Yesterday we posted a food cost analysis looking at the unit economics of popular dishes. We of course included Pizza, a staple of the American diet. Several folks on Twitter brought up great questions around why pizza had the largest markup: was it because labor costs were higher? Higher ingredient costs? Or, is pizza just a cash-cow?
We took at deeper look; here’s what we found…
Nymag has a good P&L breakdown of two New York pizzerias. Immediately, we noticed labor costs as a percentage of revenue for both establishments is far above the average for the restaurant industry:
John Fawkes was correct in his assumption around labor costs.
IDK if "marked up" is the most accurate term. Doesn't it just mean labor and equipment is more expensive for pizzas?— John Fawkes (@johnfawkes) April 3, 2017
It’s not clear (based on the data we found) if equipment unique to pizza restaurants plays a significant role in how much these establishments need to mark up pizza in order to make a profit. The data we looked at didn’t break down specifically how they’re accounting for equipment costs.
Both restaurants we looked at are achieving very health profit margins; far better than the average restaurant:
- Motorino — 10.8%
- Rocket Joe’s — 15.8%
Making pizza can be labor intensive but still very lucrative with the right secret operating sauce (and good pies!).
After seeing these profit margins, it’s no surprise to see new investment in the space. MOD Pizza, one of the more prominent new entrants in the market, raised $74 million last year (that's after raising $45 million in 2015) for more than $150 million in total capital.
In 2016, MOD Pizza added 100 locations with overall sales of $152 million (growing 134% year-over-year).
For Yaron Goldman, a MOD Pizza franchisee in North Carolina, the pizza business is a no-brainer:
“It’s the unit economics. You have a 2,200-square-foot box that can do AUVs north of $1 million. The investment is low.”