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Improved Pizza Helps Domino’s Take on the World

By Daniel B. Kline – Mar 4, 2014 at 5:36AM

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Domino's has had huge international growth and the company is now bigger internationally than it is in the United States, but it still has a ways to go before catching its biggest rival.

Partially through listening to its customers and improving the quality of its pizza, Domino's (DPZ 0.68%) has managed to become an increasingly major player on the global stage.

The pizza chain announced in its 2013 annual report that it has opened 573 new international stores, compared to only 58 domestically. That gives the company -- much to the chagrin of The Noid -- 4,986 stores in the United States and 5,900 across the world.

That still trails its biggest competitor, Yum! Brands' (YUM 2.13%) Pizza Hut. As of Jan. 1, Pizza Hut has 13,400 restaurants – including over 7,800 units in the U.S. and nearly 5,500 in 85 countries. Those figures do not include 987 locations in China and 310 India, which are separate divisions. Papa John's (PZZA 0.28%) is a distant third with 3,286 U.S. stores and only 1,142 internationally.

Domino's actually listens
Papa John's touts how it has "Better Ingredients. Better Pizza." Pizza Hut has long used variants of its current "Make it great" tag line. But while Domino's is now advertising that its pizzas are "handmade" by showing its actual pizza makers in its ads, it also famously ran a campaign in 2010 about how awful its pizzas were.

The company ran those ads as a way to demonstrate how it would fix the problem. That campaign laid the groundwork for Domino's growth, and since 2010 Domino's has made pizza quality and listening to its customers constant themes in its ads.

Did Domino's improve its pizza?

The jokes about the old Domino's pizza recipe were plentiful, and the company embraced the criticism in its 2010 "Pizza Turnaround" campaign. That was a clever strategy that not only turned a major weakness into a strength, but also invited non-fans to resample.

At the time of the new pizza's launch, Bazaarvoice (which does research for retailers) put the product to the test against its major competitors Papa John's and Pizza Hut. It should be noted that while none of the three chains necessarily offers the best pizza, they often offer the most convenient pizza. As such, how they rate against each other might be more relevant to sales than whether they are actually good.

For the test, Bazaarvoice used the following methodology:

We ordered large cheese pizzas with original crust from each, testing the competitors on the pizza basics.

Before the test, we asked the tasters to tell us which pizza they thought they liked best. Papa John's was the clear favorite, with 60% of the vote.

Each taster was blindfolded to ensure responses were based solely on taste. They were then asked to taste a slice of each competitor's pizza, and give their reviews, rating each pizza on sauce, crust, cheese, and overall taste.

The results of the survey showed that while Domino's came into the study as the favorite of only 20% of the tasters, its "new and improved" pizza was the clear favorite -- 50% of the tasters picked Domino's as the tastiest pie, and the pizza earned 3.8 out of a possible 5 stars for overall taste.

Personally I find the survey takers a little forgiving and perhaps not used to the plethora of quality pizza available to those of us living near New York. But clearly the new Domino's pizza is a vast improvement and that has cleared the way for the company's growth.

A personal take on Domino's

In college we ordered Domino's (the old recipe) because the chain stayed open later than any other pizza place, not because the pizza was any good. The new recipe is an improvement over the original but certainly not as good as a number of local places near me (admittedly I live near New Haven, Conn., one of the pizza capitals of the world). I find Domino's a lot better than Papa Johns and a little worse than Pizza Hut.

Local pizza places however aren't omnipresent with an amazingly easy online/app ordering system.They also rarely have prices as low as Domino's where $20 gets you at least two pizzas (sometimes three) and a bottle of soda. Domino's improved its pizza enough so the quality isn't so bad that hungry people with limited funds across the world won't choose not eating over ordering from Domino's.

Domino's gets bigger

Domino's improved quality has given the chain a good enough product to make a run at becoming the world's dominant pizza player. Not only is Domino's opening up more stores internationally, but its existing international stores are doing better as well. In its fourth quarter financial release, the company claimed 7% same-store sales growth internationally and 6.2% growth for the full year. Domestically, same-store sales grew 3.7% during the quarter versus a year ago and 5.4% for the full year.

Annual revenue (which includes products other than pizza) rose 7% to $1.8 billion, up from $1.68 billion. It may have taken the company a few years to fully capitalize on its pizza improvement efforts, but the changes have kicked in and Domino's is riding its better recipe to a bigger piece of the global pizza pie.

Can Domino's global growth continue?
In its 2012 annual report, Yum! showed that while it had 58 Yum! restaurants (which include Pizza Huts, KFCs, and Taco Bells) per million people in the United States, it only had two restaurants per million people in the top 10 emerging markets. Domino's is smaller than Pizza Hut internationally and certainly smaller than all three Yum! brands combined, which suggests the chain has enormous potential for growth.

Soon, it won't be just American college students ordering from Domino's because the local places with better pizza charge more, don't deliver, or aren't open as late. It will be kids all around the world.

Daniel Kline has no position in any stocks mentioned. The Motley Fool owns shares of Papa John's International. 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.

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