The net result from this lack of innovation was Pizza Hut losing significant market share. it's expected that Pizza Hut will be more competitive to be more promotional throughout 2006, and would expect aggressive advertising that accentuates a "value" message. Given a high gas price environment which is already happening today (as of June 2006), many operators in the pizza category have discussed "value" as a key theme. The challenge will be increasing transactions through "value" offerings while maintaining or boosting average pizza orders. According to Pizza Hut, much of the growth in the category in 2005 has been achieved through higher average check levels with only a small portion coming from higher transactions. Papa John's had a sales resurgence in 2005, running a successful pan pizza promotion that contributed to same-store sales growth that was well above the performance of recent years. Papa John's comps have remained positive in early 2006.

Economic Growth and Stability

Critical to the economic growth and stability of Domino's is the predictable revenue stream from franchisees, which continues to have above average rates of return for franchisees.

The ROI for any given franchisee hovers in the 40% range based on an annual sales volume of $650,000. Figure 4 shows the distribution of franchisees across the United States.

Figure 4: Distribution of Domino's franchisees throughout the U.S. true competitive strength, franchisees for Domino's are one of the most potent competitive advantages the company has. The majority of franchise owners come up through the franchise system, have an average length of relationship with Domino's for 9 years or more. A sure sign of franchisee loyalty is the 99% contract renewal Domino's is able to generate year over year, and the fact that 98% of the stores purchase all their ingredients and food products from Domino's Corporate. There is also a 99% royalty and distribution receivables rate across all franchisees and less than an 8% attrition rate of franchisees globally. Figure 5 provides for an analysis of the dynamics of franchise store ownership.

Figure 5: Dynamics of store ownership

The Customer Environment

Pizza sales are by far most common during the dinner day-part, consisting of more than 53% of Domino's sales. Late night is a pretty significant piece of the business at 13.8%, and could continue to be an opportunity in the category. Figure 6 from the Domino's Annual Report shows the distribution of pizza sales by day part.

Figure 6: Analyzing Pizza Sales by Hour of Day

To counter this trend of dinner being by far the most critical time for any pizza delivery business, Domino's competitors are experimenting with food products to move into other meals. Breakfast is not sold at most pizza operators; however, Papa John's is in the process of testing breakfast pizzas such as "pizza omelets."

Interestingly, pizza sales also tend to be skewed toward weekends, when customers order pizzas not only as a meal replacement but also for special occasions. Weekday sales may also present an opportunity for pizza operators as the demands on people's time increase and a greater premium is placed on the convenience of ordering pizza on a weeknight.

During the week, sales should increasingly benefit from busy households that, when returning home from a long day of work would rather order a pizza than cook and clean. Figure 7 provides an analysis of how Domino's management sees the opportunity for delivering pizza and other entrees adaptable to home delivery.

Figure 7: Domino's Value Pyramid

Demographically, consumers within the 15- to 34-year-old range are the most pizza-friendly. Based on the 2000 Census, trends in population demographics imply a steady increase in the percentage of people within this age range in the United States.

SWOT Analysis

Strengths

Strong and well-diversified franchise system

Domino's has developed a large, profitable, and committed franchise organization that is a critical component of its system-wide success and leading position in pizza delivery.

In addition, Domino's shares 50% of the pre-tax profits generated by its regional dough manufacturing and distribution centers with those domestic franchisees who agree to purchase all of their food from the company's distribution system. These arrangements strengthen Domino's ties with its franchisees by enhancing their profitability while providing the company with a continuing source of revenues and earnings. This arrangement also provides incentives for franchisees to work closely to reduce costs. The strong, mutually beneficial franchisee relationships are evidenced by the over 98% voluntary participation in Domino's domestic distribution system, over 99% domestic franchise contract renewal rate and over 99% collection rate on domestic franchise royalty and domestic distribution...

with a leading international presence
Domino's is the number one pizza delivery company in the U.S. with a 19.5% market share based on reported consumer spending as of the close of 2005. With 62% of the global 7156 stores located in the all the states in the U.S., the domestic store delivery areas cover a majority of U.S. households. The company's share position and scale allow it to leverage its purchasing power, distribution strength and advertising investment across its franchisees.

Outside the U.S., the company has significant share positions in the key markets in which it competes, including, among other countries, Mexico (where it is the largest quick service restaurant (QSR) company in terms of store count in any QSR category), the United Kingdom, Australia, Canada, South Korea, Japan and Taiwan. Dominos' has a leading presence in most of these international markets as well.

Global brand awareness

The Domino's Pizza brand is one of the most widely-recognized consumer brands in the world and its unique value propositions are instantly recognizable through the series of one-line positioning statements the company relies on for quick name recognition. Consumers associate this brand with the timely delivery of quality, affordable pizza and complementary side items. The Domino's Pizza brand has been routinely named a MegaBrand by Advertising Age. Domino's continues to reinforce this brand with extensive advertising through television, radio and print over the past five years, the company's domestic franchise and company-owned stores have invested an estimated $1.3 billion on national, local and co-operative advertising in the U.S. The company also enhances the strength of its brand through marketing affiliations with brands such as Coca-Cola and NASCAR.

For 2006, advertising will be increased 25%, from 4% to 5% of Sales dedicated to this strategy.

Approximately 94% of pizza consumers in the U.S. are estimated to be aware of the Domino's Pizza brand. The brand is particularly strong among pizza consumers for whom dinner is a fairly spontaneous event, which industry research indicates to be the case in nearly 50% of pizza dining occasions. In these situations, service and product quality are the consumers' priorities, the epitome of Domino's existence.

Weaknesses

Dropping Revenue per employee

For full financial ratio analysis of Domino's please see Appendix I. Domino's revenue per employee is considerably lower than the industry average in the U.S. Comparing the revenue per employee of its competitors such as Wendy's ($3.7 million) and Yum Brands ($1.6 million), the closest competitors of Domino's, the company derives much lower revenues per employees. Lower revenues per employee signify lower productivity for the company as compared to its competitors and the need for more effective use of operations and service programs to get higher levels of productivity from each employee.

Over-reliance on U.S.

Domino's is striving to be a global company yet has strong ties in both company culture and operational performance to the U.S. In 2005 the company generated less than 10% of total sales from international markets, with U.S. markets comprising the bulk of sales and profits. The U.S. consumer spending is also expected to face a downturn in the light of rising interest rates and fluctuating inflation. Consumer spending accounts for about two-thirds of all economic activities in U.S., implying its influential role in shaping up U.S. economy. Any material impact on consumer spending can affect the economy and thus businesses directly. For a company like Domino's, consumer spending is a very important factor that may affect the business of the company. This reliance on a single market, which faces the threat of declining consumer spending, has increased the company's risk profile.

Opportunities

Domino's plans to continue to promote its successful advertising campaign "Get the Door. it's Domino's," through national, local and co-operative media. Beginning in 2005 and continuing to today, each of the domestic stores increased its contributions to the advertising fund for national advertising from 3% to 4% of retail sales. The company intends to leverage its strong brand by continuing to introduce innovative, consumer-tested and profitable new pizza varieties (such as Domino's Philly Cheese Steak Pizza and Domino's Doublemelt Pizza) and complementary side items (such as buffalo wings, cheesy bread, Domino's Buffalo Chicken Kickers and Cinna Stix) as well as through marketing affiliations with brands such as Coca-Cola and NASCAR. The focus throughout all these activities is to drive up same-store revenues and increasingly put pressure on Papa John's Pizza recent increase in performance on this key metric.

Expansion and optimization of domestic store base

The company…