Australia / Analyst Insights
Consumer trends cause fast food outlets to change tactics
by Andrew Ledovskikh
Jul 19 2016

Changing consumer trends have favoured premium and healthy food produce in recent years, to the detriment of traditional fast food outlets. This trend has played out in the pizza restaurant and takeaway industry, as Pizza Hut has struggled to maintain growth as smaller pizza store operators have increasingly offered premium produce. However, Domino’s Pizza has bucked this trend by making use of its extensive store network to focus on convenience.

McDonald’s, KFC and Hungry Jacks have all underperformed the overall fast food services industry in the past five years. These operators have attempted to adjust their images and reputations by offering more premium and healthy menu items. For example, McDonald’s has added numerous cafe-style items to their menu, reduced the sugar and salt content of its food, and added new premium food options. However, this tactic has had limited success. Conversely, revenue for Domino’s Pizza has grown strongly over the past five years, significantly outperforming both the fast food services industry and the pizza restaurant and takeaway industry.

Domino’s success has emerged from a strategy that has differed to other traditional fast food outlets. Instead of attempting to compete with premium pizza stores or add healthy options to its menu, the company has expanded its store network (which has grown by over 100 stores in the past five years) and focused on technology-related convenience. For example, Domino’s implemented an SMS ordering system and a 20-minute delivery guarantee in 2015, and trialled a 10-minute delivery guarantee in New Farm, Brisbane, in the same year. This convenience-focused strategy has encouraged time-poor customers to make use of Domino’s Pizza as a quick and reliable meal option. As a result, the company’s revenue and profit have performed strongly compared with other major fast food chains over the past five years.

In contrast, Pizza Hut has only managed to grow marginally over the same period. While Pizza Hut has reduced prices, cutting into its profit margins, it has struggled to compete with Domino’s more convenient delivery options. At the same time, smaller pizza store operators have been attracting customers looking for premium pizza options. Adding to the company’s problems, many Australian Pizza Hut franchisee operators have filed a lawsuit against the parent company, claiming that its price cuts are unsustainable and destroying the franchisees’ businesses.

While many larger, traditional fast food operators have struggled over the past five years, smaller operators have been benefiting from premium and healthy eating trends. These operators have also been attempting to improve the convenience of their product offerings, potentially removing another basis of competition for the traditional fast food major players. For example, online ordering platforms Delivery Hero and MenuLog have allowed smaller restaurant and takeaway businesses to access a wider customer base and improve the convenience of their delivery services. However, these ordering platforms usually charge a percentage of the transaction as a fee to the restaurant operators, which can reduce profit margins for companies that use these services.

Changing consumer preferences have been causing fast food and takeaway outlets to alter their business models, and many of the larger, traditional fast food operators have had trouble adjusting. The success of Domino’s Pizza in the face of changing preferences demonstrates a possible direction for other large operators, which have seen limited success in the past five years.

 

Relevant industries:

Fast Food Services

Pizza Restaurants and Takeaway