As news spreads of Domino's becoming one of the hottest stocks on the ASX, it stands to reason that there is money to be made in pizza - here's why.
Domino's board member and major shareholder Jack Cowin has recently been named the third richest 'pizza billionaire' behind only the US's Little Caesar's pizza chain founder Mike Ilitch and the Phillipines' Tony Tan Caktiong of Jollibee and Greenwich Pizza Corporation fame.
After investing $400,000 in four Silvio's stores back in 1986, a business that later became Domino's, Cowin has since seen that wealth grow to approximately $1.4 billion.
Domino's dominance comes as Australia's pizza and takeaway restaurant industry over the past five years has been supported by a rising demand for premium pizzas and growth in discretionary incomes.
Over the five years through 2014-15, industry revenue grew by an annualised 3.0% to around $3.6 billion.
Consumer Preferences
Consumer interest in food and appetites for premium ingredients have grown in prevalence over the past five years. An influx of food-related television programs has stimulated Australia's growing food culture, which has benefited the industry.
Australians have become increasingly enthusiastic about premium food products. As with supermarkets, which were quick to sign celebrity endorsement deals, fast-food restaurants have adopted premium and celebrity food trends into their menus. Pizza restaurants have embraced these trends and provided a raft of gourmet pizzas at premium prices. As a result, profit margins have risen to represent 7.3% of industry revenue in 2014-15.
Technology
Driven by competition from alternative fast-food options and ready-made products in supermarkets, industry operators have sought to improve customer convenience. Many operators have turned to technology to achieve this goal. For example, almost 60% of orders for
Domino's are received online, and 30% are received online for Crust Gourmet Pizza Bar.
The accessibility of mobile apps and consumers' increasing receptiveness to online shopping have resulted in a seamless transition from phone ordering to online ordering. However, the capital investment required for websites and apps means that the industry's largest players are set to benefit the most. The software and systems required and the further developmental costs are significant, and will only pay off for restaurants that sell large volumes. Smaller restaurants have embraced online platforms such as Menulog, which allow them to reach customers online without the need for capital investment.
Consolidation
Over the past five years, a number of mergers within the traditional pizza segment have increased market share concentration. Under the management of private equity firm NBC Capital, Pizza Haven joined the Eagle Boys brand in 2008, giving Eagle Boys (a regional pizza restaurant chain) access to metropolitan markets.
In 2012, Crust Gourmet Pizza Bar, one of
Australia's fastest growing fast-food chains, was acquired by Retail Food Group (RFG), which also purchased Pizza Capers in the same year. These acquisitions were motivated by the potential economies of scale, from a supply chain and marketing perspective. Operating in different markets, the shared resources will enable both businesses to cross-pollinate best practices under an experienced management team.
