Before the pandemic, the four largest pizza chains controlled 43% of the $44 billion market. Of those, Domino's Pizza (DPZ 0.54%) stands out. The company has ridden a franchise model and an embrace of technology to a 1,000% gain in its stock over the last decade. But can the same approach work for chicken wings?
Wingstop (WING 2.52%) is betting on it. The company says it is in the flavor business, not the wing business. But it has parlayed Americans' growing love of chicken into a 300% gain in the stock since going public in 2015. The similarities to Domino's lead me to believe there could be more growth ahead.
Image source: Getty Images.
Making the franchise model work
Domino's has nearly 19,000 locations across the globe, 98% of them franchised. As it lapped the strong pandemic quarters, the company's third quarter of 2021 was its first in 10 years in which it did not grow same-store sales. For the year, the metric still grew in the U.S. and internationally, 3.5% and 8%, respectively.
Like Domino's, Wingstop relies on a franchise model. And those locations account for 98% of the total store count. The similarities don't stop there. It has experienced same-store sales growth every year since 2004. That consistency -- plus growing its footprint 73% since 2016 -- has led to 25% compound annual revenue growth for the past five years.
Another similarity results from the pair's franchise approach. Since most of the revenue comes from royalties and fees, franchisees take on operating costs like labor. This means even an ultra-productive concept like Chipotle Mexican Grill, which isn't franchised, can't produce the same sales per employee. Wingstop shareholders should be excited to see this productivity metric matching the iconic pizza chain.
WING revenue per employee (annual). Data by YCharts.
Standing where the puck is headed
There is a famous saying by the Hall of Fame hockey player Wayne Gretzky. He said he succeeded by skating to where the puck was going, not to where it was at. But for restaurants like Domino's and Wingstop, they were already standing where the puck was going.
Americans have been shifting their dining habits to delivery and takeout for years. And the pandemic accelerated the trend: Nearly two-thirds of restaurant spending in 2020 was for takeout and delivery.
According to Yelp, online ordering spiked as much as 40-fold during the pandemic, and 60% of Americans are still ordering takeout or delivery at least once per week. It's one of the habits created during the pandemic that is expected to stick. And it is a boon for pizza and wings.
Continuous improvement through innovation
Domino's has a long history of innovation, like better boxes and heated delivery bags and its development of online ordering and tracking. Continuously improving both operations and the customer experience has been a key to the chain's success.
Wingstop is following that playbook. It has a robust online ordering system and has worked to standardize digital systems across its locations. It has invested in equipment that dramatically reduces cooking time and has taken a test-and-learn approach to several initiatives, including providing its own delivery.
Management has even fought inflation with Thighstop, a virtual restaurant offering chicken thighs. It's a clever way to keep menu prices in check as the spot price for bone-in wings rose more than 70% in 2021.
It has also experimented with smaller-footprint stores that only support takeout and delivery. Currently, digital ordering makes up more than 60% of sales. The new format could push that to 100% in those locations. That's an effective way to fight wage inflation.
It is a franchise model with high productivity, consistent same-store sales growth, relentless innovation, and an enormous opportunity to add locations. If the similarities to Domino's are any indication, Wingstop shareholders could be in for a decade of big gains.
