Recently, I spoke with Lauren Silberman, a Senior Analyst with Credit Suisse. She covers the QSR and pizza restaurant industry for investors. We discussed how large pizza chains like Papa John's, Pizza Hut and Dominos are staying ahead of the market, and how smaller chains can compete.
Brian: Well, hello, PMQ Webinars Series fans. We are so happy to have you guys here today. We've got a good show for you today, talking about some of the strategies that the big brands are using to take your customers away. And we're going to figure out how to combat that, or at least meet them on a level playing field.
So, I'm going to give about another 30 seconds here real quick, just to let some of the stragglers come in, but I don't want to punish any of you who were on time and or early. After that, we'll go ahead with our intro and then we'll do our presentation and have our Q&A session afterward. So with this, I just want to say, Brad, what's the weather like over there, wherever you are?
Brad: So we're in Vancouver, Canada, and the weather is running about 38 degrees Fahrenheit, about 4°C for those Canadians. And partly cloudy skies, a little bit of low-pressure zone forming, it looks like we're going to be having some cloud for the rest of the day.
Brian: All right. So Vancouver, in a nutshell. All right. What about you Lauren?
Lauren: I'm in New York City. It's nice weather out, relatively speaking. So, that's about it.
Brian: It's probably the same as Vancouver though, right?
Lauren: Yes. It's very similar.
Brian: Well, yeah, it's doing the same out here. It's gone up to about 60 unfroze Mississippi.
All right, guys, without further ado, we're going to go ahead and start this real quick. We got some more attendees in there. I do appreciate you guys hanging on. I don't want to punish any of you guys who are here early and on time.
So without further ado, hello and welcome to the PMQ Webinar Series. I'm your host, Brian Hernandez. And today we have a couple of very knowledgeable speakers ready to answer all of your questions. Today, we're going to be investigating the six strategies that big pizza brands are using to steal your customers. And hint guys, it's not cheap pizza. I know that was what I thought at first too, but it's not that. Large pizza brands like Domino's, Pizza Hut, and Papa John's have conquered the pizza industry by offering consistent quality and using unique strategies.
Now, our speakers today, Brad Brooks of SpeedLine Solutions and Lauren Silberman of Credit Suisse, have had their ears to the ground to figure out the secrets that these large chains have used to gain the upper hand on independence in smaller chains. Now, as always, we're going to have a Q&A session after a brief presentation about the aforementioned secrets and techniques. Simply look to your, GotoWebinar dashboard and find the questions tab, there you can ask your questions. I'm going to moderate them throughout the conversation, and I'm going to make sure that they get answered ASAP.
But now to introduce our illustrious speakers, Brad Brooks is a sales and marketing director with SpeedLine Solutions. He's had more than 20 years of experience in restaurant technology, working with some of the largest brands and fastest-growing brands in the world. And Lauren Silberman is a senior analyst at Credit Suisse, responsible for the firm's coverage of the restaurant and food distribution sectors. So without further ado, I would really like to hand this over to Brad and Lauren and let the learning commence. Take it away, guys.
Brad: Great. Thanks so much, Brian. I appreciate your time. And Lauren, thank you for spending time with us.
When Lauren and I first started talking about putting together this webinar, I was really excited because as a person who follows the investment community and has been deeply involved in the restaurant community for over 20 years, I have a lot of respect for those large competitors that have managed to grow beyond 1000, 1500, 2000 stores. That's a difficult proposition. And yet, I still don't understand all of the things that make them so special.
And so, we brought Lauren on to help provide all of that context for us. Let's start off with that a little bit, Lauren. And maybe give us a brief overview of what 2020 held for these brands and what they're looking forward to in 2021. I think that's a question that almost everybody in this industry wants to understand.
Lauren: Sure. Absolutely. And thank you for having me. So 2020 was an unbelievable year for the pizza category in general, particularly the large pizza brands with the focus really being delivery and carryout.
So Domino's, for example, is two-thirds delivery, one-third carryout, which has performed extremely well, really starting at the end of March. So in the beginning, there was a little bit of, I'll say challenges as sports and some of the gatherings that often associated with pizza, back came off, but then it was replaced by these delivery occasions, these family meals, and it really took over some of the weekday occasions that perhaps didn't exist prior. So I'll say about 20% growth is what you've seen across Domino's, Pizza Hut, and Papa John’s. So Domino's has historically performed extremely well. It continued to perform well in 2020. Pizza Hut, notably their off-premise sales and 2Q, 3Q, 4Q were 21%, which is pretty much the best we've seen in the brand in history.
It's had quite a few challenges over the years. And then Papa John's, which is coming off of very difficult challenges regarding brand sentiment, really saw their brand takeoff and actually outperformed both Domino's and Papa John's. Oh, sorry, Domino's and Pizza Hut, so 25% plus. So that really from a franchisee perspective, improved their profitability, improved their economics. So ending 2020, that continues to remain strong and into early 2021, it also remains a strong part of that stimulus, but also continued lockdowns.
And as we go through the rest of 2021, the question is going to be, where does the pizza landscape fit as people go out more? Delivery will continue to be a strong category. You're seeing a big increase in menu innovation, which I know we'll discuss, but part of that is likely to offset some of the potential caution regarding, okay, if it's not pizza, what else are people looking for?
But the overall view is that delivery continues to remain strong across the restaurant industry, as people want more convenience, and that's nothing that'll go away in terms of the convenience level.
Brad: But the question is how they'll receive that product and how they'll order and get that product and whether or not they'll return to in-person dining at the same level that they were at in say 2019.
Lauren: Yeah. I think that in early 2021, for sure, we're still working through some of the challenges with the pandemic. We're still on lockdown, there's still caution. So you'll still see the sense of delivery continue.
And while I would say we've reached a peak in 2020 regarding delivery, and part of that is just incremental value that going to pick up food or going out offers relative to delivery now that costs are so high, you'll see that peak come down.
But if you look at the restaurant industry and why you've seen food away from home growth relative to food at home over the past 50 years, it's really that convenience element. And that's why drive-thrus continue to perform extremely well. It's why not just this year, but in years past, all these restaurants are opening up drive-thrus, they're doing digital, they're doing increased access because we want convenience, and it's the same as to do it yourself.
Like projects has come down historically pre-pandemic. If you look in adjacent sectors it’s because as Americans, we're looking for more convenience.
Brad: Right. We said we weren't going to talk about price and promotions, but we clearly can't go anywhere without at least beginning that discussion and talking a little bit about that pricing and promotions here.
Lauren, from your experience, tell me a little bit about the key differences that you see in how these three players approach the marketplace from a pricing perspective.
Lauren: Sure. It's pretty interesting. The three of them have very different strategies.
So if we start with Domino's, over the past almost decade, they've had the $5.99 mix and match deal, and they have the $7.99 carry-out deal. And that hasn't changed. And that continues to be their focus point. And you'll see all of their, every day, they often send out an email or they'll send out text messages, highlighting those price points. So they have brand equity around that. And that took time for them to get enough traffic for those price points to really be profitable for the brand. So they skew towards this, I'll say this value equity, and they have that mind share.
You then move on to Pizza Hut, which has-
Brad: Let me ask you just a quick question about the Domino's franchisee community. Is there a pressure from the Domino's franchisee community to increase either the price points from $5.99 and $7.99 and move them up a dollar or an increment, or to add a third offering that perhaps skews a little, so then they can have a specialty product?
Lauren: Sure. So they offer, and I believe a $9.99 deal as well. It's more of a family offering. So that is another extension of their, I'll say, their everyday value platform. I know they've tested additional price points here and there or they've looked into it. They're extremely data-driven and they have found that this price point works. And if you just look at what they've done on sales and what they've done on profit, over a decade, they've continued to increase EBITDA per store. Every year at the enterprise level as well. And their franchisee is extremely interesting because more than 95% actually started within a Domino's store.
So they understand from the bottom up that consumer and what drives the business. So well, they've tested it. They have the brand equity to maintain that and they have the traffic to be able to keep it profitable.
Brad: Okay. Those price points... Actually, let's go on. Talk about the other two brands, if you don't mind.
Lauren: So Pizza Hut has attempted to offer value. The challenge is that you really can't do the $5.99 price point as these other players because Domino's has that brand equity. So Pizza Hut in 2018 and 2016, they tried this, a $5 price points, so the $5 lineup they tried. And they just didn't get enough traffic for it to make it profitable. And $5 is just too low. So what you tend to see... and I'll say unsuccessful value strategy is you try it and then you pull back because it's not profitable. And then you're essentially not offering profitable value, or really doing everyday value platform. So they've continued to be challenged in developing an appropriate value strategy.
The same is true a bit at Papa John's, as they've had challenges, they've done a little bit of testing on value. And prior to their new CEO, they were testing like a $6 price point, which you tend to see in promotions. They do two $6 price points. They give you $12 price points, but you see that they avoid that $5.99. But still, it's not very consistent. It's not an everyday offering or platform like Domino's. So you can see it's been a challenge for pretty much everyone, but Domino's. And what you tend to see in the restaurant industry is... So pizza's a very consolidated or a very fragmented category. And part of it is actually that it's not overly focused on price points. So if you look at a burger category, everything's on price points, it's why it's so consolidated. The same is not true in pizza. So it's an interesting comparison.
Brad: Right. With a burger, I mean, there are grades of beef, but that is not nearly as predominant as, or sorry, I mean not predominant, but as noticeable as the level of, the number of, toppings or the density of the toppings on a pizza, which can drastically change the price, or the sauce, or the fact that even the way that it's cooked, you don't see those huge variances in the burger world. And just for context, you cover these three organizations from a Wall Street analyst perspective. What other types of organizations do you cover?
Lauren: Sure. So I cover 17 stocks. I cover 11 of them are the QSR, fast-casual. So everyone from Chipotle, Starbucks, McDonald's, QSR, which is Burger King, Tim Hortons, Popeyes. And then I cover casual dining, so companies like Darden, Lumen, Cheesecake. And then the food distributors, which is Sysco, US Foods and Performance Food Group.
Brad: Right. So you've got a really good overview of what's going on in this entire industry, not just the pizza sector, not just QSR, not full service, but you're going all the way back up the supply chain to the suppliers.
Let's move on and talk a little bit about technology here if we can. Domino's, it was interesting as I was doing my research for this call, and looking at the differences in how the CEO portrays the company, is a very clear indication that Domino's sees themselves as a technology company that sells pizza. Whereas if you were to read through the notes for Papa John's, they say, we're going to focus on our core business, which is the pizza business. And I thought it was interesting that they called that out specifically saying, our product is pizza, it's not the technology. Contrast those two approaches for us, if you don't mind.
Lauren: Sure. So Domino's is a technology company. It is a marketing company and they differentiate themselves by the technology and delivery infrastructure. So they're trying to make the overall experience as seamless as possible. And you can see it in how they refuse to go on delivery aggregators and they focus on the full end-to-end experiences that they want to control, and they want to control all of their data. So that foundation of data and all of their decisions are driven by data. So even how they choose where they're going to grow in their locations for... They'll introduce it to franchisees saying, "Okay, this is a good location. Do you want to open here?" That's very different than what you see in other systems. And part of that is that Domino's actually has built the infrastructure and foundation in a proprietary way.
In Michigan, they have an innovation center, which you really don't see across most companies, so that they're trying to optimize that strategy. And that's been built over decades for them to really have that foundation.
If you look at a Papa John's, them leading by pizza... First, you can't really compete with Domino's. You don't want to say I'm the most innovative company, in terms of digital when you have Domino's. So how instead does Papa John's differentiate themselves with menu innovation enabled by digital? So they're using... So instead of leading by digital like a Domino's, part of it is because Domino's has solidified itself as the digital player. And part of it it's the infrastructure they've built and that foundation over a period of years. Not to say Papa John's hasn't tried, or they don't have the building blocks and they're working towards that, but as a differentiating strategy, that's really where it comes down to the difference.
Brad: Maybe you can answer a question in terms of the level of investment that each of those companies puts towards technology into their business. I've heard people say that the number of people in head office, for example, with Domino's, that are in IT-related jobs is massive compared to what you would typically expect of a restaurant company. What's your knowledge around that area?
Lauren: I believe more than 50% of their corporate employees are IT, which isn't... That's Domino's, that's not what you see elsewhere. And like I said, they have this innovation center, which also just shows you their focus on really digital technology. In terms of the others, I'm not sure what the percentage of their corporate headquarters or their corporate employees is technology. And of course, Domino's is a big organization, so they can afford more.
Lauren: So they're all investing. They have proprietary technology and they'll continue to push that. There's room for growth, but that's kind of-
Brad: Have any of them made any big changes over or in during 2020 in terms of their technology strategy? Were there any big shifts that were in response to what happened with COVID, for example?
Lauren: So Papa John's is already starting to do delivery aggregators and partner with them. Part of that was related to their delivery drivers. And just because of some of the challenges, they didn't have sufficient staffing, or they didn't have an attractive enough proposition for delivery drivers, because it's all about how many trips you can make per hour. So by expanding, they had an opportunity for a greater addressable market. So that was a change they did...
I think they're now with three of the four large players. Pizza Hut as well is doing some work around with GrubHub as well as Uber Eats. Domino's is not. All three of them launched curbside pickup. Domino's also expanded into GPS tracking. So you saw some elements of innovation there, but in terms of overall strategy, you really didn't see any meaningful changes. You've seen an acceleration in digital downloads, an acceleration in loyalty program growth, but more of an acceleration than a transformation.
Brad: What does that technology investment for Domino's for example? What is that translated to in terms of people ordering through digital channels, for example?
Lauren: Pre COVID, 65% of sales were already digital. So quality 65 to 70 were digital, predominant Papa John's, but I think it's closer to 55, 60 for Pizza Hut. So you've seen that increase slightly throughout the pandemic that they already have such a significant penetration that theoretically you're only going to get so high, but what you've seen is also this increased focus on using data for personalization and really to use the loyalty program to inform your decisions. So I think we're going to continue to see that increase in importance. So, that's a learning that we've seen throughout the pandemic.
And then, of course, incremental convenience because these guys don't offer things like drive-thru, curbside delivery is pretty meaningful because it's essentially another access point for those that don't want to get it delivered or want to save some money by getting curbside. So I think that that's helped as an additional channel for them even as we go forward.
Brad: You've talked a little bit about menu innovation already, but I want to come back to this and spend a little time focusing on this. So you have the menu innovation that you talked about with Papa John's, for example, and some of the things that they're doing. Give us some examples of what's worked really well for them there.
Lauren: Sure. And just taking a step back historically, Domino's was this value player, digital play. Pizza Hut was focused on innovation and Papa John's was focused on quality. What you've seen is that Pizza Hut was trying to go after Domino's and really improve their digital and really try to improve the delivery and infrastructure, taking their eye off the ball of innovation. So when Papa John's was attempting to go through its turnaround in the past couple of years, this new CEO came in and really focused on menu innovation. So at the start of 2020... Well, when he came in and really August, September of 2019, he launched garlic parmesan crust, which was the first new crust that the company had launched. And he had since in February launched papadia, as well as jalapeno popper rolls. Both which of those-
Brad: What's papadia?
Lauren: Yeah, it's like a folded pizza.
Lauren: And it was really focused on the lunch daypart.
Brad: What's the price point on?
Lauren: It's about six bucks, I think that is what they're pricing it at.
Lauren: So really is the focus on that lunch daypart, with the thought that it's incremental to the business, the real focus for the pizza players is the dinner daypart. So he'll say it's a complete game-changer for the brand, and that's really helped them throughout the pandemic, is really finding those incremental opportunities. And as you saw some restaurants close and some challenges with even the QSR players, whether it's throughput or labor challenges, they had an opportunity to then expand and offer this lunch. So that's really been a key driver for them, is finding that capacity opportunity and incremental daypart.
And beyond that, they just launched stuff cross pizza in the tail end of December, which they say is the company's biggest initiative in the brand's history. And part of that is just because people who really... pizza lovers really like stuffed crust. And as you can see, that's also going after Pizza Hut, which has historically been the only one that's had it. And it's difficult operationally. So for them to be able to unlock that operationally could be a massive unlock for them. So we'll see where that goes, but you've also-
Brad: Those all sound like menu expansion, right? Where they're taking their menu, making it bigger and giving people more choice. Are they doing anything with taking some of those products and making them LTOs in order to maybe run them for just a short period of time with a special price in order to drive maybe new customer growth or sales overall?
Lauren: So they'd launched a shack pizza. So Shaq is now on their board and a brand ambassador. So they did a promotion around that, raised some money. It was tied to donations. So extra-large pizza, Shaq was in the commercials. So that was an LTO and that helped them accelerate sales for, I think, really a one-month period. So yes, a little bit of LTOs, but there is a lot related to menu expansion to your point.
Brad: Do you see any of them doing any work around specialized diets? Veganism, vegetarian options, gluten-free, low carbohydrate, anything like that?
Lauren: So Domino's already offers a gluten-free crust. Pizza Hut recently launched a couple beyond meat pizzas. So going after that opportunity. But outside of that, no, Domino's has tested, I think, vegan cheese in the UK, not in the U.S.
Lauren: I think what you tend to see with some... I don't want to call them..., but if someone's going out for pizza, they're not necessarily going out to be healthy. And if someone... It works usually more on the coast than it does in suburban and rural areas, even if we look at things like plant-based meat, it generally works better in urban markets and the coast, where suburban, rural really doesn't take off as much. So I don't see that as core to strategies in terms of the health trends.
Brad: Is that different from what you see in the other stocks you cover, where there may be like Chipotle, for example, has a very strong initiative towards that. Starbucks has got some programs in place with Beyond in some of the other vendors out there, is it different from pizza?
Lauren: Yeah. You do see a difference... So Starbucks, Chipotle are good examples. They also go after a bit more of an affluent customer. So that helps them in just thinking through their actual brand foundation, their brand strategies. If we think about Chipotle, it's this integrity platform, it's always been... that's the core of their foundation is no preservatives, no alternatives, everything pretty natural. So it makes sense that they'd go after that customer. And they also tend to skew both affluent as well as younger. So they tend to be more trend-driven than others.
Brad: Well, let's move on and talk about those delivery partnerships. You talked about the distinct strategies that each one of these companies have. So let's start off with Domino's, you mentioned before you said they don't use delivery aggregators, so they're using entirely their own infrastructure for their delivery program. And even if that means that they don't have enough capacity for drivers, for example. There's just going to work through that rather than use the delivery partners.
But I read that Papa John's in contrast uses delivery partners. And I actually saw that increase from 2% of their sales to 6% of their sales over the course of the last year. So, that's a pretty significant improvement. What are you seeing and what are you hearing in terms of those strategies? Well, how do people feel about them?
Lauren: Sure. So starting with Domino's, so Domino's they're ultimate competitive advantage because they're so technology-driven is data, and they want to make sure that they have all the data and they keep it in-house. They have no interest in sharing it with third parties. And I think if we think about it there's two parts, the delivery aggregators, one is the actual aggregator platform. So it's regeneration, and I'll say the second one is the actual fulfillment of the delivery. And even if I order directly to the store, they may not have the delivery drivers.
So there's two pieces to it. So for Domino's, they have the infrastructure in place. They don't want to compromise on the customer experience. So while delivery aggregator may be willing to go 10 miles, Domino's may only be willing to go three miles for example.
So they wouldn't even want the customer to get a pizza from 10 miles away. They'd rather not deliver there. And because of their delivery drivers and the amount of orders that they get, it's a compelling proposition because of the tip structure that they're confident enough that they can actually get enough delivery drivers.
And it's not as big of a challenge, I think, where you saw a little bit of a headwind for them, some I'll say pushback from perhaps the investment community, even pre COVID is that mind share. So while pizza has historically had such a strong mind share for delivery when you have the expansion of all these aggregators and people are actually going on aggregators to start their search, you're no longer in that customer search. That's potentially a headwind if that's where people are going.
On the flip side, that's the whole point of Domino's, is they want to show that they're... you come to us, we're the only place that is available. And we ultimately, for a variety of reasons, want to control the experience.
Papa John's on the flip side, part of the reason that they had to go to delivery aggregators or they chose to was because they had challenges with staffing up and attracting enough delivery drivers. So partnering the door dash, for example, helps them get the delivery drivers. So that's been a benefit as well as, okay, they're available through the app, we'll get incremental transactions through it. And we set our pricing structure sufficiently that it's not diluted profit. But I would say that ultimately the goal for all these companies, not just pizza, but across the board is to get people to order through your direct channels.
Brad: And so, do they incent customers to do that in any way? I haven't seen a Papa John's for example, trying to pull me into the website as opposed to ordering through an aggregator. I like the fact that the aggregator is there. If I've got a specialty pizza, a lot of times the aggregator doesn't handle some of the requests, the half and halves, quite as elegantly as their own website does. So I actually find myself switching from the aggregator where I decide I'm in the mood for pizza. I see Papa John's and then I swap over and take a look at the website I'm able to order exactly what the other people in the party want.
I think that's a fairly common experience. I think, people appreciate that. Or some do, not every order. Are you seeing them put any other incentives other than having better technology in place? Are they offering free items, for example, if you ordered directly from them?
Lauren: So they'll offer their value or deals directly through their platforms, which is generally not available on delivery aggregators, that's one. And then two is that you can earn through their loyalty program points through their direct channels, which is not through their aggregator. So ultimately, the value is theoretically better, directly through Papa John's channels.
Brad: You touched on something, it's something, I don't know anything about, you talked about the tip structure that they have at the restaurants for Domino's and that they're able to use it. Did I hear you correctly on this? And that's one of the things that makes it attractive to drivers for their organization.
Lauren: It's that because they get enough orders within a certain radius, it shortens the delivery time for delivery drivers. So let's say they can complete six drives or six drops in an hour versus if you go to another pizza store it might be three. So I can theoretically earn double the tips.
Brad: Right. Okay. I see now. I see. And typically, what I've seen with some of the aggregators, if you're in a suburban area, you're limited to four, maybe five deliveries because you don't have a home base, you're driving to the restaurant, then you're driving back out. And so by necessity, you won't have as many orders, which obviously impacts your ability to earn in a pretty significant way.
Let's talk about loyalty programs. Let's jump over to that. You've talked about it a little bit already. Walk us through the loyalty programs that they currently have and what success they've met with that?
Lauren: Sure. So Domino's is the piece of the pie rewards program. It's the simplest reward program. And one of the only ones in restaurants, that's still traffic driven. So it's, if you buy six pizzas, you get one free.
The whole strategy from the beginning has been simple, easy, the customer understands it. They understand how they order and they understand how to redeem it. And they continue to... That's the focus and there's really, hasn't been much change around their structure of the loyalty program. It's been a meaningful contribution to comp. So I believe it had about 30 million loyalty program members or so that are active loyalty program about 85 million or so in their overall customer database.
Lauren: So it continues to be a big part of their business. Papa John's I believe is about 17 million loyalty program members at this time. They haven't talked over the years that it's as meaningful as a contribution. They had some challenges with giving away too much in terms... You give away too much pizza becomes diluted to comp because if you're giving it away for free and somebody would have come otherwise, it ultimately could be a negative and they also haven't leveraged it probably as good as they can, regarding personalization. So that's certainly a focus area for them.
And then Pizza Hut as well has a Hut rewards program, which is also spend same as Papa John's. So you spend X amount and you earn a free pizza.
They haven't been very visible in terms of the contribution, which I imagine is not very meaningful. Part of that is as time goes on, you may see loyalty that it's not as meaningful as a contribution as it was at the very start with Starbucks or at the very start with Domino's as it becomes table stakes for a lot of these companies.
Brad: Yeah. I've actually... I've struggled with the ROI on loyalty overall and how that actually translates into new business. So on one hand you have Domino's for example, and it's such a great example because here's a static program. What I've seen them do is use their push notifications through their app, pretty significantly in order to try to drive that incremental visit, particularly during the week when they're a little bit slower, but it's rarely telling me about my point balance or if ever telling me about point balance, I just go in and pizza pie rewards and will tell me I have two free pizzas. It's a very simple process.
I've not seen that level of visibility with Papa John's or with Pizza Hut in terms of their loyalty program. But I will tell you that when I've done a sample with people that I know about Domino's, none of them have told me that it drives revenue for them, it drives a visit for them. They're saying, it's nice to get it. I appreciate it, but I don't go out of my way. And that comment makes me worried about loyalty programs in terms of their ability to actually drive an incredible visit.
Lauren: So loyalty in itself doesn't drive visits, it doesn't drive comp. What drives it is the actual data behind it, and how companies are using the data to incentivize use. For example, Starbucks is probably the best that exists in terms of the loyalty program. Not because the actual loyalty program, but because they know that I usually order iced coffee. So if you order a cold brew, which is more expensive, we'll give you an extra 15 points. So they personalize it and they have thousands of cohorts that they'll put you in, and then everything's around personalization at this point. Domino's is not very personalized as is Papa John's or Pizza Hut.
So loyalty in itself doesn't drive visits, it doesn't drive comp. What drives it is the actual data behind it, and how companies are using the data to incentivize use. - Lauren Silberman, Senior Analyst with Credit Suisse
So to your point, Domino's is giving you push notifications, but they aren't saying, "We know that you'll probably like chicken wings, so why don't you try chicken wings." It's less personalized. So that is certainly a potential unlock. Has it driven incremental transactions? It's interesting that kind of anecdote, they say that it's been successful for them, that people do order. I think that as you continue to see this become like I said, table stakes across the industry, the offering in itself is not going to drive traffic or frequency. It's how people use the data.
Brad: I'll defer to Domino's. They have more data than I do. I asked six people they probably asked more. I'm good with that. The last strategy that we've seen these companies use is the locations themselves and choosing locations that are designed to help support that growth. I'd like you to start off and I keep harping on Domino's, but I go to them first because in so many ways they are doing things that are innovative.
They tend to take... And you haven't said this explicitly, but as I've listened to you talk about Domino's strategy, they pick something, they pick a path, they pick a lane, they stay in it for a long time. They make it successful and they don't switch out of it. And which, all the work that people have done, you talked about pizza, for example, and all the work that they did. And then they moved... They shifted out of that lane and moved to something else. And I feel lost all of the equity that they were starting to build up. If I understood you correctly, what is Domino's doing in terms of choosing new locations?
Lauren: So in fairness to Domino's when you're putting up double-digit comps consistently. Yeah. I wouldn't change my strategy either.
Brad: No. Neither will I. Keep doing it.
Lauren: So stay in the lane. So Domino's for their locations one is, as we talked about, they're all data-driven. So as they look at where to go and where to grow, it is driven by ultimately data and they do go to franchisee... It's a franchisee concept. They'll go to franchisees and say, "Okay, this is a great location. Do you want to open here." That's part of their strategy? And I mean, that's better than most, and you're starting to see that more and more other companies are at a minimum trying to partner with third parties that also offer that kind of data. So Domino's is pursuing what they call a fortressing strategy. So they are breaking up their addressable markets per store into smaller areas.
So Domino's is pursuing what they call a fortressing strategy. So they are breaking up their addressable markets per store into smaller areas. - Lauren Silberman, Senior Analyst with Credit Suisse
So let's say traditionally, they may have done five miles a delivery radius. They're breaking that down into three miles and adding another store in between two stores, with this thesis, or they've shown that carry-out sales are generally a hundred percent incremental and what they'll call a split store. And while delivery sales will go down, the franchisee will ultimately earn more sales in a specific market, as well as more EBITDA or profit because the delivery is shorter. So the actual cost per transaction comes down. It's better for delivery drivers. So it's both an offensive strategy to grow market share and defensive strategy to prevent other pizza players or other restaurants from coming in.
But ultimately they're improving the service levels because you can speed up the time it takes to deliver pizzas, which increases frequency, it increases spending, it increases customer attention. So they continue to pursue that. And because the returns are less than three years payback periods of franchisees, they've proven that over time, this has been a successful strategy for them. And they've done this in international markets as well, but it's really improving those delivery service times, getting some incremental, carry out sales and ultimately increasing profit and sales for the enterprise.
Brad: Obviously, every neighborhood is different. Every market is different. Is there a sense that any of these players are starting to reach saturation with the number of locations that they have, or do they all see lots of headroom for growth?
Lauren: So Domino's continues to stay strong opportunities for growth. It's an exceptionally fragmented category. So you have the opportunity is some independence, theoretically closed down. Dominoes will go in. Pizza Hut has been closing stores over years. Part of the challenge is they have historically had about 10% of their business being dine-in, which is pretty much a dead piece of the business, and where they're located is not optimal for carryout or delivery. So they're also trying to just relocate their asset base and improve the asset base. So that's part of their challenge. So they're not really as much growth-focused as they are optimizing and relocating.
And then Papa John's has a store... Over the past couple of years has been... growth has declined a little bit part of it's just the challenges related to brand sentiment and the economic concept and down, profitability has been down. But at this point with delivery up in 2020, about 20%, and the new management has improved profitability, they're going to go on a more growth-focused strategy. And part of that is partnering with more private equity and well-capitalized franchisees to try to really accelerate that growth.
Brad: And are they taking advantage of the closures in retail and restaurants and... You mentioned pizza places closing down, but there's all sorts of vacant space available now that I just have not seen in years.
Lauren: Yeah. And what they'll say is... I mean, part of this has been challenging in terms of timing because you have delays related to COVID and permitting. So it's less clear how significant the opportunity is. And what we hear largely speaking is that rent prices have not gone down. And while you've seen an increase in availability, you haven't seen it on the rent side. So there's still some price discovery that perhaps even growth-focused concepts are saying, do we wait to see if prices come down even more if we can get even more favorable leases. So I don't think you've seen a meaningful step-change in unit growth yet.
Brad: Okay. So we've gone through the six strategies, we've got price points, we have technology, we talked about menu innovation, we talked about delivery partnerships, loyalty programs, and choosing locations for growth.
I have a bonus question for you though, which is, what brands or concepts should we be watching? Who else is doing something interesting? Who else is growing? Where should the pizza industry be, or where should other investors or if you're a chain, where should you be looking for the next big threat? Do we see it in the likes of California Pizza Kitchen? Do we see it from guys like Papa Murphy's with a take and bake strategy, or are we seeing it with maybe a brand that is expanding and has a thousand locations, someone like Marcos, for example, that has got good breadth, good distribution of stores, good technology base, it seems, and yet doesn't necessarily have the same national exposure that a Pizza Hut or a Domino's or a Papa John's has.
Lauren: It's interesting. I was going to say actually that you're seeing a blurring of the lines across cuisine segments, as well as food at home food away from home. So you're seeing this increase in I'll say, the chicken category that's just been on fire. So if you look at brands like Wingstop, right? Which delivers well relative to other foods, that to me is even more competitive than just pizza in itself.
You're no longer competing with just pizza. It's what else delivered successfully. And you're seeing this with strategies like with, it just wings or with all these virtual concepts, Bloomin's doing tender shack. You're seeing Domino's in July, they upgraded their wings platform. I mean, there's a reason for this. And if you look at virtual brands, those vast majority have actually been around chicken and the chicken concepts, part of that because it delivers well.
You're no longer competing with just pizza. - Lauren Silberman, Senior Analyst with Credit Suisse
I would say second to that, you're seeing an increase in also casual dining restaurants, which are... I'm just thinking through big brands, we're doing these family meals. So part of the beauty of pizzas is actually a family occasion and one with good value. So you're seeing these bundle meals come out, which is also much more competitive to that value, that family occasion, relative to what we've seen historically. And then just high growth concepts, like you've said, I would also point out even Sweetgreen's a little bit higher-end and maybe goes to a different customer, but they're moving into suburban markets. They're moving in from urban markets. So I think that seeing things like that is just creating a much more competitive environment to pizza and to the delivery market.
Brad: So the question that everyone asks, which is, we have had a lot of pizza over the course of the last 12 months as we move into our second year of dealing with COVID. Do all people keep ordering pizza? Are you predicting a decline in the industry or are you predicting that it will be steady-state, and we'll just continue to build on the foundation that we have?
Lauren: I am expecting that it's largely stable from 2020. I think that pizza as a category is just as a cuisine in itself is globally relevant. It's easy to eat. It's a family occasion and ultimately offers incredible value. And that's not competitive with delivery aggregators. So even if I order a family of four on a delivery aggregator versus what I can get for a family of four for pizza, pizza still blows away on value. So I think that in itself is the core competitive advantage in pizza. And then I'd say the other piece is pizza delivery. If you believe that delivery continues to remain strong and that there's this incremental delivery occasion that'll exist, even in a post COVID environment, delivery, if you think about the boxes of pizza, a lot easier to deliver than if you're delivering four cheeseburgers. So ultimately, we remain positive on the pizza category. We think Americans love pizza.
So ultimately, we remain positive on the pizza category. We think Americans love pizza. - Lauren Silberman, Senior Analyst with Credit Suisse
Brad: Perfect. That's great. If you've just joined us, we're speaking with Lauren Silberman, she's an analyst at Credit Suisse, covering the restaurant industry. She covers 17 stocks, including companies ranging from full service all the way to quick service, as well as pizza and some of the suppliers in the industry. Brian, I want to maybe just open it up to questions. Do you have any questions for us from the audience?
Brian: Yeah, we've had several that have come in, but I did want to let everybody else know that if you go to the questions tab in your dashboard there you can still ask them. There's one that actually goes to my heartstrings. I started at Pizza Hut and have actually worked at Taco Bell, but has Yum been successful in leveraging their different brands to drive customers to Pizza Hut or use Pizza Hut to drive people to their other brands? Such as I believe Yum still covers Pizza Hut, Taco Bell and KFC, I believe. Right?
Lauren: Yep. Exactly. Right. They don't cross brands at all. So the actual infrastructure at the top does have... They leverage it across different brands, but to the extent of any cross-branding, the answer's no. So they haven't leveraged that.
Brian: Okay. When I was there too, they were separate entities, but all under the same umbrella. And I think this was...
This next question was touched on a little bit by Brad, but what has been the impact of COVID on permitting in opening new stores? Now, we were talking the other day too, that unfortunately some other stores have gone under, but there's a lot of infrastructure. So it makes it easier for other people to come in and open this. Have we seen an uptake of people opening new places, even during the pandemic, because all the infrastructure's there? I guess this is for both of you. Yeah. Go ahead.
Lauren: Yeah. So we've seen growth, but growth has not been as significant throughout 2020, even prior you have seen incremental closure. So a lot of chains as well as... Well, particularly chance of taking the opportunity to optimize their portfolios without any pushback from investors. So really taking the bottom of their portfolios and say, "Okay, let's close them." Allow franchisees to close them to improve the ultimate profitability of their enterprises, which hopefully also offers them incremental free cash flow and capital to invest for the future. So we'll see what that takes in 2020. I'm not sure. Brad, do you have anything?
Brad: No, that's good. Brian, let's do one more question and then we'll close off the webinar, but what else have you got out there?
Brian: Well, I want to say, if you can give me two... I've got one that is... What do you guys think is the most important thing for independence to focus on as far as maybe menu growth or, to compete with these larger chains, you have all these secrets? How can they fight against them through online ordering and things like that? And is it menu growth? Is it raising prices, offering deals, bundles, and things like that?
I guess that actually ties in with the second question. So we'll just make it the last question. What is the first step, the best step that anybody can take to integrate all these tips that you guys have given us to help an independent... fight against these big chains. And I'm going to put this up to both of you guys, and whoever speaks first goes first.
Lauren: Okay, I can go over this. So I would say that the opportunity that an independent has that these other chains don't, is the customer engagement and actual local community feel. And I think even more post-COVID, your customers are going to want to engage with the brand itself. And you're starting to see brands need to have a personality, brands need to have this... People need to feel something towards the brand, and it's no longer just a pizza company. It's no longer just a restaurant. It's more than that. So I think that finding opportunities to do that and then to of course, increase your access points to make it as convenient as possible for customers, but ultimately stripping everything down, being able to engage with their customers, growing that loyalty on a one-to-one experience, even without digital or even without the best infrastructure in place, I think well positions independents.
Brad: Yeah, I would agree with that. And at the risk of doing a shameless plug, I'll tell you the experience that we have here working at SpeedLine with independent restaurants. A lot of times they'll come to us and they'll say, "I want to get a new point of sales system because I want to be able to enter orders better. I have an old system." Right? We get into it and we try to understand what it is that they're trying to accomplish. Are they trying to increase sales? Are they trying to decrease their costs? Do they want better information about their customers? And when they're ordering, do they want a more seamless, online ordering experience? We do all of those things and start to understand what is it you're trying to accomplish.
From there, it becomes very easy for us to draw a straight line between, here's what you want now, here's where you want to be. What's getting in the way are maybe two or three simple things, and it's not always technology. I'll be the first to say, if you want to reduce your food costs, go with clear garbage bags, put an alarm on your back door, do some of the blame basic blocking and tackling that prevents that theft and you'll deal with 60 to 70% of your food cost issues. But when it comes to something that's a little more complex, like how do I get customers to come in more often? How do I get them to spend more with every single check?
Those are the types of things that we think are particularly important challenges for us to help solve for independent restaurant operators. And I think that that's probably one of the things that sets SpeedLine apart from the marketplace. In that, we try to give people the tools that some of these largest chains are using and put them in the hands of independent operators. So, we're always happy to help explore that. So that was more of a shameless plug than I expected. So thanks for bearing with me.
Brian: No. It's not. We call it the name dropping and it's been very informative. So that's very good. And I tell you what? I want to take it back. I do want to ask you guys both one last question, and we can make it quick here, but I mean, one of the biggest hurdles that you see like independent pizzerias facing after some of these other restaurants are coming back out of the fray? Some of these guys went into hiding a little bit. What is maybe one of the biggest hurdles, if you can both just give me one of the biggest hurdles you see people facing, and maybe just a quick... I don't want to say a quick fix, but a suggestion. But what do you think people are going to be facing now that other people are coming back out, and now that we're getting back into the new normal, I should say?
Lauren: Too much focus on delivery aggregators, I will say is dangerous to any business. So doing what you can to get people, even if it's carryout or get people in is helpful. And then even thinking through some of your underutilized dayparts or underutilized days, maybe specific promotions or specific events around those days to drive transactions. Similar to what we were talking about Papa John's, really drove lunch through their papadia, trying to find something creative.
Brad: Yeah, I would agree. There's an additional piece that I've seen. And I don't know whether it's perspective or if it's fear or if it's courage, but it's one of those words that keeps independents from experiencing the growth that they probably deserve. When I talk to people that are growing their brand aggressively right now, and we work with a number of chains, smaller chains that are growing very aggressively, 20, 30% growth in their franchise plans this year alone. When I talk to those people, what they see is all around me see is negativity, and I see opportunity.
So there's a real mindset shift that happens when you start to look at what is the rest of the industry doing and how can they take advantage of that? They're driving by locations. For example, they're seeing maybe a restaurant that's gone out of business.
And they're saying, "That could be my next location. I want to find out about that." And they're aggressively pursuing a growth strategy during a time when everyone else wants to maybe shrink back a little bit. Isn't much of an answer, but what it has to do with attitude and courage that I'm hearing from our most aggressive customers who are really growing their brands.
Brian: Yeah, and that's great. I mean, you got to have the will to survive. And the pizza industry has that will. And we are the most resilient industry in the restaurant industry itself. I do want to thank all of our guests, everybody who attended, thank you so much for your time and attention. I do want to thank Lauren Silberman of Credit Suisse. Did I say that correctly?
Lauren: You did.
Brad: Nailed it.
Brian: Awesome. Brad Brooks of SpeedLine Solutions, thank you guys so much. We will put this up there, so it's available. If you missed it and you registered, you can just email me. We can make sure that you have all this information, but, past that, I want to thank everybody for tuning into the PMQ Webinar Series. Everybody say goodbye and give you all your sign-off. Brad, you go first.
Brad: Great. Thanks so much, Brian. I appreciate your time. Lauren, what a pleasure to speaking with you. I really appreciate your time today.
Lauren: Likewise. Thanks for having me.
Brian: Thank you, everybody. We'll see you guys on the next episode of the PMQ Webinar Series. You guys have a great day and stay safe.
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Posted on Thu, Feb 25, 2021 @ 09:02 AM.
Updated on May 5, 2022 @ 6:13 PM PST.