Forbes just published a lengthy article exploring the growth of the "next big dining trend" of fast casual pizza. And while the emergence of these "top-your-own" concepts has been staggering throughout the past two years, Domino's CEO J. Patrick Doyle admitted Tuesday that he has no idea what fast casual pizza means.
"If you look at fast casual, largely it's defined as better quality, better tasting and we think we have that," Doyle said during Domino's Q1 2013 earnings call. "That's part of why we've had strong growth over the last few years, really since we relaunched our brand (in 2009)."
Domino's turned in another strong quarter this week, generating a domestic same-store sales increase of 6.2 percent compared to Q1 2012. Internationally, same-store sales grew 6.5 percent during the quarter.
And with new brands popping up seemingly every week, promising customized pizzas in less than 2 minutes, Doyle doesn't seem concerned about the additional competition. In fact, he says, the schism between larger chains and smaller ones is growing deeper.
"There are a lot of people doing interesting things in the pizza category. We continue to watch those things. None of them are at a scale that we see any real effect and some that have gotten a lot of attention have already closed a lot of stores," Doyle said. "Some brands are doing better and are on their way up, but the net effect is larger players have been taking share away from smaller players."
Doyle said the major factor in this growing divide is technology. Chains such as Domino's simply have the capital to invest in innovative and brand-specific digital platforms.
"There is enormous leverage that we're going to get out of the digital platform. We continue to believe it's a big reason why you're seeing share gains for the larger players versus the regionals and independents," Doyle said. "Our calendar going out a few years is full with innovation we think will drive impact with customers."
During the quarter, Domino's G&A expenses grew by $6.5 million, or 13.6 percent quarter over quarter. The increase was due, in large part, to investments in technology across the system. Domino's anticipates full-year expenses to increase an additional $9 million, also in part because of technology and e-commerce efforts, according to Michael T. Lawton, CFO.
Technology investments made globally
Those investments will be made across the chain's global system. Doyle said the company has a big opportunity to develop online ordering and technology initiatives in both developed and emerging economies. Domino's digital ordering now averages over 35 percent of total sales, with mobile ordering as the fastest growing segment.
In Australia, Domino's recently launched an app that allows customers to provide real-time feedback to their local store. In Japan, an iPhone app was recently unveiled that features a popular animated character in that country.
The United Kingdom business receives more than 60 percent of its delivery orders from digital channels. And, in the U.S., the goal is to continue to drive orders and sales from digital channels.
"We are also continually improving these sites with enhancements like card on file, which is now available for online orders and will soon be available for all mobile orders as well," Doyle said.
There are technology solutions regionals and independents can offer, Doyle added, but they don't add up to the same experience for customers.
"The bigger gap in technology is between (Domino's, Pizza Hut and Papa John's) and the regionals and independents. I think it's going to be something that's very difficult for them to overcome," he said. "We do think it's a serious competitive advantage. It's something that we're going to continue to invest in, to try to maintain and grow. I'm sure that some of them are going to do better things into the future, but I think it's tough for them to catch up with us."
Other highlights from Q1
Domino's total revenues were up $33 million or 8.6 percent from the prior year. This increase was primarily a result of three factors:
- Higher supply-chain revenues resulting from higher-order counts, a change in the mix of products sold per order and an increase in commodity prices;
- Higher domestic and international royalty revenues due to same-store sales growth and international store count growth; and
- A third-party was contracted to manage Domino’s gift card program, which reduced its gift card liability by $2.6 million.
Consumer spending has been conservative since the beginning of the year due to higher payroll taxes, gas prices, etc. Doyle said Domino's results are well above what most in the restaurant industry have been experiencing because of the value pizza offers.
"We're a good value and we've continued to be a good value," he said. "For under $25, you can feed a family of four with pizza — something that we feel keeps our category strong in an uncertain economy versus other segments."
Domino's new pan pizza, while not promoted on TV during Q1, continues to perform well. Doyle said the new platform gives the brand room to grow in a new cross-segment and potentially take even more share.
"Pan pizza has really been about increased frequency, increased retention. Customers of Domino's who have gone elsewhere when they wanted to buy pan pizza are now staying with us for those occasions," Doyle said.
Catering could become a bigger piece of the business in the future. Doyle said the company has "looked hard" at the service.
"I don't know that catering exactly the way that we all kind of think about catering will be a big area," he said. "But I think there are definitely things we can do to make larger orders easier for customers."
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