Competitive strategies of Domino's and Papa John's during the recession

¶ … Domino's Pizza and Papa John's Pizza

During the last few years, the food service industry has seen a tremendous amount of challenges. As host of chains and restaurants are facing a number of issues from: declining consumer spending and rising costs. In the case of many pizza restaurants, this can be particularly challenging, as discretionary income becomes less (affecting their overall bottom line). Evidence of this can be seen by comparing the total amount of consumer spending from 1998 to 2007, with the loss of household wealth that was seen during the recession. Where, consumers would spend an additional $2.4 trillion between 1998 and 2007. This accounts for approximately 86% of all U.S. economic activity. When the recession began, most consumers cut back dramatically on their spending, as $11 trillion in household wealth would disappear during that time. (Schroeder) This is significant, because shows how the severe implosion in both numbers would highlight various challenges; that many pizza restaurants are facing. As a result, both Domino's and Papa John's have been utilizing a number of unique strategies, to help improve their operating results and increase market share. However, given the fact that these two organizations are ranked number two and three (as far as pizza sales are concerned), means that the competition can become very cut throat. (Horovitz) as different initiatives have provided mixed results for many organizations. Part of the reason for this, is because of the sharp implosion and near zero growth in sales, as this would force a number of companies to engage in draconian as well as unorthodox methods (in an effort to increase their earnings). When you combine this with the severe contraction in the economy, this meant that the industry is using variety of different strategies to increase their sales as much as possible (during a time when it is very challenging). To determine which restaurant is a better investment, requires conducting a side by side comparison of both companies. Once this is takes place, it will highlight the underlying strengths and weaknesses of each organization; allowing us to know which company is a better investment opportunity over the long-term.

Introduction

Problem

Over the last several years, the pizza industry has become increasingly fragmented. Part of the reason for this, is because of the large number of players in sector. Evidence of this, can be seen by looking at the total size of the U.S. pizza sales volumes for the five largest chains in 2009; where they account for a total of $11.8 billion. Out of this number the various sales were divided among the different competitors to include: Pizza Hut ($5.0 billion), Domino's ($3.0 billion), Papa John's ($2.1 billion), Little Caesar's ($1.1 billion) and Papa Murphy's ($600 million). (Horovitz) This is significant, because it shows how the industry is highly competitive, with a number of different chains posing as possible threats to one another. Given the fact that sales will be limited to certain extent; means that competitive pressures can increase dramatically. For investors this is problematic, as it makes identifying possible opportunities very challenging. In the case of Domino's (NYSE: DPZ) and Papa John's Pizza (NASDAQ: PZZA), they are engaged in a heated rivalry for market share, customers as well as bragging rights. Recent evidence of this can be seen, with the 14.3% increase in sales that Domino's would experience, after introducing a new recipe in the first quarter of 2010. At the same time, Papa John's would see a decline of .4% sales. Commenting about these results Papa John's would say, "It's not surprising that they drove trial on a new product." This is important, because it shows how identifying possible investment opportunities can be challenging. Further evidence of this can be seen by comparing the performance of the common stocks of both companies. Where, Domino's would see the price of their stock decline from $30.00 (in 2007) to $5.00 by 2008. Currently, the price is sitting at $15.00 per share. ("Domino's Pizza") While Papa John's, would decline from $30.00 (in 2007) to $15.00 (in 2008). At the moment, the common stock is currently trading at $25.76. ("Papa John's International") This is significant, because it shows how both companies would see a severe decline in earnings and sales (once the effects of the recession (begun to take effect in 2008). The recent efforts by both organizations to address these issues, have caused their earnings to stabilize somewhat. However, given the fact that the economy is sitting at zero growth and consumer spending has not picked dramatically, means that they are forced to use various techniques to increase their sales is much as possible. This is challenging, because each company has been engaging in their own unique strategy to address these issues.

Purpose

The purpose is to determine which company is a better investment opportunity. This requires utilizing time tested techniques to include: past challenges that each company faced / how each one was met, comparative statistics and specific competitive advantages held by each rival. These different elements were selected, because they can provide the most accurate picture, as to what the underlying strengths and weakness are that could be affecting each organization. This will improve the accuracy of any kind of forecasting and interpretations of various company events. Once these different elements have been carefully examined, we will be able to make a more precise determination; as to which company has the greatest potential for seeing significant gains.

Sources

The resources that will be utilized for this analysis will mainly be: primary sources, secondary sources and information provided by Data Monitor. As far as primary sources are concerned, an emphasis will be placed on establishing some basic back groundwork about the business models of each organization to include: utilizing information from books and the company itself. This will provide the greatest insights about the specific programs and how they could be having an impact upon the organization. At which point, secondary sources will be utilized to identify current issues facing both companies and how they are reacting to them. Then, the information from Data Monitor will be used to examine the financial strength of both companies. When you put these different elements together, they will provide the most accurate assessment of each organization. This is important, because it will help to address specific information and current news, about possible events that could be affecting each company.

Methods

To determine what company is a better investment we will be utilizing what is known as qualitative analysis. This is when you are analyzing the underlying strength of the investment using non-quantifiable information such as: changes in financial information, past issues and possible challenges that the company could face in the future. ("Qualitative Analysis") Once this takes place, it will provide information about the underlying strengths and weaknesses of each organization. At which point, we will begin using comparative analysis. This is when we will be comparing the strengths and weaknesses of both companies, to determine which one is the better investment opportunity, based on the information from the qualitative analysis. ("Comparative Analysis") Together, these different elements will provide the greatest insights, as which organization is the better investment opportunity.

Body / Data Analysis

Past Challenges each Company Faced and how they met these Challenges

Over the past several years, all of the different pizza restaurants have been impacted by a number of different factors to include: high gas prices, rising costs for a host of ingredients (such as: cheese, wheat along with meat) and they were forced to wrestle with a severe economic contraction. (Haubrich) This is problematic, because all of these different restaurants are dependent upon the price of various costs remaining stable. At the same time, they need to see consistent increases in sales within the local communities they serve. Once any of these different factors becomes an issue, it can slowly eat away at the profit margins for all of the different restaurants in the sector. When you put these different elements together, this means that the entire industry would face similar challenges, which would increase the overall amount of pressure that many organizations would face.

The biggest challenges confronting Domino's, was dealing with lingering effects of the recession and rebranding the company's image. When the recession first began in late 2007, it would have an immediate impact on Dominos' overall bottom line. Where, the company would deal with runaway costs and declining sales. Commenting about these issues the former CEO David a. Brandon would say, "The combination of unprecedented cost inflation and cautious consumer spending are hurting same store sales." (Martin) This is significant, because it shows how the recession and inflation would have a dramatic impact upon the company's bottom line.

At the same time, the company was beginning to have an image problem. Where, it was seen as a traditional pizza chain that offered a bottom up approach. This meant that they would focus on providing low cost pizzas, quickly to the general public. Over the course of time, this basic strategy would make the company less exciting and vulnerable to new competitors that are quickly emerging. (Horovitz) This is important, because it shows how the strategy that made the company successful in the past; would help contribute to the various issues that they were wrestling with. At which point, it would begin to have an impact upon how they were viewed by customers.

When you put these different elements together, this shows how Domino's was facing severe challenges from rising costs and declining sales. This is because they were not changing their business strategy, which helped contribute to their image problem. As a result, some kind of drastic improvements were necessary, to address the underlying challenges that the company was facing.

To overcome these different challenges, Dominos would begin examining the entire organization. What happened was the severe economic challenges and loss of market share that the company was experiencing, would begin to have a negative impact upon profit margins. To counter these effects, they would hire a new CEO (Patrick Doyle). He would focus on improving the overall quality and the image of the company, by introducing a new recipe along with marketing campaign. This would have a dramatic impact upon first quarter profits, by increasing them by14.3% (the largest quarterly improvement in company's history). At the same time, other pizza delivery businesses and frozen pizza manufacturers reported a 3% decrease in sales. (Horovitz) This is significant, because it would show how the strategy that was implemented by Doyle would address: the pricing pressures, declining sales and the image problem that the company had. In many ways, one could argue that this emphasis would help Domino's be able to standout in the minds of consumers, contributing to the increase in sales.

In the case of Papa John's, they have been facing similar challenges as Domino's. Where, the company has been wrestling with rising prices for various related commodities (i.e. cheese as well as other ingredients) and a sharp implosion in consumer spending. Evidence of the total impact of these two factors on the company can be seen, by looking no further than their recent quarterly earnings results. As earnings would come in at $.30 cents versus $.42 cents at the same time one year ago, while domestic same stores sales would decline by .6%. ("Papa John's Announced Third Quarter Results ") This is significant, because it shows how Papa John's has been wrestling with the same challenges facing the industry. At the same time, Domino's Pizza is reinventing itself and seeing an upsurge in sales, as this strategy could siphon market share away from the company. When you put these different elements together, this highlights how a change is taking place in the industry, which is having adverse effects on the overall bottom line of Papa John's.

To mitigate these effects, the company has begun using multiple strategies simultaneously. As far as rising prices are concerned, cheese was the biggest cost that the company was facing. To address this issue, Papa John's entered into a purchasing agreement with BIBP (a franchise owned entity), where they are providing them with cheese, for each location at a discount. The way this works is BIBP make large purchases in the market for cheese. They then offer a discount to franchisees, as the various fees help offset any increases in cheese prices. This is significant, because it shows how the company is aggressively focused on reducing the total impact that rising prices could have on its bottom line. ("Pizza Lovers")

To improve the image of the company and keep up with the changes Domino's introduced; Papa John's responded with the Pizza Challenge. This is where the company would challenge customers, to create their own 14-inch pizza over the summer. The winner would have a chance to meet the founder of Papa John's and will have their pizza featured as a main pie in the restaurants. This is significant, because it shows how the company is adjusting to the changes from the competition, by creating their own unique menus. Based on the recent quarterly results, this has helped to reduce the large implosion in sales, yet it has not translated into the same kind of success that Domino's would see earlier in the year. (Stickney 655)

When you analyze both companies, it is clear that they are facing similar kinds of challenges. As Domino's is responding by changing their menu and the way they market the company. While Papa John's, is involved in reducing the costs that they are paying for cheese and the overall types of pizzas they offer. This is significant, because it shows how both organizations are adapting to the various changes, by using unique strategies, to respond to external challenges and those faced by competitors.

Specific Competitive Advantages held by Each Company

In the case of Domino's Pizza, they have a number of distinct advantages that they can use to help increase market share as well as profitability to include: strong franchises, a well-known name and their outstanding delivery service. These different advantages are important, because they highlight how the company has a strong presence in the U.S. pizza market. ("Domino's Pizza Inc.") When you combine this with new innovations (such as: changing the recipe / improving the image of the organization), these different advantages allow Domino's to see significant increases in sales. Where, the two different elements are allowing the company to distinguish itself from competitors. This is important, because it highlights how the largest advantages are: their overall size and the basic foundation that they have established over the years. At which point, this would help the company to realize a 14.3% improvement in sales (Horovitz).

As far as Papa John's is concerned, their largest advantages are: the ability of the company to control costs and to adapt to competitive forces. Controlling costs is a major part of the company's strategy for maintaining profitability. Where, they use the BPIP segment to help reduce sharp increases in commodities prices. At the same time they have various quality control centers around the country, which supply the stores with the different products that they will require. This is important, because it shows how the company is actively taking steps to address external issues that could cause their earnings to become more volatile. The ability to adapt to competitive forces is where Papa John's will implement their own programs to address the changes from rivals. This is important, because it allows the company to be able to quickly adapt to changes that are occurring, helping to improve their ability to increase their overall bottom line and maintain market share.

When you examine the different advantages of both organizations, it is clear that they are using them to help improve their profits and market share. This is significant, because it highlights the overall competitive nature of the industry, as these two rivals will use these strengths to gain dominance over the other. ("Papa John's International")

Conclusions / Recommendations

As you look at the strengths as well as weaknesses of both Domino's and Papa John's Pizza, it is clear that they are facing similar challenges. However, the strongest investment would be Papa John's. The reason why is because: it uses various tools for controlling runaway costs and they are quick to respond to changes in the market from competitors. This is despite the fact, that Domino's saw a substantial improvement in earnings when they changed their recipe. Where, there was a onetime increase, in comparison with a negative trend that has been taking shape over the last several years. This is problematic for investors, because given the fact that Papa John's can quickly adapt, means that any kind of successes from Domino's could be short lived. As a result, with both companies are facing similar pressures and challenges as the rest of sector. This means that Papa John's is better investment because of these two advantages. Over the long-term, this will more than likely help the company be able adapt to various external issues quickly, because they addressed fundamental challenges that are affecting the industry. That being said, a careful examination of the industry is highlighting how all of the different pizza restaurants are facing similar challenges. Even though Papa John's may have an advantage as far as dealing with these issues, the fact of the matter is that any one of the their competitors could create new strategy (which could siphon customers away from them). This significant, because it shows how the long-term issues of declining consumer spending and rising prices could continue to have an impact upon the bottom line for Papa John's. As a result, these issues will not go away anytime soon. Therefore, it is imperative that everyone consider the fact that the Papa John's could face a period of stagnant earnings and changes to their operational strategy. This is in response to changes that are occurring in the economy and consumer tastes, which are forcing them to evolve.