The net result from this lack of innovation was Pizza Hut losing significant market share. it's expected that Pizza Hut will be more competitive to be more promotional throughout 2006, and would expect aggressive advertising that accentuates a "value" message.
Given a high gas price environment which is already happening today (as of June 2006), many operators in the pizza category have discussed "value" as a key theme. The challenge will be increasing transactions through "value" offerings while maintaining or boosting average pizza orders. According to Pizza Hut, much of the growth in the category in 2005 has been achieved through higher average check levels with only a small portion coming from higher transactions. Papa John's had a sales resurgence in 2005, running a successful pan pizza promotion that contributed to same-store sales growth that was well above the performance of recent years. Papa John's comps have remained positive in early 2006.
Economic Growth and Stability
Critical to the economic growth and stability of Domino's is the predictable revenue stream from franchisees, which continues to have above average rates of return for franchisees.
The ROI for any given franchisee hovers in the 40% range based on an annual sales volume of $650,000. Figure 4 shows the distribution of franchisees across the United States.
Figure 4: Distribution of Domino's franchisees throughout the U.S. true competitive strength, franchisees for Domino's are one of the most potent competitive advantages the company has. The majority of franchise owners come up through the franchise system, have an average length of relationship with Domino's for 9 years or more. A sure sign of franchisee loyalty is the 99% contract renewal Domino's is able to generate year over year, and the fact that 98% of the stores purchase all their ingredients and food products from Domino's Corporate. There is also a 99% royalty and distribution receivables rate across all franchisees and less than an 8% attrition rate of franchisees globally. Figure 5 provides for an analysis of the dynamics of franchise store ownership.
Figure 5: Dynamics of store ownership
The Customer Environment
Pizza sales are by far most common during the dinner day-part, consisting of more than 53% of Domino's sales. Late night is a pretty significant piece of the business at 13.8%, and could continue to be an opportunity in the category. Figure 6 from the Domino's Annual Report shows the distribution of pizza sales by day part.
Figure 6: Analyzing Pizza Sales by Hour of Day
To counter this trend of dinner being by far the most critical time for any pizza delivery business, Domino's competitors are experimenting with food products to move into other meals. Breakfast is not sold at most pizza operators; however, Papa John's is in the process of testing breakfast pizzas such as "pizza omelets."
Interestingly, pizza sales also tend to be skewed toward weekends, when customers order pizzas not only as a meal replacement but also for special occasions. Weekday sales may also present an opportunity for pizza operators as the demands on people's time increase and a greater premium is placed on the convenience of ordering pizza on a weeknight.
During the week, sales should increasingly benefit from busy households that, when returning home from a long day of work would rather order a pizza than cook and clean. Figure 7 provides an analysis of how Domino's management sees the opportunity for delivering pizza and other entrees adaptable to home delivery.
Figure 7: Domino's Value Pyramid
Demographically, consumers within the 15- to 34-year-old range are the most pizza-friendly. Based on the 2000 Census, trends in population demographics imply a steady increase in the percentage of people within this age range in the United States.
SWOT Analysis
Strengths
Strong and well-diversified franchise system
Domino's has developed a large, profitable, and committed franchise organization that is a critical component of its system-wide success and leading position in pizza delivery.
In addition, Domino's shares 50% of the pre-tax profits generated by its regional dough manufacturing and distribution centers with those domestic franchisees who agree to purchase all of their food from the company's distribution system. These arrangements strengthen Domino's ties with its franchisees by enhancing their profitability while providing the company with a continuing source of revenues and earnings. This arrangement also provides incentives for franchisees to work closely to reduce costs. The strong, mutually beneficial franchisee relationships are evidenced by the over 98% voluntary participation in Domino's domestic distribution system, over 99% domestic franchise contract renewal rate and over 99% collection rate on domestic franchise royalty and domestic distribution...
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