College students, put down the remote and pay attention, because we're going to discuss the single most important staple of your diet: pizza! Although nothing quite tops the popularity of the hamburger in U.S. restaurants, Americans eat approximately 3 billion pizzas each year, or 100 acres worth of pizza each day, according to ThePizzaJoint.com.
Based on statistics from PMQ Pizza Magazine (yes, that's a real thing), in 2014, U.S. pizza sales totaled an estimated $38.5 billion, which was a 3.1% improvement over estimated 2013 sales totals. However, if we slice a bit deeper we see that chain pizzerias wound up taking an estimated 59% of the $38.5 billion pie, and they controlled almost 46% of total open pizza stores as of September 2014. Mom and pop pizza places might be a fun find, but a handful of large names tend to control this industry.
The importance of customer loyalty and engagement
As investors we're always looking for growing trends and solid business models that we might be able to invest in and profit from over the long-term. But determining which national pizza chain stands head and shoulders above its peers isn't easy. For that we'll turn to Brand Keys, an independent research firm based in New York that uses a proprietary formula to rank companies based on how well they engage with their consumers and keep them coming back.
Customer loyalty is important for pizza chains. Loyal customers don't rely on specials or discounts, meaning they contribute the best margins. Additionally, loyal and satisfied customers are more likely to tell their friends and family about their experience. Nothing against advertisers, but consumers tend to be more likely to take action based on a friend or family member's recommendation than because of a commercial.
Brand Keys' 2016 Customer Loyalty Engagement Index looked at six different national pizza chains. Let's briefly look at a few of the runner-ups and then dig deeper into what strategies the top pizza chain is using to engage its customers and keep them loyal to the brand.
Fighting for a piece of the pie
Perhaps the biggest disappointment this year is Yum! Brands' (NYSE:YUM) Pizza Hut, which fell from second to fourth on a year-over-year basis. Although ahead of laggards Little Caesars and Chuck E. Cheese, which ranked fifth and sixth, respectively, this is a stunning fall for Yum Brands' pizza chain, which had been riding high following the introduction of a new line of eccentric pizzas.
Based on reviews highlighted by BuzzFeed last summer, it doesn't appear to be the new menu that's been hurting Pizza Hut's turnaround efforts so much as inconsistencies within its quality and service. If there is one ray of sunshine, it's that Pizza Hut set a record for single-day digital sales during the Super Bowl. Yet if Pizza Hut is able to correct the quality issues that seem prevalent on its social media accounts, it'll probably still find the sledding tough against an increasingly crowded field.
Moving up to third from fifth in Brand Keys' 2016 rankings is Papa Murphy's. One factor making Papa Murphy's so successful is that it's the only niche retail chain in the take-and-bake category. It also benefits from the use of fresh ingredients and the transparency of its preparation. Consumers have the choice of phoning their order in ahead of time or watching Papa Murphy's employees prepare their pizzas right in front of their eyes.
The biggest knocks against Papa Murphy's continue to be price and convenience. Papa Murphy's focus on fresh ingredients comes with a notably higher price point than its peers, and it is a pick-up only service, no delivery. Nonetheless, Papa Murphy's has delivered 19 consecutive quarters of comparable-store sales growth, which signals it's doing something right.
Papa John's International (NASDAQ:PZZA), while not taking home the top honors, has to be satisfied with its second-place ranking in 2016, up one spot from last year. Papa John's emphasis on fresh ingredients in its ads, and its focus on quality, have translated into a generally happy customer base, as well a consistent product.
The biggest problem for Papa John's has been, and continues to be, its public image. First, CEO John Schnatter had to backpedal from comments made in the summer of 2012 that he'd be forced to raise his pizza prices due to the implementation of Obamacare (officially the Affordable Care Act). Consumer didn't take so kindly to the perceived extra charge, or Schnatter's threats to cut costs by cutting workers' hours.
Papa John's may again find itself in a bad light with Denver Broncos quarterback Peyton Manning, one of the company's most prominent spokespeople, facing scrutiny over a handful of off-the-field allegations. Until Papa John's can put its PR gaffes in the rearview mirror, it'll struggle to be America's top pizza company in terms of loyalty and engagement.
America's top national pizza chain
But topping Brand Keys' Customer Loyalty Engagement Index for the pizza category once again is Domino's Pizza (NYSE:DPZ).
What makes Domino's story truly unique is that at the beginning of the decade it looked like an utter disaster. Rather than trying to mask its problems, Domino's confronted them head-on with a mea culpa advertising campaign that admitted its faults, led by its CEO, Patrick Doyle. The direct approach doesn't always work with consumers, but in this instance it worked out nicely. Domino's stepped down from a pedestal and cast itself as a business willing to listen to its customers and meet their demands. More than a half-decade later it's the national pizza chain leading in consumer loyalty and engagement.
One key component to that change has been Domino's open acceptance of innovation and technology. It's an active business on social media, with nearly 1 million Twitter followers, 236,000 tweets, and some 45,400 people and business that it follows. Interacting with its loyal customer base is an easy way to spread word-of-mouth (i.e., free) advertising.
Domino's has also placed an emphasis on web-based ordering, which is more efficient since it frees up in-store associates to make pizzas and/or deliveries. Domino's has even attached a loyalty rewards program to consumers who place their orders online instead of over the phone or in-store.
Another key to success for Domino's has been the retooling of its side orders. The introduction of specialty chickens, along with updates to its tasty cheesey breads, sandwiches, and pastas, have provided a high-margin punch for Domino's, and helped boost the discretionary spending of the company's loyal customers.
In short, Domino's is listening to its customers, and the proof is in the pudding (and pie crust). In its latest quarterly report, the company delivered 10.5% same-store sales growth domestically, and 7.7% same-store sales growth internationally. It was also the 87th consecutive quarter (that's almost 22 years) of international same-store sales growth. Domino's is firing on all cylinders, and with Americans' loyally in its corner, it doesn't look as if it'll cede that top spot anytime soon.
If investors are looking to get their piece of the pie in the pizza industry, they'd be wise to consider giving Domino's a closer examination.