Cheap week
Domino’s Pizza (DMP) has just announced that it is extending its cheap deals from two days a week (Mondays and Tuesdays), to everyday of the week.
Whilst initially we thought that the move may be a response to the softer consumer sentiment in recent months or maturing domestic growth, we began to consider the long-term implications of this strategy.
Domino’s has based its brand on providing quality pizzas at affordable prices. This seems to be the rationale for the decision according to the announcement by management:
“Pizza is a social food that brings people together so it’s important that great value is offered to our customers during peak pizza eating times such as Friday and Saturday nights – it seems only fair to us and we think our customers will agree!”
We do believe that customers will agree. But why would the company discount its core products on Friday and Saturday nights, when demand is the greatest, and hence consumers are less sensitive to price?
Australia is one of the most competitive pizza markets in the world. As such, it’s unlikely that the pizza industry is conducive to a natural monopoly in the way that Seek and Carsales have grown to control the online job and automotive classifieds markets. In their early years, Seek and Carsales offered customers low rates to build the network. Once the network reached a capacity where it became too costly for users to switch, the companies were then able to exercise pricing power.
Whilst it’s unlikely that Domino’s will ever have such pricing power, we do think that the new pricing strategy may offer the longer-term potential to both capture new customers and encourage up-selling of higher margin products like gourmet pizzas, soft drinks and desserts.
This argument should be considered in conjunction with Domino’s digital strategy, in which the company plans to become purely online in Australia within the next five years. If executed properly, a purely digital model combined with a compelling value proposition will help retain their customer base. This will hopefully translate to more people buying more pizzas, more often.
The ability for a retailer to lead sales with a cheap core product and up-sell higher margin products into an ever increasing network of customers is not a new strategy. Domino’s will introduce the new prices on June 27, which means it may be over six months until we see the impact on sales and margins.
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Andrew Legget
:
I think you are right that Pizza distribution will never be a monopoly, i don’t think it is inconceivable to see competition reducing though as the battle takes some casualties (if not an entire brand or chain, then at least by ensuring that at least one of the other chains close their stores in the competiting areas). if Dominos suffers the least (or at all) then it will have the best store footprint to allow its online strategy to become the gold standard in the pizza market as it will allow them to serve the greatest area and have fewer black spots.
This would create that network effect of a real estate.com or seek.
If it can get rid of one or two competitors than there is no stopping it from raising prices in the future.
I have a choice between Dominos (x2), Eagle Boys, Pizza Hut, Crust and assorted pizza restaurant businesses which may or may not deliver.
Dominos is easily the most aggressive with, it seems a consistent , stream of discount vouchers coming through the letter box. It also seems to be the busiest and have the best locations for its stores. I would say it would be the dominate chain, if they can for example cause Eagle Boys (in its much worse location and apparent activity) to rethink whether it is worth continuing its operations and shut up shop, then the spillover would likely fall to either one of the two DMP stores either side of the area.
Whilst they may not have the best pizzas in the area, the ones that do are restaurants that do not allow pick up or delivery, they are the most convenient. Add to this a value proposition through a lower price and you have a very good chance i feel of achieving some decent growth and market share gains.