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Why Papa John's and Domino's Are All About Digital Pizza Ordering

By Adam Levy - May 21, 2016 at 5:05PM

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Papa John's says 55% of orders came from digital platforms last quarter, up from 50% in the previous year.

I can't remember the last time I called someone on the phone to place an order for pizza. Apparently, that's the case with a lot of people.

Papa John's (PZZA -1.93%) told investors during its first-quarter earnings call that 55% of its total sales now come through digital. That's up from 50% the year before. Sixty percent of those digital transactions came from mobile devices.

Competing pizza chains Domino's (DPZ 0.17%) and Yum! Brands' (YUM -0.28%) Pizza Hut are also investing heavily in e-commerce. Both have invested in ordering methods for smartwatches, connected cars, and video game systems. Domino's even introduced "zero-click ordering" on its smartphone app, and more than half of its U.S. sales came from digital channels last year. Pizza Hut says digital sales also make up about half of its total.

So why the rush to grow sales through digital channels?

More efficient use of staff

As more orders come through digital platforms, pizza restaurants can have fewer employees in their stores. That's particularly important in light of recent legislation to raise minimum wages in some states, and the potential for minimum wage increases in still more states.

During Domino's first-quarter earnings call, CFO Jeffrey Lawrence told investors, "The biggest thing going against us [at company-owned stores] is more labor rate than anything else." Wage pressure weighed on Domino's operating margin in the first quarter, resulting in lower-than-expected earnings.

Papa John himself, John Schnatter, told investors that digital is the best way to counter those wage increases. "The drivers make more than the $15 an hour, and that leaves you, really the people in the store that are prepping and doing the phone, and the more you drive your IS platform, the less of those folks you need. So I think we're in a perfect position to handle any kind of wage increase."

And it's not just pizza places looking to drive more orders through mobile. Starbucks (SBUX -0.05%) introduced its mobile order and pay system last fall. The system reduces lines at its stores, enabling Starbucks to serve more customers more quickly and efficiently. It also helps reduce attrition from the line, boosting sales. Ten percent of sales at Starbucks' high-traffic stores now come through mobile order and pay.

While most pizza places like Papa John's or Domino's don't have to worry about lines out the door the way Starbucks does, these systems come in handy during big events such as the Super Bowl. Pizza Hut fulfilled a record $12 million worth of orders through digital platforms on Super Bowl Sunday.

Bigger orders

Not only do pizza restaurants benefit from labor efficiencies from digital ordering, but people are also more inclined to buy more through digital. Whether that's from the visual aspect of digital orders or the ability to automatically "upsell," Domino's says its online order values are on average higher than phone sales. Yum! has noticed a similar trend, with mobile orders for Taco Bell averaging 30% more than in-store orders.

So not only is digital ordering less labor-intensive for the restaurants and easier for customers, but it also drives an increase in average tickets. That's not a recipe for great pizza; it's a recipe for bigger profit margins. It's clear why all three major pizza chains are dumping boatloads of money into digital platforms.

Domino's has been most aggressive. You can now order Domino's through Amazon.com's Echo smart speaker. You can send a text or tweet. And, as mentioned, you can simply open the app, and it will automatically place your favorite order if you just wait around for 10 seconds with its new zero-click ordering. Domino's is also testing an automated vehicle in Australia to help deliver pizzas, adding another layer to the automation.

But Papa John's is still the leader in digital sales, with 55% of its its total sales coming from digital orders. Part of that is coming from improvements to its mobile app and website and the natural migration of consumers to the Internet. But part of it is a concerted effort by management to drive customers to digital through incentives (i.e., coupon codes).

Both Papa John's and Domino's efforts require significant upfront costs, but they're finding it worth it as digital customers spend more and cost less, producing better long-term profits.

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Stocks Mentioned

Domino's Pizza, Inc. Stock Quote
Domino's Pizza, Inc.
DPZ
$389.71 (0.17%) $0.67
Papa John's International, Inc. Stock Quote
Papa John's International, Inc.
PZZA
$83.52 (-1.93%) $-1.64
Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
YUM
$113.51 (-0.28%) $0.32
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$76.39 (-0.05%) $0.04
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$106.21 (-2.49%) $-2.71

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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