Domino\'s Pizza and Papa John\'s

¶ … 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.

Comparative Statistics

The comparative statistics will tell us the underlying strengths and weakness of both companies going forward. Where, we will look at a number of different factors to include: annual sales, market share, employees, the total amount of stores, types of products / services being provided and the various sources of revenue. Once this takes place, it will provide a more complete picture as to the underlying strengths and weakness of each organization.

In the case of Domino's Pizza, the company has been aggressively adapting to changes that are occurring in the industry. Where, annual sales have been weak for a number of years, as they would decline between 2006 and 2009. During this time, they would come in at $551 million (for 2006) and continue their decline until 2009 (when sales would come in at $443.6 million). The total market share that Domino's accounts for is 18.4%. The number of employees that currently work at the company is 10,200. The overall amount of stores that the company has worldwide is 8,553. There are a number of different products / services that they offer to include: beverages, deserts, pizza, sandwiches, Buffalo wings, pasta, cinnamon sticks and home delivery services. The company earns their revenues through sales at various corporate owned locations and they make a 5.5% royalty fee off of their independent franchises. ("Domino's Pizza Inc.") This is significant, because it shows how Domino's has been wrestling with various issues related to their size and declining sales. As their income stream is limited mainly to same store sales (at company owned stores) and the franchise fee that they receive from independently owned locations.

When you look at Papa John's, they have also been adapting to the various changes that have been taking place. Where, annual sales would decline between 2008 and 2009 by .5%. (" Papa John's Announces Full Year and Fourth Quarter Earnings") the total market share of that is controlled by the company is between 6 and 7%. (Eagles) the overall amount of employees that work at Papa John's is 16,000. The number of retail locations open is: 3,491 restaurants. The different products / services that company provides includes: pizza, breadsticks, cheese sticks, chicken strips, wings, deserts and cheese. At the same time they offer: dine in, takeout and delivery services. Their main sources are from: same store sales and the franchise fee that the company receives from it indecently owned locations. ("Papa John's International Data Monitior") This is significant, because it shows how Papa John's is wrestling with similar issues as Domino's Pizza.

When you compare the various statistics, it is obvious that Papa John's and Domino's are similar as far as: products as well as income streams are concerned. The biggest difference between the two is the overall market share and size, with Domino's being the larger pizza restaurant. As a result, this highlights the overall rivalry between both, with one trying to create strategies to outperform the other (because they occupy the number two and three spots).

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).