Domino’s Pizza is jumping from the pan into the fire with its largest rival, having launched Monday its Handmade Pan Pizza, which one securities analyst said could boost Domino’s earnings significantly if the product succeeds in taking market share from Pizza Hut.
Domino’s began selling the pan pizza yesterday, and a new marketing campaign for it will debut Oct. 1. The company cited research that one in five pizzas sold in the United States is a pan pizza when describing its opportunity, and Stephen Anderson of Miller Tabak + Co. said Domino’s new product would be “an important near-term catalyst” for its sales and earnings.
“With pan pizza accounting for more than $7 billion in annual sales, this is a market segment in which Domino’s needs to participate, in our view,” Anderson wrote. “Pizza Hut is far and away the market share leader in pan pizza, as we estimate it garners at least 30 percent of all pan pizza sales nationwide, while Papa John’s does not offer pan pizza. Given the product credibility Domino’s has garnered in the past three years, most notably with the re-launch of its flagship hand-tossed pizza in December 2009, we anticipate a similar success with its new pan pizza.”
The analyst estimated that if Domino’s gained only a tiny amount of Pizza Hut’s share of the pan pizza market, it would benefit the brand’s top and bottom lines considerably.
“Assuming Domino’s amasses 0.5 percent of total pan pizza sales industrywide, we estimate Domino’s same-restaurant sales lift will average 1 percent from the fourth quarter of 2012 through the third quarter of 2013,” Anderson wrote.
That improvement would equal $7,100 in incremental sales per restaurant in a 12-month period beginning next month, he wrote.
“We project the sharpest year-over-year gains in our model will come in the fourth quarter of 2012 and in the first quarter of 2013, given our estimate of 4-percent comp growth — above management’s long-term guidance of 1 percent to 3 percent — for U.S. units,” Anderson wrote. “This translates into a 2-cent earnings-per-share gain in the fourth quarter and 5 cents in 2013, all else being equal.”
Domino’s announcement comes at a time when the two rivals had been looking for incremental revenue in many of the same places. Over the past several years, the two chains have rolled out pastas, sandwiches and desserts to entice guests to add on to their orders.
Domino’s and Pizza Hut also have been locked in a contest to advertise the greatest value proposition, as Pizza Hut’s $10 any-size pizza deal kept the pressure on Domino’s to sustain its $5.99 price point for medium, two-topping pizzas first used to introduce Domino’s reformulated tossed pizza. Domino’s also has deployed a $7.99 carryout special for large pizzas Monday through Wednesday.
Much of Pizza Hut’s recent success has come from aggressively priced bundled meals like the Big Dinner Box and the $10 Dinner Box, and Domino’s followed suit in June with the rollout of the $19.99 Perfect Combo deal.
Each chain has been able to claim same-store sales success from their initiatives. In its most recent second quarter, Pizza Hut’s same-store sales rose 4 percent in the United States.
Domino’s second-quarter same-store sales rose 1.7 percent, though transactions fell slightly by an unspecified amount. The quarter before, comparable sales increased 2 percent despite slightly negative traffic as well, resulting from an advertising shift toward site items like Parmesan Bread Bites rather than core pizza items.
Advertising for the new Handmade Pan Pizza, while feasibly challenging Pizza Hut’s hold on that market, would allow Domino’s to market a core offering at a higher price point, Anderson noted.
“New-product introductions such as the pan pizza will address investor concerns about declining order counts in the first half of 2012, a period in which 'center of the plate' product development at Domino’s was dormant relative to prior quarters,” he wrote. Moreover, we argue the new pan pizza provides an opportunity for franchisees to lift average ticket, given that the $7.99 price for a medium pan pizza is above the $5.99 price for a regular medium pizza.”
Anderson added that an improved pan pizza could take market share not only from Pizza Hut, but also from independents and smaller regional chains, even when Pizza Hut and Papa John’s are back on offense regarding their marketing. Both chains are rerunning a promotion from a year earlier to offer large pizzas for $10.
Ann Arbor, Mich.-based Domino’s operates or franchises nearly 10,000 restaurants in the United States and in 70 international markets.