Domino's must change its ways fast or risk losing pizza war, analysts warn

Domino's Pizza -- the Michigan chain that built a nationwide empire on its 30-minute delivery time -- may be forced to break another record. This time, for a quick recovery.

If it doesn't, analysts and industry experts warn, the Ann Arbor operation may get relegated to third place in the very business it helped invent.


Because growth in the pizza industry has dropped to a lethargic pace after seeing double-digit gains in the 1980s, the battle for customers is expected to ultimately cripple one of the big three -- Domino's, Pizza Hut or Little Caesars.

Like the hamburger-chain business 20 years ago, these contenders may ultimately find there just aren't enough customers to go around.


And Domino's, which has lost delivery customers to archrival Pizza Hut in the last three years and saw sales decline last year for the first time in recent history, can't afford more mistakes.

"When a ship like Domino's goes off course, it's very difficult to get back on course," said George Thompson, a securities analyst with Prudential Securities.

Among the major chains, only Domino's and Pizza Hut are competing head-on for quick-service delivery customers. Little Caesars, which has grown the fastest in recent years, is still comfortable as the dominant chain in the carryout business. But both Pizza Hut, which also does sit-down business, and Domino's have carryout, though they're devoting most of their effort and marketing dollars to their delivery businesses.

Nevertheless, all three are expected to end up fighting each other for consumers who like cheap pizza and quick service.

"The real question is: At what point will we find that we don't need any more pizza?" said Ron Paul, president of Technomic Inc., a food-industry consulting firm in Chicago.

"At some point, we'll begin to see a shakeout and then wind up with only two pizza chains. I think we're only a couple years from that shakeout," Mr. Paul said. "One would have to suspect that Domino's is the most vulnerable.

"It's the most narrowly positioned in terms of menu and their ability to offer any sit-down service."

The pizza industry -- both sit-down and off-premises -- is a $17 billion business, with off-premises dining driving much of its sales. Since 1987, delivery and carryout together have grown from 65 percent of the industry to 67 percent, or $11.4 billion, according to NPD Crest, a market research firm in Park Ridge, Ill.


Before Pizza Hut started offering delivery service in 1986, Domino's was virtually the only nationwide delivery chain. But since 1989, Domino's has seen declines in its share of delivery-customer traffic and dollars to 46 percent and 46.6 percent, respectively, according to Pizza Hut.

In contrast, Pizza Hut says its delivery share has risen to 19.8 percent in traffic and 20.2 percent in dollars.

Last year, Domino's sales dropped to $2.4 billion from $2.65 billion in 1990. Pizza Hut's delivery sales reached $1 billion in 1991. The entire company, including its restaurants, made $4.3 billion last year.

As the latest player, Little Caesars has seen the most dramatic growth in recent years. Last month, it announced that sales are projected to grow 25 percent, to $2.16 billion, in 1992.

While Michael Raymond, vice president of marketing and consumer and product research for Domino's, agrees a showdown is inevitable, he says Domino's will prevail as the leader in the delivery business.

But analysts and outside observers remain skeptical, in large part because of the company's highly publicized management shake-ups in the last two years.


Two years ago founder Thomas S. Monaghan, a devout Catholic, made an unsuccessful attempt to sell the company and soon afterward removed himself from daily operations to concentrate on his religious work. In December, he fired his successor and took back control.

In late February, Mr. Monaghan announced he was selling off such assets as the Detroit Tigers baseball club, a Lake Huron, Mich., resort and a large portion of Domino's. According to the Wall Street Journal, it was one more attempt by Mr. Monaghan to reconcile his vast wealth and his religious beliefs.

Additionally, the company may offer a large percentage of its shares to the public, though Domino's officials aren't saying when that could happen.

Despite the dramatic moves in the last several months, Domino's is expected to have a hard time regaining the momentum it enjoyed before Pizza Hut became a threat.

Ridiculed for years for developing its now-famous 30-minute delivery time at the expense of taste, it's starting to reshuffle its priorities.

"When you wanted a pizza and you wanted it fast, you called Domino's," said Brian Quinton, former editor of Restaurants & Institutions magazine. "Now their ads stress quality rather than speed. I think they felt very vulnerable on the quality issue because of Pizza Hut."


But even though Domino's is trying to rework its core business, it doesn't have some of the advantages Pizza Hut enjoys, including being owned by PepsiCo, said Mr. Thompson of Prudential Securities.

Pizza Hut's restaurant business also lets it spread fixed costs over a wider base and spend more on advertising, Mr. Thompson said. Such economies enable Pizza Hut to compete with Domino's on price. In fact, Domino's sold 10 million more pizzas in 1991 than in 1990, but discounts cut into its total sales.

And although Domino's could continue aggressive discounting because it is not under great pressure to maintain high pretax profit margins, its franchise owners -- who run the vast majority of its stores -- would not put up with it for long, Mr. Thompson said.

Domino's decision to sell only pizza and soft drinks could end up haunting it in the long run, according to Mr. Paul, of Technomic.

In the trend-troubled restaurant industry, more and more chains are expanding their menus as they battle to maintain market share. Even McDonald's Corp. is experimenting with pasta dishes.