores’ product placement, in-store advertising, and more, they are more powerful. However, the black swan event that was the corona virus proved that downstream buyers’ increase in demand held a lot of power as well. The demand spiked so much from individual consumers that the grocers and firms had to respond quickly in order to meet their demand. In this case, during the pandemic, the final buyer had more power than the first line of buyers.

I think that despite the high power the buyers possess, this is still an attractive industry. Firms are reliant on two sets of buyers for profit, but as previous industry reports have shown, the annual revenue is trending upward.

Suppliers in this industry include providers of raw ingredients such as flour, wheat, meat and dairy production. According to IBIS World, second tier suppliers are vegetable farming, frozen food production and bread production. Wheat is the most important ingredient in frozen pizza production, so firms are extremely reliant on wheat availability and price (Amir, 2019). They also get many ingredients for specialty, meat pizzas from butcher farms all over the country as well.

The power of suppliers is high when they do not depend heavily on the industry for their revenues and there are no readily available substitutes for the products or services that the suppliers offer (Rothaermal, Strategic Management, 4th Edition). The suppliers for frozen pizza firms supply goods to firms in other industries as well, therefore they are not specifically dependent on their frozen pizza partnerships. Additionally, although there are many producers of wheat, vegetables, flour, etc, in the US, there are no substitutes for those products. For firms to make pizza they absolutely need those raw ingredients.

The high power of suppliers is not a major deterrent for new firms. Although many incumbent firms already have established contracts and relationships with suppliers, there are enough options throughout the country for a new entrant to find a relationship they find favorable.

According to Amir at IBIS World, the barriers to entry and medium or moderate. One barrier to entry in this segment is the advantages independent of size, such as brand loyalty and customer perceived quality. Generally, consumers find a pizza brand that they like and tend to stick with it. So, brand loyalty plays a large part in frozen pizza sales and market share.

Another barrier to note is the high capital requirements for entry. To enter, a new firm must have capital for facilities, production, advertisement, and distribution. Many incumbent firms also have established relationship with grocery chains and wholesale grocery suppliers. Many of them have long term contracts that might deter another firm from attempting to enter. New firms may not be able to land such favorable deals with grocers around the country.

  This force has a great effect on the attractiveness of the industry. By definition, high brand loyalty, high capital requirements, and well-established incumbents are large barriers to entry, which, in turn, make this industry less attractive to enter.

The threat of substitutes for frozen pizza is moderately high. The main substitute is fresh baked pizzas from local or chain brick-and-mortar stores that offer dine in, delivery and take out. Delivery services like Ubereats and Postmates have offered an easier way for consumers to order fresh pizza, so buyers can choose this substitute right from the convenience of their phone.

During the corona virus pandemic, the direct substitute option of restaurant fresh pizza was virtually taken away. The unavailability of that substitute during this time caused buyers to purchase frozen pizzas and demand them in high quantities. This proves that when the availability of a substitute is taken away, demand for the firm’s product can skyrocket. The virus affected the threat of substitutes for frozen pizza, making the recent impact of this force less impactful.

I think the threat of substitutes only moderately affects the attractiveness of the industry. During times of crisis and uncertainty, people search for comfort, and many found that this year in frozen pizza. While fresh, restaurant style pizza may be more appealing, the fact that it costs more is a deterrent for buyers- they have a high switching cost. High switching costs result in a lower impact of the threat of substitutes. For consumers in 2020, many of whom are budget conscious, the switching cost to fresh, takeout pizza may be too high.

According to IBIS World, competition within the industry between firms is medium and steady. Primarily, competitors compete on price and perceived quality in taste and overall ingredients. Brand loyalty is a high factor for the rivalry in the industry.

The intense rivalry between firms drives the profit potential per firm down. Because there is medium level rivalry within this industry, profit possibility per firm is affected. Here, three firms in particular capture the majority of market share and therefor higher profitability than their competitors. But smaller competitors are able to make their fair share of profit as well. In addition to differentiation competition strategies, there has been increased price-based competition from private label producers in the market (Amir, 2020).

In summary, I think it will be interesting to see the effect that the Coronavirus has on each of the five forces. It could make the power of suppliers even higher if the options for purchasing raw ingredients and meat throughout the county get smaller or more expensive. With the sharp increase in demand, competition within the industry may increase as well. Because the threat of substitutes has decreased, with more consumers opting to stay in, save money, and keep pizza in freezer for a long time, the competition between incumbent firms may get even stronger. The increase in demand may also allow for a decrease in barriers of entry. Because consumers are looking to buy more frozen pizza, and many stores are running out of selection, consumers may be more likely to try a new brand or purchase whatever brand is left in the store.

The industry segments are also affected by each force in a different way. For example, the power of suppliers could be higher for the specialty, organic, and all-natural pizza. There, firms would be extremely dependent on certain farms or production facilities that specifically offer those ingredients.

The Drivers of Change in the Industry and Impact They Will Have

One of the major drivers of change in this industry is the political and legal effects, specifically from those agencies that place regulations upon firms in the food industry. One of these agencies is the Food and Drug Administration, or the FDA. The FDA monitors and regulates the quality of food and ingredients that can go to market for consumers. They dictate which products are suitable for purchase, and therefore can be a key driver of change for frozen pizza firms.

Another major driver is sociocultural effects. These are reflected in increased concerns and attitudes toward healthy eating. At one time, consumers viewed frozen pizza as “rubbery and greasy” (Amir, 2019). But frozen pizza firms have responded well to this and increased the nutritional value of their pizzas. Consumer preference has changed the makeup of products, the marketing and positioning of the products in the market.

Another driver of change is disposable income among consumers. A high disposable income among buyers allows them the freedom to go out to a restaurant and get fresh pizza, or to pay the extra delivery fees on food apps like Gubhub and Postmates. More recently, the disposable income for most Americans during the pandemic has gone down. With record unemployment rates, the lack of extended benefits and economic uncertainty, more people opt to purchase frozen pizza, which traditionally is much less expensive than takeout. American’s can stock up on the frozen meal for less money and use it as a ‘treat’, the same way a family would with takeout.

Companies in the Strongest/Weakest Positions

The first firm that is a major player in this industry is Nestle. They are by far the most successful with 30.7% of the market share. Their brand name frozen pizzas include Stouffers, Tombstone, Hot Pockets, Jack's Pizza, DiGiorno, and California Pizza Kitchen (Amir, 2019). Nestle is a Swiss company that operates all over the world in many different markets. They are one of the largest and most successful food production companies in the world. They compete in the frozen pizza industry with their subsidiary located in the United States called Nestle Pizza Division.

Nestle’s strategy has always been about differentiation. When Nestle acquired DiGiorno from Kraft in 2010, they inherited a unique brand that had been distinguishing itself from other frozen pizzas since 1995 (CNBC pizza history). They have continuously responded to sociocultural health trends by reinventing some of their already name- recognizable brands. For example, a thin, preservative-free crust was released from a subset of DiGiorno- DiGiorno Pizzaria, in 2015. When they introduced this, they made sure to highlight the fact that no artificial flavor was used. (Amir, 2019).

They have also differentiated themselves with clever marketing campaigns. DiGiorno brand is most recognizable from its 1997 slogan, “It’s not delivery, it’s DiGiorno”. In 2013, Nestle built upon that and introduced an ad that asked, “How fresh is it?” (Saxena, 2019). These advertisements differentiated DiGiorno and increased brand recognition. DiGiorno’s ad slogans are something that I grew up with, and still remember today. They directly compare themselves to their substitute, fresh-restaurant pizza, claiming that their taste and freshness is equal to and indistinguishable from that of delivery. This comparison was particularly useful during the pandemic when customers were unable (or unwilling) to purchase fresh delivery from a restaurant. Nestle’s DiGiorno has positioned themselves to be the next best thing.

Although they have held a commanding lead in market share, their annual growth rate has declined over the years. Their growth decreased by 2.8% from 2014 to 2019 (Amir, 2019).

The second most successful firm in the industry is Schwan’s, which captures 13.5% market share. Schwan’s brand names include Red Baron, Tony's, Freschetta, Bon Appetit, and Big Daddy's (Amir, 2019). Schwan’s has had a long history in the United States, gaining popularity in the 1970’s. “Then, in 1976, Schwan’s expanded its pizza business by launching Red Baron, which is now one of the country’s leading frozen pizza brands with over $570 million in annual sales as of 2017, according to Statista” (Huddleston Jr, 2020)

Schwan has differentiated themself with unique services. For example, Schwan’s is a leader in delivering frozen pizzas to school. They began this in the 1970’s and now own 70% of the school pizza market (Huddleston Jr, 2020). Schwan’s is also unique in that they offer direct to consumer delivering. If a customer wants a Schwan’s pizza, they can go directly to the company website, order a few pies, and have a cooler delivered by UPS in 1-2 days. This is feature that most frozen pizza manufacturers offer, and it a smart strategy during the Covid crisis of 2020.

Similarly to Nestle, Schwan’s brands also attempts differentiation by offering healthy pizza options. For example, in 2018 the firm announced that it planned to expand their gluten free line for their brand Freschetta. Their strategy focuses on utilizing high quality ingredients with specialty toppings and premium variety. Unlike DiGiorno, they don’t specifically compare themselves to delivery, but they achieve perceived value with their artisan crust and quality ingredients.

Since 2014, Schwan’s also saw a decrease in growth, specifically by 2.8%. This decrease, of course, does not include the mass spike in sales during the 2020 Coronavirus, but it does show a similar decline to the industry leader, Nestle (Amir, 2019).

The firm with the third largest market share is General Mills, with 5.6% market share. Their brands include Totino’s Pizza Party and Annie’s (Amir, 2019). General Mills was founded in Minneapolis and has become one of the largest food manufacturers in the world. General Mills, unlike Schwan’s, does not only focus on frozen food. They are more similar to Nestle, in that they manufacture food in all different categories. While they are most known for their cereals, they have been able to command a solid share of the frozen pizza market.

Just like its competitors, General Mills differentiates itself through the innovation of new styles of pizza. Additionally, they heavily focus their marketing strategy to attract a younger generation of consumers. They are attempting to capture a consumer base that their competitors have not focused on. They did this through the introduction of Totino’s Pizza Rolls, which are bite size frozen pizza rolls that are ready in just a few minutes.

They also acquired Annie’s Homegrown Inc, which is an organic food producer, to sell natural and organic frozen pizzas. Like other firms, they are trying to appeal to the demographic shift in preference toward healthier meals.

To sum up, I think that the strategies of the three highest earning firms are similar in some ways. Their number one form of differentiation and competitive strategy is positioning their pizzas to be healthier and more nutritional than standard frozen pizzas. They have however employed different marketing strategies to capture different consumers in the market.

Frozen pizza is an American staple, and a comfort food that many have enjoyed since they were young. When individuals choose frozen pizza, they tend to go for what they know or what feels comfortable to them. For years, Nestle, Schwan’s and General Mills have been America’s choice for frozen pizza comfort.

Key Success Factors for Competitive Success

As was mentioned previously, a key factor for success in the frozen pizza industry is “the ability to alter goods and services produced in favor of market conditions” (Amir, 2019). That is, the ability to change along with customer preference. Many firms have done just that, especially the three key firms with the highest market share. They all offer options that have more nutritional value than frozen pizzas of the past. They also offer selections that cater to trending dietary preferences like “cauliflower crusts” and gluten free. There are constant and everchanging possibilities within the three segments of frozen pizza, and over time successful firms will change their strategy along with the changing preferences of individual consumers.

The ability to changes goods along with preference is a factor that goes hand in hand with another key factor, having a wide and expanding product range. These two factors have the strongest correlation to firm success and profitability. While consumers tastes have shifted to healthier choices, there is still a demand for the classic pizza with original toppings. In fact, that is the segment that captures most of the market share. For firms to be successful in all segments, they need to offer a wide range of pizza options, that continue to expand with consumer preference.

Furthermore, another important key factor of success is the relationship and contracts that firms have with suppliers of key inputs. These supply contracts “reduce supply volatility considerably” (Amir, 2019). A reduction in volatility of the inputs from suppliers allows the firms to budget correctly, make accurate forecasts for the future, and reduces uncertainty. For firms to achieve sustained competitive advantage over their competitors they need to be able to formulate and implement a strategy that pursues long term goals. Certainty produces more accurate forecasts which can make a strategy more successful. The importance of this factor will remain crucial to firms for many years and is not likely to change over time. The quality of input ingredients is a key core competence that firms are constantly trying to preserve.

Industry’s Attractiveness and Prospects for Long-Term Profitability

The frozen pizza industry is attractive in terms of new entrant opportunities and long-term profitability. Industry reports pre-Covid-19 predicted only moderate growth over the next five years, to 2020. But the pandemic has changed that, definitely for the year 2020, and possibly changed the industry for a long time. Right now, America is filled with ambiguity in terms of the political, legal, economic, sociocultural and technological landscape. We are still in the midst of the pandemic and it’s unsure whether things will ever get back normal, including the industry for frozen pizza. Because of this, consumers are sticking to what they know and items that comfort them, such as frozen pizza.

“Today, the U.S. frozen pizza market is worth roughly $5 billion with the global market worth more than double that amount. By 2023, one estimate from Allied Market Research projects the global market could be worth more than $17 billion.” (Huddleston Jr, 2020).

An industry that has prospered in a time when most industries suffered is promising. The pandemic has offered a unique opportunity for frozen pizza to deliver on specific needs of consumers. Needs that may not have been present before 2020.

For consumers in a pandemic, Covid-19 world, frozen pizza offers many attributes that their substitutes simply cannot.

“When asked why they purchased frozen food, consumers cited long shelf-life (60%), the ability to stock up in case of food shortages (58%) and the desire to limit the number of trips to the supermarket (51%). Shoppers also pointed to ease of preparation (46%), faster preparation and cleanup (36%) and a belief that frozen foods currently are safer than fresh items (33%).” (Redman 2019).

These attributes, and more, are what make the frozen pizza industry so attractive enter.

Sources Used