Domino’s Pizza: Delivering Innovation and Profit

Pizza. It’s not the first thing that comes to mind when thinking of digital innovation or technology. Yet, when considering the winners and losers of the economy’s digital transformation, there can be no denying that pizza has a place at the table. More specifically, Domino’s Pizza. From 2010 to March 2017, Domino’s share price outperformed those of vaunted tech giants like Amazon, Apple, Facebook, and Google.[1] Similarly, since March 2014, Domino’s (+214%) has considerably outperformed its industry peers, including Pizza Hut’s parent company Yum! Brands (+79%), McDonalds (+90%), Restaurant Brands International (+76%), and Papa John’s (-15%).[2] While the entirety of this outperformance cannot solely be attributed to digital innovation, Domino’s commitment to technology is a clear differentiator from its industry peers.

 

 

 

After the company’s stock price bottomed out in 2008, Domino’s boldly pursued a multi-pronged strategy to initiate a turnaround.[3] In an effort to rehabilitate their brand, Domino’s announced a new menu and pizza recipe.[4]  Simultaneously, Domino’s began to invest in digital capabilities that would enable it to deliver their product in innovative ways. However, in order to execute on these digital innovations, Domino’s first built out a more robust internal IT function, capable of internally developing these new digital innovations.[5] [6] As of 2016, approximately half of Domino’s 800 headquarter employees worked in software and analytics.[7] Perhaps most importantly, executive support for the company’s digital transformation ensured that the newly-empowered IT department and their marketing counterparts were able to collaborate in a quick, iterative processes.[8]

With this digital foundation in place, Domino’s emerged as a digital pioneer in the quick serve restaurant (QSR) industry. In 2008, Domino’s “Pizza Tracker” technology was launched, allowing customers to track the progress of their online orders via the Domino’s website.[9] Subsequently, in 2011, Domino’s launched its highly-rated iPhone application, further simplifying the consumer’s path to purchase. These innovations, when coupled with menu and ingredient changes, quickly took hold: approximately 25% of the company’s domestic sales were ordered online or through a handheld device in 2011.[10] As of 2017, this figure had reached 60%.[11] This early push into digital has not yet subsided. More recently, Domino’s became the first company to deliver pizza by drone, in addition to testing deliveries with autonomous vehicles.[12] [13] While some of these initiatives could potentially be considered to be “gimmicky” endeavors in innovation, Domino’s commitment to digital has undoubtedly increased value to consumers by simplifying the barriers to ordering and delivering their pizza.

While these initiatives demonstrate a desire to digitally transform their business, Domino’s efforts prove particularly effective because they closely align with the company’s business model. Most notably, as a franchisor, Domino’s provides centralized services such as supply chain management and IT systems to their franchisees. Innovations like the Pizza Tracker allowed franchisees to simplify their operations (e.g., less employee emphasis on taking orders), monitor their delivery performance, and make incremental improvements. Similarly, Domino’s proprietary Pulse point-of-sale computer system facilitated franchisee’s efforts to take customer order and manage inventory.[14] Lastly, to further simplify the operations of franchisee stores, Domino’s announced the introduction of an artificial intelligence-enabled “virtual ordering assistant” to take telephone orders in stores.[15] Together, these digital innovations both help franchisees operate their franchises more effectively and increase the Domino’s corporate leverage over their franchisees, thereby justifying the royalties that they command.

 

Digital loser (for now…)

On the contrary, Pizza Hut is a direct competitor that has struggled to adapt to the digital environment in which Domino’s has excelled. Despite Yum! Brand’s strong stock performance, Pizza Hut remains a laggard in the company’s portfolio. Since 1995, Pizza Hut has seen a gradual decline in market share: from 25% to 14.5% in 2015.[16] As seen below, Pizza Hut’s revenue growth has been rapidly outpaced by Domino’s digitally-enabled strategy. The dismal performance stems, broadly, from the company’s self-assessed inability “to gain traction with our commitment to hot, fast, and reliable experiences.”[17]  In the context of Domino’s success, these failings can largely be attributed to a poor customer experience (driven by lack of digital investment) and a business model that was not optimized for the continued rise of delivery orders. Regarding the company’s digital shortcomings, current Pizza Hut president remarked, “it wasn’t so long ago that people were talking about Pizza Hut and digital being a weakness.”[18] In a similar vein, the company’s business model was heavily geared towards dine-in customers. According to the company’s Analyst Day presentation, these “typical dine-in” assets were a “drag on brand perception and ability to execute.”[19] These two strategic decisions ultimately hampered Pizza Hut’s ability to deliver on their customer value proposition and, consequently, their performance suffered.

 

 

However, Pizza Hut has all but declared that they will be quickly following in Domino’s footsteps. In 2017, the CEO of Yum! Brands announced a $130M turnaround plan to invest in “assets and technology,” in order to “make this a more relevant brand.”[20] Since then, Pizza Hut has announced an investment in and a partnership with GrubHub, signed an international pizza delivery deal with Telepizza, and acquired online ordering software QuikOrder.[21] [22] [23] In addressing their typical dine-in assets, the company has now opened over 70 “Delco” units, which are designed for the specific purpose of delivery.[24] These initiatives reflect a company that is driven to join Domino’s as a winner in the new digitally-enabled QSR industry.

Whether these initiatives will be successful will likely be contingent upon two factors. First, it remains to be seen whether Pizza Hut will pursue a full-scale digital transformation as Domino’s did. In a 2018 interview, Pizza Hut’s Global Chief Customer Officer stated that a “wholesale overhaul” of Pizza Hut’s legacy systems was infeasible and, accordingly, new intelligent delivery algorithms would have to overlay over their old systems.[25] A patchwork attempt to create a digital transformation may not drive the operating leverage that Domino’s has achieved in recent years. Secondly, Pizza Hut must continue to evolve its business model to be more in line with the evolution that its digital assets aspire to deliver. Namely, they must continue to expand their Delco unit base, while selling off unproductive dine-in assets. Without a full-scale commitment to these initiatives it is possible that Domino’s will outcompete Pizza Hut in its superior execution of delivery pizza, while Pizza Hut tries to service both the dine-in and delivery markets.

 

Conclusion

As demonstrated in the cases of Domino’s and Pizza Hut, the success of a digital transformation is contingent upon both a dedicated investment to build digital capabilities and a close alignment with the company’s business model. As reflected in its immense success, Domino’s Pizza satisfies both conditions. However, with this triumph in the rearview, it remains to be seen whether this digitally-propelled success will be sustainable. Pizza Hut has articulated what can be seen as a copy-cat strategy, and new substitute products – enabled by third-party delivery services like UberEats – can offer wider variety and outsource their delivery processes. At the very least, regardless of who wins this battle in the long-term, we – as consumers – can rest easy, knowing that our appetites will not go unsatisfied.

 

 

 

 

 

[1] https://qz.com/938620/dominos-dpz-stock-has-outperformed-google-goog-facebook-fb-apple-aapl-and-amazon-amzn-this-decade/

[2] https://www.tradingview.com/chart/?symbol=NYSE%3ADPZ

[3] https://www.forbes.com/sites/kylewong/2018/01/26/how-dominos-transformed-into-an-ecommerce-powerhouse-whose-product-is-pizza/#55b5da6a7f76

[4] http://pizzaturnaround.com/2009/12/introducing-our-inspired-new-pizza/index.html

[5] https://www.cmo.com/features/articles/2018/4/9/dominos-cdo-right-internal-structure-to-be-digital-innovator.html#gs.AzJ2aPEO

[6] https://hbr.org/2015/11/dont-let-big-data-bury-your-brand

[7] https://hbr.org/2016/11/how-dominos-pizza-reinvented-itself

[8] https://hbr.org/2015/11/dont-let-big-data-bury-your-brand

[9] https://www.pizzamarketplace.com/news/dominos-intros-pizza-tracking-system/

[10] https://www.pizzamarketplace.com/news/dominos-launches-iphone-ordering-app/.

[11] https://www.latimes.com/business/la-fi-agenda-dominos-20170515-story.html

[12] https://www.cnbc.com/2016/11/16/dominos-has-delivered-the-worlds-first-ever-pizza-by-drone-to-a-new-zealand-couple.html

[13] https://www.cnbc.com/2018/02/27/ford-teams-with-dominos-to-test-deliveries-by-autonomous-vehicles.html

[14] HBS Case, “Domino’s Pizza,” Case Number 9-512-004

[15] https://www.qsrmagazine.com/ordering/dominos-begins-testing-artificial-intelligence-phone-orders

[16] https://www.cnbc.com/2017/02/09/yum-brands-posts-weak-sales-as-pizza-hut-continues-to-struggle.html

[17] https://www.qsrmagazine.com/pizza/checking-pizza-huts-130m-comeback-plan

[18] https://seekingalpha.com/article/4227124-yum-brands-inc-yum-ceo-greg-creed-hosts-2018-investor-analyst-day-conference-transcript?part=single

[19] http://investors.yum.com/Interactive/newlookandfeel/4025819/pdf/Final_Combined_Presentation_2018.pdf

[20] https://www.cnbc.com/2017/02/09/yum-brands-posts-weak-sales-as-pizza-hut-continues-to-struggle.html

[21] https://www.qsrmagazine.com/pizza/checking-pizza-huts-130m-comeback-plan

[22] https://www.qsrmagazine.com/news/pizza-hut-signs-landmark-international-deal-telepizza-group

[23] https://www.qsrmagazine.com/pizza/pizza-hut-makes-one-its-biggest-acquisitions-ever

[24] https://seekingalpha.com/article/4227124-yum-brands-inc-yum-ceo-greg-creed-hosts-2018-investor-analyst-day-conference-transcript?part=single

[25] https://aibusiness.com/pizza-hut-digital-ai-overhaul/