Marketing concept and market segmentation in practice

Marketing Concept and Market Segmentation in Practice

Marketing Concept and Marketing Segmentation in Practice

Criteria for Evaluating Marketing Concept and Segmentation

In completing this analysis of Domino's Pizza Global Operations, a SWOT Analysis, assessment of the company's external and industry factors, Porter's Five Forces Model of Competition, and a thorough analysis of the existing and potential Domino's customers have all been used as the basis of completing this analysis and recommendations. The result is a series of marketing goals and objectives, marketing strategies, market mix recommendations by objective, and a series of evaluation control and contingency plans.

Situation Analysis

Today Domino's is the leader in the delivery segment of pizza sales in the U.S., second only to Pizza Hut in total pizza sales, as this competitor has 4,000 Red Roof restaurants with over 100-person seating capacity. Domino's strength in delivery is evidenced by the fact that the company delivers an average of one million pizzas a day and has the greatest market share of the delivery business at 19.4% at the close of 2005.

The figure to the right shows the market share in the U.S. For pizza delivery, and this is from the March, 2005 investor presentation given by Domino's CEO.

Year-to-date the company has sold and delivered well over 600,000 pizzas according to the latest earnings call hosted at the close of their last quarter. This delivery-only approach allows Domino's to focus its marketing and operations strategies on delivery only, without the distractions and potential struggles of a dine-in business, as is the case for Pizza Hut.

According to many industry analysts and experts and also by reviewing Domino's financials and low asset investments and exposure to long-term debt through ration analysis (see Appendix I for ratio analysis) the delivery-only business is the best area in which to operate within the $33 billion pizza market. Approximately $12 billion of the pizza category's sales are through delivery, and according to Roper (2005) delivery will continue to gain share in the category as lifestyle trends continually place more and more of an emphasis on time and convenience, and using pizza delivery to overcome the highly hectic times from 4:30pm to 6pm on weeknights. This has also been validated through research completed by Domino's Market Research (2005).

Figure 2 illustrates how the change in families and lifestyles in general provide a favorable backdrop for the pizza delivery business.

Figure 2: The shifting mix of pizza sales favor delivery

According to Roper, at 4:30 on an average afternoon, 73% of Americans have no idea what they will feed their family for dinner. With the growing amount of last-minute dinner decisions, pizza delivery is a timely and convenient option that gives families a viable meal replacement option for an affordable price. As daily lives become more hectic and people are less inclined to cook, shop, and clean, we would expect this occasion to increase and provide continued demand for pizza delivery

Product Market Structure

The quick-service restaurant (QSR) pizza category is the second-largest category within the $187 billion QSR sector, with an estimated $33 billion in 2005. The QSR pizza category consists of four components: delivery, dine-in, carryout, and a diminutive drive-thru business. Domino's operates primarily within the delivery segment of the QSR pizza category. Delivery accounts for 36% of the total U.S. QSR pizza category, with $11.8 billion in sales for the 12 months ended November 2005. Pizza delivery sales growth in the U.S. was close to flat during that same time frame, although over the past several years, delivery has grown steadily as a percentage of the pizza category, to 36% of the pizza category sales in 2005 from 29% in 1997 according to NPD (2005) shown in Figure 3.

Figure 3: Industry-wide pizza delivery choices by consumers

The External Environment

The following sections of this marketing plan review industry analysis, competitive pressures, factors leading to economic growth and stability, sociocultural trends, the customers' environment, and the internal organizational climate.

Industry Analysis

Throughout the last five years, Domino's has outperformed both Pizza Hut and Papa John's in same-store sales growth yet in 2005 has seen their lead in this area falter. In the most recent surveys from Roper (2006), there is clear evidence that Domino's same store-sales are being driven down by Papa John's highly effective uses of promotion and new products. 2006's competitive challenge is to re-invigorate same-store sales and become the industry leader once again.

Papa John's sales out performance has been driven by an improved and consistent delivery-focused marketing message, as well as strong new and limited-time-only products. Domino's stressing Cheesy Bread, the Philly Cheese Steak pizza, and last year's 5-5-5 promotion have all contributed to greater in-store sales yet the company is still struggling relative to competitors. Despite a strong presence in a very competitive category, Domino's most pressing marketing challenge is to retain same-store sales leadership. The company has been extremely consistent in achieving at least some degree of same-store sales growth each year, an achievement that its peers cannot claim. Domino's has had 12 consecutive years of flat or positive same-store sales growth. The most recent 7-7-7 promotion is anticipated to be just as success as 5-5-5 based on the feedback of franchise advisory council members.

Porters' Five Forces Model of Competition applied to Domino's

The five forces that comprise Dr. Porter's model are industry competitors, pressure for substitute products, bargaining power of suppliers, bargaining power of buyers, and the influence of potential entrants. Diagram 1 shows the Porter Five Forces Model graphically. Each of these areas is now discussed in bullet form in the following series of sections.

Assessing Domino's Industry Competitors

Highly fragmented series of competitors throughout all nations Dominos competes in makes branding consistency and product quality critical.

Strongest global competitor is Pizza Hut.

Significant churn in the smaller mom-and-pop independent shops.

Pressure from Substitute Products

Significant competition from QSR concepts that include both lunch and dinner, and also have a steady stream of new products and services.

Focus on QSR entrees that are easily delivered by drivers is the major substitute competitive threat.

Instant dinner products in many food stores is also forcing a significant emphasis on innovation over simply relying on price as the competitive strength.

Bargaining Power of Buyers

Dominos' buyers demand innovation in the form of both new menu and food items but also in the definition of new pizza concepts. Pizza Hut has been slow to innovate on certain product areas and as a result has faced pressure from buyers as they seek out competitor's newer pizza and dinner offerings.

Domino's customers demand regional variation and quality. Their most loyal customers are less concerned with price and more concerned with consistent quality and taste.

Domino's customers are less price-sensitive than the majority of pizza purchasers as a result the customer base has significant influence on future product direction.

Bargaining Power of Suppliers

Highly dependent on the very volatile commodity of cheese and its price. The price of cheese has a direct impact on the company's broader profitability.

Domino's has yet to fully vertically integrate into cheese production, yet has moved aggressively into dough and distribution facilities to gain greater control over their supply chain

Highly dependent on the price of other dairy and cheese products as well, as innovation in this industry centers on how to re-define entirely new product concepts based on cheeses.

Potential Entrants

Apart from Pizza Hut and Papa Johns at a national level, Domino's has no chain-based competitors today of any size in the United States today.

Secondary competitors include the smaller chains of ten stores or more stores that comprise 40% of the total U.S. pizza market.

Competitive Pressures Most Prevalent in Advertising

Advertising as a Competitive Weapon

Domino's has the second-largest advertising budget in the pizza category behind Pizza Hut. Although Domino's advertising budget is lower than Pizza Hut's in the aggregate, the company can narrow its focus on promoting its delivery business. Almost every Domino's Pizza commercial features a delivery driver, and its slogan, "Get the Door, Its Domino's," has helped create a top-of-mind awareness that has made the Domino's brand synonymous with pizza delivery. Recently, the company has been at the forefront of alternative media strategies that use various Internet promotions as well as product placements in movies such as in Good Company and television shows like the Apprentice.

The pizza QSR category is very advertising driven in general, and any additional media weight can be pivotal given that approximately 85% of transactions include an advertised deal, promotion, or coupon according to Roper (2005). Franchisees from Domino's agree with an advertising shift toward national media once again because of the impressive 4.6% same-store sales growth that it helped generate at franchised stores in 2005. Although franchisees are given the option to spend less on local advertising to offset the national increase, the company expects many franchisees to continue prior local marketing levels. Domino's sees much higher advertising effectiveness from national media buys vs. local media, as the former are 40% more efficient than local media buys, and that national television reaches 20% more of its target customers than local television.

Pizza Hut, Domino's most dominant global competitor, was clearly way behind all three national pizza chains in 2005, with a very weak innovation story on new products to sell, and more re-shuffling of menu items with aggressive pricing and programs to bring in the lucrative in-store buyer. 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 receivables.

A pizza delivery-company in the U.S. 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 plans to continue expanding its base of domestic stores to take advantage of the attractive growth opportunities in U.S. pizza delivery. The scale of operation allows Domino's to expand its franchisee base without adding significantly to infrastructure costs. Additionally, the franchise-oriented business model allows expanding the store base with little if any capital investment, as franchisees pays for their own fixed assets.

International business expansion

Pizza's global appeal has on the one hand been a central focus for Domino's yet on the other has continually frustrated their attempts to move into the global markets more aggressively and with stronger results. Domino's continues to built a broad international platform, almost through its master franchise model, as evidenced by the nearly 2,900 international stores in more than 50 countries. These international stores have produced positive quarterly same store sales growth for 44 consecutive quarters.

Threats

Challenged by rapid cheese cost fluctuations

Back in 2004, cheese prices skyrocketed to an all-time high, with Domino's paying an average of $1.64 per pound for cheese that year. The company's gross margins fell by 70%, in part due to the higher cost for cheese. The forecasting of cheese prices is capricious and difficult, and yet it is the one single commodity that is critical to the success of Domino's long-term. The swings in the popularity of low-carb diets also have impacted the company's ability to sell given the high cheese content of their pizzas and food items.

Increasing retail rental rates

Domino's ability to expand also is dependent on retail locations and their prices as well. In areas where real estate is at a premium, the costs of starting up a new Domino's are astronomical. The investment required for a new retail location in a large metro area is typically at rents 4% to 6% above what a comparable suburban or rural location can be created from.

Focus towards health consciousness

Over the past few years the focus on low carb diets and healthy eating has continually impacted the sales of fast food products, Books and now movies extolling the evils of fast food are also having a direct effect on the sales of food by QSR outlets. Consumers are showing increased preference for fat-free and healthy food products. Food items containing trans-fat are losing market share as they are linked to cardiovascular diseases. This could impact the revenues of the company.

Market saturation

By most analysts' and experts' forecasts, the U.S. fast food market is close to saturation. This translates into the need for highly unique value propositions, new product introductions every year that grab the attention of the consumer who is open to trying new foods for dinner, and a focus on quality to ensure customer satisfaction with the new products. Between 2004 and 2008, the U.S. fast food market is expected to increase in value by only 1.7% to reach approximately U.S.$153.3 billion. Thus, the potential growth for fast-food chains like Domino's does not seem too high.

Marketing Goals and Objectives

The following marketing goals and objectives that Domino's needs to accomplish within 2006 to continue its market leadership:

Aggressively drive up same-store sales by 30% through the aggressive use of national advertising and the bundling of pizza and dessert offerings including drinks.

Minimize customer churn by 15% through loyalty programs.

Grow web-based ordering by 15% through the use of coupons and specials available only on the web.

Marketing Strategies

Primary Target Market the primary target market for Domino's Pizza is the hectic household, with a per capita income of $46,000 a year in major metro areas with populations of 1 million or more. This market is further differentiated in that it contains or more children under 18, and the majority of evenings there is confusion and little thought to what is for dinner. This fits with the statistic of 73% of households do not know what they will have for dinner at 4:30pm every evening.

Marketing Mix

Product Definition: A pizza large enough to feed a family of four with several alterative toppings included and a series of vegetarian, beef, chicken or seafood combinations as well.

The following is a perceptual map that shows the relationship of Domino's relative to other brands in the competitive arena.

Pricing: Competitively priced with high enough margins for the franchisees to make some margin as well.

Promotion: The Family Meal Replacement Strategy starts with the 7-7-7 strategy as defined in earlier parts of this plan, including a focus on the areas of core programming around bundling to reduce customer churn.

Place: Primarily a delivery product, this will be a meal served in thirty minutes or less.

Marketing Implementation

Drive up same-store sales by 30%

Minimize customer churn by 15%

Grow web-based ordering by 15%

Product

Easy-to-deliver highly nutritious meal finger food" for watching a DVD at home (orderable over the Web)

Deep fried cinnamon buns for dessert

Sandwiches for lunch by ordering out X (office catering)

(as a dessert ad-on) orderable over the web

Price

Stay with price positioning that connotes value over cheapness