Domino's Pizza: From Cardboard Taste to Record Sales Growth, Slides of Economics

Download Domino's Pizza: From Cardboard Taste to Record Sales Growth and more Slides Economics in PDF only on Docsity! 1 DOMINO’S The Turnaround How DomiNO’s Became Domi-YES! Tiffany Le, 303-668-243 Tom Pashut, 703-649-375 Econ 106T, Lecture 2, Lab 2A 2 After the end of Quarter 1 of 2010, international pizza restaurant chain Domino’s Pizza experienced an astronomical turnaround, having one of the largest sales growths in the history of fast-food restaurants. The company completely revamped its brand from being a chain serving “mediocre” food to one that was actually well-received by consumers and critics alike. This huge turnaround was a result of an extensive effort to overhaul both the company’s products and its processes by introducing a new recipe and drastically improving its online and mobile technology infrastructure. Today, Domino’s is the second largest pizza restaurant chain in the world and its online service is the 4th largest e-tailer in the country. Two major questions arise: How exactly were they able to achieve such a successful and unprecedented turnaround? And what should they do moving forward to sustain and improve upon such growth? HISTORY of DOMINO’S Pizza was brought to America in the 1800’s by Italian immigrants and rose to popularity in the 1950’s as Italian-American celebrities, such as Frank Sinatra, began speaking highly of the “pie”.1 2 It wasn’t long after this rise that the Domino’s chain was created. In the year 1960, two brothers Tom and James Monaghan scraped together $500 to buy a small pizzeria in Michigan called Dominick’s Pizza. After only 8 months, James grew tired of the business and sold his shares to his brother to buy a second hand Volkswagen car. Tom took this opportunity to revitalize the store and, in addition to making decorative changes to the pizza joint, enact changes to improve its profitability.3 From the very start, reliance on delivery and a focus on more efficient, streamlined processes (often at the sake of quality or customer satisfaction) were crucial aspects of the company’s business model. Because the shop itself was very small and had little room for sit-down diners, Tom hired laid-off factory workers and offered them commission to drive and deliver pizzas to nearby towns.4 The early focus on deliveries helped spread the brand quickly, and was a critical reason for Domino’s quick success as it allowed the shop to serve a greater volume of customers than other pizzerias that did not have delivery service. Additionally, Tom would always look for ways to improve profits by streamlining practices. For example, he would often drop items from the menu spontaneously if he was shorthanded at the shop. Though this would often upset customers, he found that volume and profits increased every time he did this, which led to Domino’s focus on a simpler, more “traditional” menu.5 As operations and popularity increased for the shop, its original owner decided to retain the name “DomiNick’s”. Unable to come up with anything, Tom Monaghan resorted to posting a YellowPages ad asking for new name suggestions. A driver named Jim Kennedy happened to see the ad and submitted his suggestion, 1 http://inventors.about.com/od/foodrelatedinventions/a/pizza.htm, accessed 11/26/11 2 http://whatscookingamerica.net/History/Pizza/PizzaHistory.htm, accessed 11/26/11 3 http://lifestyle.iloveindia.com/lounge/history-of-dominos-pizza-1915.html, accessed 11/26/11 4 http://www.fundinguniverse.com/company-histories/Dominos-Inc-Company-History.html, accessed 11/26/11 5 Monaghan, Tom, "Domino's Pizza," Fortune Small Business, September 2003, p. 58. 5 With rising customer dissatisfaction evident not only through surveys and word-of-mouth but also in sales numbers (3rd Quarter revenues dropped 6.5% in 2009, missing analyst estimates, and its shares posted a steeper-than-expected decline of 8%17), Domino’s hired a new CEO, J. Patrick Doyle, in 2010 to help the company undergo a massive overhaul of both its products and processes.18 Though it was an incredibly risky move, especially in the eyes of marketing pundits of the time, Doyle’s decision to completely revamp the company’s image proved highly successful. The company spent 18 months and millions of dollars to create a completely new recipe for its pizzas, update its online ordering system to become more efficient and user- friendly, and roll out a brutally honest and interactive ad campaign that actively utilized the internet and technology.19 These significant changes proved to be real game-changers, and helped to not only increase sales but also re-energize the brand in the minds of consumers across the country. NEW RECIPE Doyle knew that Domino’s biggest weakness was the taste of its pizzas. The core recipe had not changed for decades and consumers were starting to leave the chain for other brands that provided fresher, healthier, and better-tasting pizzas. "This is not a slight tweak. We changed everything on our pizza from the crust up," said Domino's USA President J. Patrick Doyle. "We changed the crust, we changed the sauce, we changed the cheese."20 The company tested dozens of cheeses, 15 sauces and 50 crust-seasoning blends over two years in order to arrive at what they determined to be a recipe that was worthy of the revamped brand.21 Domino’s put these new products to the test by submitting their pizzas to an independent, blind taste test of nearly 1,800 random pizza consumers from eight U.S. markets. The company came out on top, beating its major competitors Papa John’s and Pizza Hut by a wide margin.22 REVAMPED ONLINE SYSTEM In addition to its new recipe, Domino’s also made an effort to upgrade the one aspect it was already good at – its delivery service. Though the pizza chain was already popular for its fast and easy delivery options and was already a leader in the space, Doyle knew that it still needed to stay ahead of the curve and create something bold and new that would make it difficult for competitors to mimic quickly. In December of 2009, Domino’s hired 30 tech workers to reconfigure its online ordering system and restructure its entire information 17 http://www.reuters.com/article/2009/10/13/dominos-idUSN1316576920091013 18 http://www.usatoday.com/money/industries/food/2010-05-05-dominos05_ST_N.htm?csp=obinsite 19 http://www.usatoday.com/money/companies/earnings/2010-03-02-dominos_N.htm?csp=obinsite 20 http://slice.seriouseats.com/archives/2009/12/dominos-pizza-changes-core-recipe-garlic-parsley-crust-sweeter-sauce- provolone-cheese.html 21 http://www.usatoday.com/money/industries/food/2009-12-16-dominos16_ST_N.htm 22 http://phx.corporate-ir.net/phoenix.zhtml?c=135383&p=irol-newsArticle&ID=1381948&highlight= 6 technology operation.23 The company, which used to outsource most of its IT work, decided to change things up and move operations in-house by conducting its own software engineering and consolidating various data and Web operations within its own operation. “We thought the importance to our business and the criticality of the technology was too great to continue to outsource it,” Domino’s Chief Information Officer Christopher McGlothlin said. The mindset here is that online customers are often more loyal and often order more items per transaction, so they are a very valuable part of the business. Additionally, focusing on online consumers helps to combat the industry’s struggle to increase foot traffic in the poor economy. The new system included a faster, more user-friendly interface and allowed more options for order customization (consumers could essentially “make their own pizzas” from a variety of options). It also had an advanced tracking system that allowed customers to see every step of the pizza-making and delivery process, right down to seeing the name of the person who was putting their pizza in the oven. “WE KNOW OUR PIZZA SUCKED” Perhaps the most crucial aspect to all of the changes was the way Domino’s decided to handle its marketing. It could have easily gone the way of many other companies and merely pushed a basic advertising campaign that promoted “new and improved” pizzas. However, the team decided not to spin the matter around and, instead of just promoting its new pizzas, it also apologized profusely to its customers and admitted that its old pizzas were awful.24 This was certainly a risky move as it involved the company admitting all of its past failures in a blunt manner, something most companies rarely ever do. Starting in early 2010, alongside the rollout of the new and improved recipe, Domino’s had television ads that showed customers discussing how they felt the pizza was "devoid of flavor."25 Along with the television ads, Domino’s actively tried to engage customers by creating a website called PizzaTurnaround.com that documented customers’ responses to their new pizzas. Prominent food bloggers were encouraged to take live videos of themselves tasting the pizzas and providing their honest, unedited comments, which were then shown directly on the website.26 Customers were also encouraged to take pictures of their pizzas right when they ordered them, and these photos were then placed on the website. Domino’s proudly claimed that all images of their pizzas were “unedited and un-Photoshopped”, unlike that of their competitors. As such, the company was able to successfully utilize online social media, often a tricky tool for most companies as the online crowd can be brutally honest due to ease of accessibility and the ability to remain anonymous, to further improve their brand amongst casual fast-food fans and major foodies alike. 23 http://www.annarbor.com/business-review/dominos-pizza-reshaping-online-ordering-system-hiring-ann-arbor-software- employees/ 24 http://www2.qsrmagazine.com/articles/features/144/dominos-4.phtml 25 http://finance.yahoo.com/blogs/daily-ticker/domino-delivered-tasty-turnaround-151339457.html 26 http://www.pizzaturnaround.com/ 7 SEEING RESULTS Domino’s risky plan turned out to be a very smart move. At the end Quarter 1 of 2010, a few months after the launch of its new campaign, the chain posted sales numbers that experienced a huge 14.3% increase over the last quarter, one of the highest-ever revenue jumps for a fast-food chain.27 In addition, the company’s stock rose a whopping 130% from December 2009 to December 2010, and recently hit a high of $32.50 per share on November 16, 2011, a significant improvement over its measly $4.00 per share price in 2008.28 The company’s domestic same store sales grew 6.3% during the fourth quarter of 2010 versus the year-ago period, and 9.9% for the full year, due to increased store traffic and positive consumer response to its improved pizza and processes.29 Overall, the company posted total revenues of $1.6 billion in 2010 (up 11.9% from $1.4 billion in 2009).30 In addition to its improvement in the overall fast-food market, Domino’s was also seeing huge gains in its dominance within the online sector. As of September 2010, the company is the 4th-largest e-tailer in the market, just behind Amazon, Staples, and Office Depot.31 The fact that a pizza franchise has such dominance over the ecommerce space, especially when up against heavy-weights that deal primarily with technology and durable goods, is both shocking and impressive. The Domino’s Pizza Tracker certainly played a big role in helping the company achieve this status, as it boosted its online ordering profits by 23% since its inception. Domino’s rapid improvement stunned industry experts, who claimed that especially due to the fickleness of consumers, it was extremely rare for a well-known brand to revamp its image and operations so successfully in such a short amount of time. It is now clear that the company made the right move in revitalizing its recipe, brand, and operations – however, one great year of enormous growth does not immediately lead to long-term success. The company is still the #2 player in the market, and must try to find ways to not only sustain its growth, but also continue expanding in the hopes of toppling the market leader. STRATEGIC NEXT STEPS Even though Domino’s was able to survive the economic downturn through a revamped marketing campaign and combat the problem of decreased foot traffic in national pizza restaurants by bringing their customers online, it is still the second-largest player in the market. For the fiscal year 2010, Pizza Hut boasted over $10 billion in worldwide sales (around $5.4 billion of which came from the United States)32 whereas Domino’s had $6.2 billion sales worldwide (around $3.3 billion of which were domestic).33 Thus, the company must be careful to not only focus on keeping up the momentum from the recent spike in sales, but to also find ways to grow and 27 http://www2.qsrmagazine.com/articles/features/144/dominos-1.phtml 28 http://seekingalpha.com/article/308756-after-the-turnaround-for-domino-s-pizza-too-late-to-buy-shares 29 http://phx.corporate-ir.net/phoenix.zhtml?c=135383&p=irol-newsArticle&ID=1534134&highlight= 30 http://investing.businessweek.com/research/stocks/earnings/earnings.asp?ticker=DPZ:US 31 http://blog.cmbinfo.com/bid/46079/Customer-Experience-Makes-Domino-s-4th-Largest-e-tailer 32 http://www.yum.com/annualreport/ 33 http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9ODY2NDF8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1