Pizza Hut

How real is the threat by Domino's to Pizza Hut? How well has Pizza Hut done so far in responding to the Domino's threat?

Domino's has been expanding its delivery business aggressively. The number of its delivery units and sales has been increasing at a steady rate since 1984. The impact of competition can be observed through the decrease in Pizza Hut's PSA sales growth and net sales growth. Domino's has also strategically challenged Pizza Hut's initiation in delivery service by focusing its expansion in metropolitan areas with heavy advertising and promotion. To Pizza Hut, the threat by Domino's is very real.

Pizza Hut started to respond to the Domino's threat by quickly launching delivery-only units, mainly in the metropolitan areas. The company-ran delivery-only service has not been profitable, possibly due to the high cost in deploying the Customer Service Center (CSC) and acquiring vehicles for delivery. On the other hand, the delivery service launched by Pizza Hut's franchisees has been mostly successful and profitable. The markets selected by franchisees for delivery service had solid performance in traditional restaurant format. The cost of CSC and vehicles has also been saved through alternative solutions.

Should Pizza Hut enter the home delivery market?

Pizza Hut has to enter the home delivery market.

Even though pizza is a popular restaurant food, the demand for home delivery and carryout is rising among busy professional families. Prior to the Domino's threat, Pizza Hut did not have a strategy to serve the customer segment that has delivery needs. As a result, those customers might have compromised by doing carryout. The launch of Domino's made delivery service widely available. Customers who have needs for delivery would now switch to the only channel member (Domino's) that provided delivery service. To secure the existing customer base, Pizza Hut has to enter the home delivery market as an act of defense.

How good is Pizza Hut's delivery concept?

Pizza Hut's delivery concept has many flaws.

On the supply side, delivery service provides lower profit margin than traditional restaurant. To guarantee a decent return, Pizza Hut should target the solutions that provide lower cost. CSC seems to be an advanced solution for delivery order taking. However, the system is expensive for deployment. Franchisees have also proven that a local phone number can serve customers as effective as a CSC system in a mature market.

Pizza Hut is forcing all franchisees to roll out delivery-only units by amending the franchise agreement. The company neglected the characteristics of a successful delivery segment: located in metro area with a great track record in traditional restaurant business.

Pizza Hut's company-owned delivery unit has also failed to fully utilize its management talents. As indicated in the case, many delivery service managers found their task not challenging enough. In my opinion, company managers should be relocated to retrofit restaurants where high managing skills are required.

What is the nature of the channel conflict that Pizza Hut faces from its entry into the home delivery market?

The home delivery strategy