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 of Industry 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.
A full transcript follows the video.
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's Domino's and Papa John's. Domino's is obviously the one that has seen incredible success. Anybody who's bought into the stock in the past three or four years has probably been very pleased with the results. Domino's annual revenue growth has been in the double digits or darn close for three years running. Their comps are similarly elevated over the other big players in the industry, their competitors. We talk about innovation on the menu. Domino's is in an instance where they're really embracing technology. They're really embracing it like nobody else has before. I think they have something like 14 or 15 or more ways for ordering a pizza from the company.
Dan Kline: From a practical point of view, I would say them and Starbucks are right in the same realm. But, what Domino's has done is they've taken a good enough product -- I mean, you and I eat pizza, no one is sitting around going, "You know what my favorite pizza is? Domino's." But, at 11:00 at night, they're going, "What pizza can I get that I only have to text an emoji to get?" Not that a lot of people are using gimmick ordering, but what they are using is, Domino's has a very innovative app. It's very simple to order, you can program a recurring order very easily, and the Pizza Tracker lets you see when your pizza is getting made, when it's getting delivered. So, they have a lower-end-of-the-market product. Every town has three pizza places that offer better pizza than Domino's or Papa John's. But what those two companies -- Domino's more than Papa John's, but Papa John's is catching up -- have done is make it super convenient.
We talked about this this morning -- pizza lends itself very well to this. There are markets 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 a piece of pizza in a microwave or toaster oven is still pretty good. So, the product they're selling -- and Domino's and Papa John's are both kind of a doughy pizza -- travels well. So they have made a very strong package. It's not about the pizza being the best. It's not about it being 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 easy to get a Domino's pizza," or there's 50 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, and that has worked very well.
Shen: Sure. I will add, I was surprised to find, Domino's market share for pizza delivery is significant at 20%. But that still leaves them a pretty decent amount of room to grow. I think they've managed to grab share, especially with their growth in recent years.
Kline: They've been growing -- I don't remember the exact number, but -- about five years U.S. year-over-year growth, and globally, it's about three years. So, they have a model that 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's pushing 110% capacity, they open a new one, and it just grows that business and rolls it into being 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, a massive network of stores. But, before we move on to the next topic, one place that Domino's is facing issues, and this goes back to our earlier discussion, is ultimately, like the burger chains and fast food industry, they are still facing an issue of lacking the flexibility to raise prices. This, obviously, comes from competition of the first company we talked about in the show, with Chipotle. You have some of these fast-casual names, better burgers, &pizza, which I'm a huge fan of here in D.C. Essentially, those competitors have managed to narrow the gap between what you're paying for just a little bit more with 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-own Chipotle 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. But Domino'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 at Domino's, there's always deals on that, but there's never a deal on the salad. There's never deal on the wacky bread or whatever it is that they call their bread products that they sell you. The dessert products might be a throw in, but the soda isn't. So, there's a lot of ancillary items that build up that check. And as 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'm going to go to a better pizza place." But because you're spending so little, it's really easy to throw in that Papa John's pizza cookie, and pump your check up. So it's a smart strategy. Plus, you're not 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're making it up in volume.
Shen: Sure. And fundamentally, 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: You get 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.