Why Convenience Has Been Key to the Success of Major Pizza Chains

By Motley Fool StaffMarketsFool.com

While the overall restaurant business has struggled, Domino's (NYSE: DPZ) and Papa John's (NASDAQ: PZZA) have managed to buck that trend. The two pizza chains have enjoyed steady growth at a time when many fast food and fast casual rivals continue to suffer.

In this episode ofIndustry Focus: Consumer Goods,Vincent Shen and Daniel Kline look at how Domino's has used technology to make the ordering process for customers truly as effortless as possible. They also discuss pricing in this niche, as well as the growing impact of new fast casual pizza chains.

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A full transcript follows the video.

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This video was recorded on Jan. 26, 2017.

Vincent Shen: So, there's two companies,at least one in particular,that I would consider part of this space,not a burger company, at least,that I think has very much bucked this trend. That'sDomino'sandPapa John's. Domino's isobviously the one that has seen incredible success. Anybody who'sbought into the stock in the past three or four yearshas probably been very pleased with the results.Domino's annual revenue growth has been in the double digitsor darn close for three years running. Their comps aresimilarly elevatedover the other big players in the industry, theircompetitors. We talk about innovationon the menu. Domino's is in aninstance where they're really embracing technology. They'rereally embracing it like nobody else hasbefore. I think they have something like 14 or 15 or more ways for ordering a pizza from the company.

Dan Kline:From apractical point of view,I would say them andStarbucksareright in the same realm. But,what Domino's has done is they've taken agood enough product --I mean, you and I eat pizza,no one is sitting around going, "You knowwhat my favorite pizza is? Domino's." But, at 11:00 at night, they're going, "Whatpizza can I get that I only have to text an emoji to get?" Not thata lot of people are using gimmickordering, but what they are using is,Domino's has a very innovative app. It's very simple to order, you canprogram a recurring order very easily,and the Pizza Tracker lets you seewhen your pizza is getting made,when it's getting delivered. So, they have a lower-end-of-the-marketproduct. Every town has three pizzaplaces that offer better pizza than Domino's or Papa John's. Butwhat those two companies --Domino's more than Papa John's,but Papa John's is catching up --have done is make it superconvenient.

We talked about this this morning --pizza lends itself very well to this. There aremarkets where you can get McDonald's delivery,but if you live five minutes away from a McDonald's,the fries aren't going to be as good when they get there. Cold pizza is fine. Throwing apiece of pizza in a microwave or toaster ovenis still pretty good. So, theproduct they're selling -- andDomino's and Papa John's are both kind of a doughy pizza --travels well. So they have made a verystrong package. It's not about the pizzabeing the best. It's not about itbeing the cheapest, although they do do a lot of pricing deals. It really is about, "Hey,I'm a little drunk and it's really easyto get a Domino's pizza," or there's50 college kids sitting around studying,let's just order a mess of pizzas, and calling the local place,you have to make a phone call, it's going to take 45 minutes,maybe you have to go pick it up.Domino's makes it very simple, andthat has worked very well.

Shen:Sure. I will add,I was surprised to find,Domino's market share for pizza delivery issignificant at 20%. But that still leaves them apretty decent amount of room to grow. I think they've managed to grab share, especially with their growthin recent years.

Kline:They've been growing -- I don't remember the exact number, but -- about five years U.S. year-over-year growth, andglobally, it's about three years. So, they have a modelthat you can pretty much extend. And what happens is,in a lot of cases, they open a new store,and it's taking off pressure from an existing store. So,they already have a store that'spushing 110% capacity, they open a new one, and it justgrows that business and rolls it intobeing able to get you pizza faster.

Shen:There have been estimates,I believe the company sees, just in the U.S.,potential for as many as 6,000 locations. So, amassive network of stores. But,before we move on to the next topic, one place thatDomino's is facing issues, andthis goes back to our earlier discussion, isultimately,like the burger chains and fast food industry, they are still facing an issue oflacking the flexibility to raise prices. This,obviously, comes from competition of thefirst company we talked about in the show, withChipotle. You have some of thesefast-casual names, better burgers,&pizza, whichI'm a huge fan of here in D.C. Essentially, thosecompetitors have managed to narrow the gapbetween what you're paying forjust a little bit morewith a pretty decent jump in quality.

Kline:I mean, fast casual pizza, we have four chains near me that are Blaze Pizza and a few local ones that do that sort of make-your-ownChipotle concept, and the pizza is all very good,and it's full price, even the ones that deliver,it's very expensive compared to Domino's. ButDomino's and Papa John's do something very subtle in the pricing that you may not think about. The pizza is cheap.You can always get $7.99 two mediums atDomino's, there's always deals on that,but there's never a deal on the salad. There'snever deal on the wacky bread orwhatever it is that they call their bread products that they sell you. Thedessert products might be a throw in,but the soda isn't. So,there's a lot of ancillary items that build up that check. Andas much as their heavily discounted --you're right, there's a ceiling. If Domino's gets to $12.99 for a pizza,you might go, "I'mgoing to go to a better pizza place." Butbecause you're spending so little, it's really easy to throw in thatPapa John's pizza cookie, andpump your check up. So it's a smart strategy. Plus, you'renot going to necessarily order McDonald's or Chipotle for 75 friends,but if you're having a Super Bowl party,Domino's is still pretty convenient, and they'remaking it up in volume.

Shen:Sure. Andfundamentally,it's the same idea from what a McPick 2 hopes to do --bring you in on that value, two pizzas for $8, but then, with everything else on the menu --

Kline:Youget a coffee,you get a shake, you buy a Grimace costume,it could really be anything.

Daniel Kline has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool owns shares of Papa John's International. The Motley Fool is short Domino's Pizza and has the following options: short June 2017 $140 puts on Domino's Pizza. The Motley Fool has a disclosure policy.