Domino’s Pizza and its competitive advantage in the QSR industry.
Introduction: About Domino’s Pizza
Domino’s Pizza is the global industry leader in the QSR Pizza sector. The company was founded in 1960 and renamed Domino’s Pizza in 1965. It opened its first Pizza franchised store in 1967.
The company has grown into one of the most recognized consumer brands globally in these 60 years. It has remained committed to product quality, innovation, customer satisfaction, and customer convenience throughout its history.
At the end of 2020, the company had 17,644 stores operational throughout the globe of which 6,355 were operational in the United States and the rest outside the US. During the pandemic, the company was quick to make changes to its operating model to cater to the changed circumstances and customer needs inside as well as outside the United States.
The result was that while several companies across various industries experienced severe losses during the pandemic, Domino’s experienced significant growth in sales and revenue. Apart from its company-owned stores and franchised stores, the company also generates revenue from its supply chain offerings. Its revenue for 2020 remained $4.1 billion compared to $3.6 billion a year ago.
The company has continued to invest in growing its capacity despite the pandemic in order to support long-term growth. It opened two new supply chain centers as well as a Thin Crust Production line in 2020 to support its franchisees’ business growth. Apart from that, the company also introduced two new products for its US customers.
Domino’s growth is supported by its strong and resilient business model and its focus on product quality and customer experience. The company has also maintained a strong brand image and invested in digital technology for smoother operations.
In this post, we will discuss the factors that drive the competitive advantage of Domino’s Pizza and have helped the brand build a superior business model and strong operational performance globally. However, before discussing the competitive advantage of the company, we will first briefly discuss its target market and business model of Domino’s.
Domino’s Target Market:
Domino’s caters to the needs of a very diverse customer base that includes customers from various economic segments and backgrounds. Apart from that, it also caters to customers across diverse age groups. You can say that the largest target segment of the company is the middle-class customers in the young to middle age segment.
The growth of middle-class consumers as a profitable customer segment in the past several years has caused the fast-food brands to shift the focus of their product and marketing strategies towards this segment. Domino’s targets the customers in the 18-40 age group mainly.
It has priced its products in a manner that they are affordable for a vast customer segment including lower middle class and middle class as well as affluent buyers. Its target customer segment also includes professionals and college-goers.
The company offers a vast and diverse menu so as to cater to the tastes and preferences of diverse customer segments. The vegetarian customers also prefer Domino’s compared to several other fast food brands because of the large number of vegetarian offerings included in its menu.
Domino’s Business Model in Brief: Sources of Income
The business model of the company is also among its leading strengths that has helped it find significant success and opportunities of growth in the US as well as other markets. The company is mainly a franchisor with 98% of its stores owned and operated by franchisees. However, despite being a largely franchise based model, it is not a complex business model. Domino’s Pizza has adopted a simple and straightforward business model.
Its stores serve quality food at competitive prices. The company combines quality food and competitive prices with easy ordering access and efficient service. The company has enhanced its product offerings and customer experience through the use of technological innovations.
Its main source of revenues and earnings are the royalties and fees it charges from its franchisees. It also sells food equipment and supplies to its franchisees mainly in the US and Canada through its supply chain operations. The company is largely operated by franchisees but also owns a small number of restaurants whose revenues and earnings go to the company directly.
The strength of Domino’s Business Model is that it generates significant returns for the franchisee and the franchisor both. Apart from that, low operating expenses have also helped the company generate significant profits. Domino’s generates most of its revenue from its US operations. International operations of the company account for a very small portion of the company’s net annual revenues.
Domino’s Business Segments:
Domino’s Business segment is divided into three main segments: US Stores, International Franchise and Supply chain.
Based on 2020 revenues, this is the second largest operating segment of Domino’s. This segment includes the US based franchised and company owned stores of the company. However, it mainly includes the franchised stores of the company, which are very large in number (94% of the total US store count) as compared to the company owned stores in the United States. In 2020, the number of US based franchised stores of Domino’s was 5,992. Apart from it, the company also operated a network of 363 company owned stores in 2020 in the United States.
It is the second largest segment of the company in the United States. This segment generated 35% of the net revenues of the company in 2020. Domino’s US stores segment accounted for $1.45 billion of the company’s net revenue in the latest fiscal (Domino’s Annual Report, 2020).
The international franchise segment of the company is the smallest segment of the company based on the net revenue it generates. This segment includes all Domino’s franchised stores across 90 countries outside the United States. At the beginning of 2021, the company had 11,289 international franchise stores.
Apart from the royalty payments that the company receives from these international franchised stores, some technology-related fees also account for the revenues Domino’s generates from this segment.
The supply chain segment is the largest business segment of the company based on the portion of net revenue it generates each year. In 2020, this segment accounted for 59% of the total net revenues of the company. In 2020, this segment generates total net revenues worth $2.42 billion (Domino's Annual report, 2020).
Domino’s operates 21 regional dough manufacturing and supply chain centers, two thin-crust manufacturing centers, and one vegetable processing center in the United States. Domino’s also operates five dough manufacturing and supply chain centers in Canada.
The supply chain segment of Domino’s supplies more than 6,800 stores with various foods and supplies regularly. Since it is the largest segment of the company, Domino’s plans to grow its investment in building additional supply chain capacity in the future.
Domino’s Competitive Advantage:
Domino’s is a well-established fast-food brand with a global presence and a large customer base globally. The company has a strong advantage over its competitors in the QSR Pizza segment in the US and internationally. Its competitive advantage arises from several sources and while not all of them offer a sustainable competitive advantage, most of them have helped the company strengthen its advantage in the industry.
Domino’s main strength is its strong brand equity. It has maintained a strong brand image of a customer-friendly and quality-focused fast-food brand. Based on retail sales, it is the largest pizza brand in the world. It is among the most widely recognized consumer brands in the world. It is the recognized world leader in pizza delivery and also a significant business in the carry-out segment.
Consumers worldwide associate Domino’s Pizza with timely delivery, product quality, and technological innovation. Technology has played a key role in helping the company sustain its strong image and grow brand equity. However, despite its strong brand recognition and market share, the company invests heavily in paid advertising. Over the past five years, its US bases stores including (company-owned and franchised stores) spent more than $2.2 billion on advertising.
Strong market share in the United States:-
Market share is not necessarily competitive advantage but signals the strong competitive edge Domino’s has over its competitors in the US. In its 2020 annual report, the company highlighted that it was the largest pizza delivery company in the US with a market share of 36%.
The company’s share in the carry-out segment has also continued to strengthen and according to its annual report for 2020, it was 14% in the US. Internationally too, the company enjoys a strong market share in the QSR pizza segment.
Customer experience has become a key focus area for businesses in the 21st century. However, in the case of the QSR industry, whether for the restaurants offering dine in and carry out or only carry out, it definitely acquires stronger importance. The customers do not visit the Domino’s stores only to satisfy their hunger but they want a superior customer experience.
Domino’s offers a great dine-in experience which is among the best in the entire restaurant industry. Apart from that, the other factors that have also helped the company improve customer satisfaction include product quality and technological innovation. Customers can easily place orders and grab deals using the Domino’s app. The app enjoys a 4.7 rating in the USA.
Domino’s is a truly global brand with sales across 90 countries. While the US and Canada are among its largest markets and the company generates a significant portion of its revenues from the United States market only, still it is a globally recognized brand and competes with the industry leaders like McDonalds and Subway.
Domino’s has continued to improve its brand and the overall customer experience. However, technology has definitely played a key role in helping the company improve customer satisfaction and grow its revenues in the US as well as international markets.
Technology is now playing a key role in the QSR sector where apart from helping companies streamline their operations, technology has helped companies improve their efficiency in several areas including marketing and finance.
However, the thing that customers appreciate the most is how easy it is to order from Domino’s pizza. In 2020, the company achieved more than half of its global retail sales through digital channels.
Domino’s notes in its 2020 annual report,
“In the U.S., we have developed several innovative ordering platforms, including those for Google Home, Facebook Messenger, Apple Watch, Amazon Echo, Twitter, and more. In 2019, we announced a partnership with Nuro to further our exploration and testing of autonomous pizza delivery. In 2020, we added GPS to our Domino’s Tracker, which allows customers to monitor the progress of their food, from the preparation stages to the time it is in the oven to the time it arrives at their doors. In mid-2020, we launched a new way to order contactless carry out nationwide – via Domino’s Carside Delivery™, which customers can choose when placing a prepaid online order.”
Domino's 2020 annual report.
Domino’s is known as a brand with intense focus on product quality. While its focus on product quality attracts new customers in large numbers, it also drives higher customer retention rates.
Its core hand-tossed pizza recipe has contributed to long-term growth in customer reorder rates, consumer traffic and increased sales. In the course of its 60 years of existence, the company has introduced several product innovations.
However, quality is a key factor in the QSR industry that drives higher sales and retention rates. Customers want high-quality and healthy food and focus on product quality has helped Domino’s become the favorite choice of millions of customers inside the US and internationally. Quality is also a major differentiator in the QSR industry that affects sales and market share of the QSR brands.
Domino’s caters to the needs and preferences of various customer segments. It offers a diverse menu that includes several products for both vegetarian and non-vegetarian customers. Apart from offering diverse choices in terms of the Pizza crust, the company also offers sufficient variety in terms of Pizza content to cater to the varying tastes of the diverse customer segments it caters to.
From the cheese lovers to those who want plenty of veggies in their Pizzas, it has quite a broad set of choices for its customers worldwide. Internationally, it also offers several varieties that cater to the local tastes and choices.
Its supply chain is not just a leading source of revenue for the brand but also an important driver of competitive advantage for it. It supports the entire business of the company in the US and Canada including franchised and company operated stores.
Its vertically integrated dough manufacturing and supply chain system enhances the quality and consistency of Domino’s products, enhances the brand’s relationships with franchisees, and leverages economies of scale to offer lower costs to the company-owned stores.
Apart from that, it also offers an additional advantage which is that the managers can focus on store operations rather than spending their time mixing dough and sourcing other ingredients for making Pizzas. Internationally also, several of the master franchisees of the company run supply chain businesses that cater to the Domino’s franchised stores in the international markets.
Its supply chain can be considered as the backbone of the company. While the company sources several products from external suppliers, still its own dough manufacturing and supply chain system reduces its dependence on them.
Resilient business model:
The business model of Domino’s Pizza has continued to evolve with time and has proved to be highly profitable for the brand. Apart from being a strong and proven business model that has proved its resilience even during the pandemic, it is also a cost-efficient business model.
One of the key features of its strong business model is the strong store-level economics that makes it profitable for the brand as well as the franchisees in the US and international markets. The company has continued to find superior growth compared to the competing Pizza businesses in the US and international markets even during the pandemic.
Domino’s can easily adapt its operating model to cater to the changing needs of the situation. The pizza brand developed a cost-efficient store model, characterized by a delivery- and carryout-oriented store design, with moderate capital requirements and a menu of quality, affordable items.
At the store level, the simplicity and efficiency of its operations offer Domino’s a significant advantage over the competitors, who, in many cases, also focus on dine-in or have broader menu offerings. The simplicity of business operations removes bottlenecks and helps the company improve efficiency and productivity organization-wide.
Domino’s offers quality food at competitive prices which is key to growth in the heavily competitive QSR industry. Pizza has kept getting cheaper in the US and other international markets. Price wars started several years ago in the industry and have continued to intensify resulting in Pizza prices getting lower and lower.
The increased number of local and international players has also intensified the price wars among pizza businesses. Domino’s also adopted a competitive pricing strategy to gain market share and increase sales. The company has experienced heavy success in its domestic and international markets. It sells good quality food at affordable prices which works to attract and retain customers.
The human capital of the company is also an important source of competitive advantage for the brand which has continued to invest in its human resources to maximize job satisfaction and attract more talented people. The company employed around 14,400 people in 2020. The company offers its employees the opportunity to work on a large variety of projects and find faster career growth.
CSR and sustainability:
Domino’s also focuses on CSR and sustainability to maintain a strong social image. Its national philanthropic partner is St. Jude Children’s Research Hospital. The company has contributed around $82 million to the hospital since this partnership began in 2004.
Domino’s also supports the Domino’s Pizza Partners Foundation which is a not-for-profit committed to helping Domino’s team members facing a crisis. In 2020, Domino’s also pledged $3 million to help the Black communities in the US including dedicating $1 million to the company’s first Balck franchise Opportunity Fund.
Apart from that, the company also focuses on making its business operations more sustainable and sourcing sustainably. Since 2015, the company has sourced 100% sustainable mass balance palm oil, which is used in some of Domino’s products. Other areas that the company has placed a special focus on in terms of sustainability include minimizing food wastage and recycling.
A few last words:
Domino's has continued to strengthen its position in the QSR Pizza sector. Its market-leading position grew stronger during the pandemic driven by a higher focus on digitization and supply chain excellence. One of the key drivers of its faster growth in the industry is its supply chain. Domino's plans to continue investing in its supply chain to find faster growth and improve its business model.
The resilience of its business model was proved during the pandemic. While Domino's has established itself as the market leader in the QSR pizza sector, it is operating in a highly competitive market environment where growth requires continuous focus on innovation and customer experience. In 2020, it achieve more than half of its orders through digital sales channels.
Consumer behavior globally has changed a lot driven by the changes brought around by the pandemic. Domino's has altered its operating model to cater to the changed demand scenario and that has also helped the company successfully manage the impact of the pandemic. However, there are still several challenges ahead including the heavy competition in the QSR sector.
Domino's has continued to improve its pricing strategy to respond to the increased competition in the industry. Apart from its traditional rivals, Domino's is facing heavier competition from new sources which are using technology to alter the demand in the QSR industry. Apart from improving its focus on product innovation, the company is also investing in technology to serve its customers better. Its strong relationships with franchisees and external supply chain partners have also strengthened its competitive edge. To maintain its advantage and leadership position, Domino's will need to maintain its focus on changing customer needs and preferences. Overall, while Domino's is poised for next stage of growth, its future will be affected heavily by technology. The company can exploit the latest technologies including AI and digital technology to generate superior results.