Domino's Pizza is Winning with the Strategy Starbucks Abandoned

By Markets Fool.com


Image source: Domino's Pizza.

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Domino's Pizza is looking to loyalty to drive increased sales.Last fall, the company rolled out its first nationwide loyalty program: Piece of the Pie Rewards. Signing up through the Domino's app is easy, and once a customer enters the program, they can start earning free pizza for placing repeat orders online.

It's been more than two quarters since Domino's introduced the program -- enough time to get a sense of its effect on the company's underlying business. During Domino's April earnings call, management offered up some color on Piece of the Pie's performance.

Fueling sales growth

Domino's same-store sales rose 6.4% in the U.S. last quarter on an annual basis. At stores owned by franchisees, sales rose 6.6%, better than the 6% analysts had been anticipating. Notably, that marks the 20th consecutive quarter of positive U.S. same-store sales growth -- an impressive streak. What's behind those stronger sales?

According to Domino's management, the company's new loyalty program is playing an important role. "We're feeling good about the loyalty program...it clearly was a positive contributor to comps in the first quarter, and we're seeing enough on it that we're feeling good about how it's going to affect the growth [of] the business going forward," Domino's CFO Jeff Lawrence said on the company's first quarter earnings call.

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Likewise, in February, Domino's management made similar remarks about the program's effect on the company's fourth quarter. "Our loyalty program was launched during the fourth quarter [and] has produced encouraging early results, feedback, and engagement from our digital customers. This introduction had a positive impact on the fourth quarter, and we look forward to continuing to introduce it to our growing digital audience," Domino's CEO Patrick Doyle said.

It's about boosting market share, not juicing sales

Piece of the Pie is not complicated, and is relatively easy to understand. If a customer places an online order totaling $10 or more (about the equivalent of a medium, two-topping pizza), they earn 10 points, and they can earn up to 10 points per day. For every 60 points they accumulate, they earn a free medium two-topping pizza. That's it.

Obviously, simplicity confers a host of benefits, but Domino's management has been straightforward in laying out the goals it's hoping to achieve. Piece of the Pie doesn't reward big spenders, but rather repeat customers. The customer who buys $100 worth of pizza and the customer who buys $11 worth of pizza earn the same number of points. That's intentional: Piece of the Pie is about driving volume, not increasing the size of individual orders. On Domino's February earnings callDoyle discusses this:

We're trying to drive volume in our business. It's about driving frequency and retention of those customers. I think it's a fundamental choice that brands need to make on whether or not it's going to be about driving ticket and overall sales versus frequency of the customers. And we clearly chose that we want to drive order counts within our system.

That stands in stark contrast to the changes coffee giant Starbucks made to its loyalty program back in April. For years, Starbucks operated a system roughly similar to Domino's Piece of the Pie: after purchasing 12 drinks, Starbucks customers would receive a free beverage of their choice. Now, under the new system, Starbucks customers are rewarded not for the number of drinks they purchase, but on the basis of how much money they spend.

Starbuck's old system was designed to drive volume, encouraging coffee drinkers to make daily trips to their local Starbucks for their cup of coffee. Starbucks' new system, in contrast, doesn't so much reward regular loyalty, as it encourages customers to order more expensive drinks, or to purchase other items like pastries and breakfast sandwiches alongside their beverage.

Starbucks has made growing its food business a top priority for the company, and it's finding some success. Last quarter, Starbucks food revenue rose 16% on an annual basis. In total, it generated 20% of Starbucks' U.S. revenue, its highest share ever. Starbucks' new loyalty program should help its food sales rise even further.

Back in February, Doyle was asked to contrast Domino's loyalty program with Starbucks'. "I am aware of [the change Starbucks] made...But for us, as low as our market share is overall within the pizza category, we think it makes sense to be focusing primarily on order counts." Domino's is one of the nation's largest pizza chains, but its share of the pizza market remains below 20%.

Starbucks and Domino's loyalty programs are important to both companies, and are similar in the sense that they both leverage the investments the companies have made in technology, and in their apps. But they're ultimately pursuing two different strategies, and the differing structure of their loyalty programs reflects that.

The article Domino's Pizza is Winning with the Strategy Starbucks Abandoned originally appeared on Fool.com.

Sam Mattera has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.