A hamburger and fries might be about as American as you can get when it comes to comfort foods in the U.S., but I'd contend that pizza comes in a very close second. When the big game is on TV or your children have a big test coming up the next day in school, there's perhaps no easier go-to food than pizza.
You certainly don't have to look very far to find the nearest pizza chain to you with research firm CHD Expert in September 2012 reporting that there were 71,856 pizzeria stores within the United States. As CHD also reports, these pizza joints brought in a cool $36.79 billion dollars in the fiscal year ending Sept. 2012, with Yum! Brands (NYSE:YUM)-owned Pizza Hut, Domino's Pizza (NYSE:DPZ), Papa John's (NASDAQ:PZZA), and Little Caesars comprising about 15%, 9%, 6%, and 4% of the "revenue pie," so to speak.
Obviously having a bigger store presence can help boost sales as in the case of Pizza Hut. CHD Expert notes that Pizza Hut owned 10.57% of the 71,856 stores open as of Sept. 2012, followed by Domino's, Little Caesars and Papa John's. But there's more value to be had in quality than quantity when it comes to making pizzas and appealing to consumers.
With a projected growth rate of 1.6%, the pizza industry within 10 years could be generating $43.1 billion per year in sales, which for investors could mean hefty profits. For consumers, it could also mean an influx of new names and a watering-down of flavors as companies lose sight of the big picture: their core consumer.
That's why today we're going to take a closer look at a study conducted by Brand Keys utilizing its proprietary Customer Loyalty Engagement Index that examines how well a company engages with and retains customers.
However, before I reveal which of the seven pizza chains that Brand Keys examined topped the list, let's have a closer look at why customer engagement and loyalty even matter in the first place.
Why pizza chains need to focus on their customers
When an advertising blitzkrieg simply isn't enough for the nation's top chains, they'll often turn to promotions to draw in consumers. I can personally vouch that I've tried pizza at a few different chains over the years specifically because a promotion enticed me to walk through the door. While getting customers in the door can be somewhat easy if a company angles its promotion correctly, keeping them loyal and turning them into higher-margin consumers who aren't sale-dependent is the true key to pizza chain success.
A pizza chain more adept at pleasing consumers through its superior customer service and quality taste is more likely to make them customers for life. These core customers are ultimately less reliant on promotional deals and provide the stability of cash flow that pizza chains need to expand. In addition, these core customers are also less likely to flee when a company inevitably raises its prices. Without these core customers we'd simply see pizza chain earnings fluctuating wildly on a quarter-to-quarter basis.
Pizza that'll make you say "Doh!"
As you might imagine, there can only be one top dog on Brand Keys' survey among seven pizza chains, so many simply didn't make the cut.
Although it's my personal choice, Papa Murphy's (NASDAQ:FRSH) only snagged the No. 5 spot, likely having to do with the convenience factor of needing to take your pizza home and cook it yourself for a similar price (or higher) than purchasing a fully prepared pizza at another chain. Of course the trade-off is that you receive what are perceived to be fresher ingredients and get to watch your pizza be prepared. Ultimately, though, it would appear that pizza-hungry consumers value their time and their wallet more.
Little Caesars and Pizza Hut, despite their size, aren't going to the take the crown, either. These giant chains finished fourth and third, respectively, in Brand Keys' study.
For Little Caesars it's been a lack of adequate branding. With considerably fewer storefronts than Pizza Hut and Domino's, for example, it needs to work twice as hard simply to draw consumers in the door. It doesn't have a signature dish or draw factors that really draws consumers over the long run.
Pizza Hut is actually doing quite well thanks to its size advantage and deep pockets. One area where it's seen loyalty improvement is with social media. By turning to the Internet Pizza Hut has been able to spread the word of mouth on promotions and new products with ease. Based on Brand Keys' results it still has a ways to go, but things are heading in the right direction.
Between Papa John's and Domino's Pizza, the customer loyalty king is ...?
Based on what we've seen so far this leaves only two possible pizza chains to claim the top spot in brand loyalty: Papa John's, led by its CEO and familiar face in ads, John Schnatter, and Domino's Pizza, led by CEO J. Patrick Doyle who has appeared in quite a few mea culpa Domino's ads in recent years.
Before I spill the beans, do you have a guess which pizza brand you believe is the head cheese?
Got your answer?
Did you say Papa John's? If you did, you guessed incorrectly!
Why not Papa John's? I would surmise it has a lot to do with PR flubs over the past couple of years rather than the quality of pizza or service. John Schnatter was heavily criticized in August 2012, when he announced that the implementation of Obamacare and the need to provide health-care options to his full-time workers would add $0.11-$0.14 per pizza, or $0.15-$0.20 per order. Many consumers took that as a slap in the face, as well as a reminder that workers in pizza chains often make relatively low wages which can make it very difficult for them to pay for their own health insurance.
As for Schnatter's advertising campaign ("Better ingredients, better pizza"), it appears to be spot-on, drawing a fairly regular group of new consumers and retaining a good portion of them. In Papa John's most recent quarterly report the company delivered a comparable-store sales increase of 9.6% in North America and reaffirmed its full-year guidance. Simply put, even though its CEO might be hurting the company's image, it's clear that consumers like the pizza. Since image snafus tend to blow over fairly quickly, I'd contend the company still has a bright future, and perhaps an eventual shot at the No. 1 brand loyalty spot.
Why this Domino didn't fall
A couple of factors have worked in Domino's favor to help push it to the top of the ladder in terms of brand loyalty and help it earn the trust of consumers.
First and foremost, Domino's was able to pull off the very rare mea culpa ad campaign. With CEO Patrick Doyle at the helm it went on TV and admitted that its pizza wasn't that good and announced its intentions to get better through new recipes and by listening to consumers' feedback. What we've witnessed is an incredible response by the public, with same-store sales growing nearly 5% in the first-quarter and its EPS jumping 15%. It also marked the 81st consecutive quarter (more than 20 years) of international same-store sales growth. By focusing on the quality of its product rather than the quantity of storefronts it has Domino's has been able to hang onto a number of new customers.
Perhaps more importantly, its mea culpa campaign also allowed the company to reach out to consumers on a personal level. These campaigns don't always work, but with Doyle reaching out and essentially fessing up to his company's mistakes -- see its recent "Failure is an option" campaign -- it brought Domino's down from a high-perch and placed it on a more level playing ground with John and Jane Q. Public.
Another winning strategy has been Domino's usage of social media to spread its message and relate to consumers. Take Papa John's which, as of yesterday, had made some 18,600 tweets and claimed about 197,000 followers on Twitter since it joined. By comparison, Domino's has made more than three times as many tweets (60,300) and has more than double the followers (538,000) which would imply that it's simply trying harder to go the extra mile for its customers – and clearly that's showing in its results.
Domino's is not going to be handed this honor lightly every year, and it'll need to remain innovative if it hopes to maintain its growth within the U.S. and overseas, but it's clear that its current strategy is working, and that's great news for existing shareholders.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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