Should Domino's Be Worried About Pizza Hut's New Focus on Digital?
Few companies have parlayed investments in digital technology into profit-generating success as has Domino's Pizza (NYSE: DPZ). While Starbucks usually is lauded for melding its loyalty app with mobile order and pay, the seemingly modest pizza shop can easily point to its platform for helping turn around its fortunes.
Domino's credits its technology innovations with helping it attain an estimated $5.6 billion in digital sales last year, or more than half of its $10.9 billion in total revenue the company and its franchisees generated in 2016. In just the past five years, Domino's has grown its revenue at a nearly 10% compounded annual growth rate, leading to a 1,000% return on its stock. In contrast, Starbucks stock has only tripled in value.
Grabbing a slice of growth
Yet pizza seems to be where real innovation is happening, because it's not just Domino's that has found success with digital technology, but Pizza Hut is alsobecoming a leader in showing just how far merchants can take artificial intelligence.The Yum! Brands (NYSE: YUM) pizza chain is still in the midst of a turnaround like the one Domino's needed a few years back, and it is counting on technology to do it.
Pizza Hut bills itself as the largest restaurant chain in the world,and though it was one of the early pioneers in digital information, introducing an online-ordering feature way back in 1994, it has sincefollowed along in Domino's wake, adding capabilities to its platform on how and where you can order a pie.
Image source: Getty Images.
Last year, for example, it added the ability to order a pizza through Facebook Messenger and Twitter, similar to its rival, which also allowed customers to order via Amazon.com's Echo, through text messages, the Apple Watch, smart TVs, and more. Pizza Hut has added more capabilities, too, such as using Alexa to order through Amazon Echo, Tap, and Fire TV.
Also similar to the Domino's app, which lets a customer watch his or her order wend its way through the system to final delivery, Pizza Hut added its "Visual Promise Time," which is a real-time pizza tracker that the pizzeria told Business Insider it likened to "the 'Uber-ization' of our customer experience," referring to the innovative ride-sharing app.
Everything is mobile-oriented
Now Pizza Hut is integrating its digital efforts into a mobile-first strategy, as more than 70% of its digital orders come through a mobile device. The idea is to make it an easy, intuitive experience for the customer, and according to Nation's Restaurant News, the chain says it means it will "make sure that when the customer is interacting with us in that mobile space that it's intuitive, it's easy, it fits the device, it fits the screen they are on, and it fits the customer interactions they are used to."
Although Pizza Hut's first pizza-builder app launched in 2008, ithas struggled to make it seamless and relevant to the business, as it instead tried to define itself as a fast-casual destination, only to see sales stumble. While same-store sales still fell 2% in the most recent period, Yum! Brands reported that Pizza Hut's GAAP operating profits were up 19% while core operating profits were 21% higher. Should it be able to build upon the customer engagement that its sister chain Taco Bell has so successfully achieved, Pizza Hut may be able to more readily challenge Domino's.
Image source: Domino's Pizza.
Not that its delivery-chain rival has anything to worry about at the moment. Just as Wal-Mart is improbably seen as a tech company, so is Domino's Pizza. It enjoyed a better than 10% jump in comps in the first quarter, the 24th consecutive period of growth in its domestic business, and an incredible 93 straight quarters of growth in international markets.
Domino's been helped along in no small part because digital now comprises 60% of its business, a level Pizza Hut would undoubtedly love to replicate. While the streamlining and further integration of Yum! Brands chain's pizza-builder app may help it do so, Domino's Pizza isn't looking back over its shoulder.
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Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends AMZN, AAPL, and SBUX. The Motley Fool has a disclosure policy.