Entering the Delivery SegmentPresented by Group 7

Background• 1986 –

– Pizza Hut’s leadership of the overall pizza market is being challenged by Domino’s, a delivery-only chain.

– The delivery segment accounts for only 20% of the $12.7 billion pizza market, but it is growing rapidly, while the eat-in segment has recently seen very slow growth.

– A change in consumer preferences has led to the increased purchases in the delivery segment.

• Issues:– Initially resisted entry into delivery segments for fear of cannibalizing its existing eat-in restaurants– Its attempt to attain system-wide acceptance has not been well received by its franchises. Pizza Hut

franchisees are predominantly large powerful organizations, two-thirds of which own more than 10 restaurants each. The franchises are divided on their assessments of the value of the delivery business, and most do not agree with Pizza Hut’s specific plans for reaching this segment. After finding little initial success convincing the franchises to participate, Pizza Hut must find a way to “sell” its concept to the franchises.

Attractiveness of Delivery Segment• There was a shift in the consumer purchase behavior. Consumers preferred a more

relaxed and convenient lifestyle and two career families found cooking at home or eating at restaurants too time consuming.

• The delivery operations will bring in new customers into the pizza market and the growth is due to these new customers

• Competition from Domino's is an important factor. Pizza Hut – family dining ambience and Carry out and Dominos – Convenience

• Dominos was also providing delivery at no additional charge and also the delivery prices were lower than that of Pizza Hut’s eat-in restaurants.

  Eat-In Carryout Delivery

Benefit Atmosphere, Quality Time Time factors

Price Sensitivity Lowest Modest Highest

Demographic Profile Non-families Families, time-starved

Families, convenience

Pizza Hut’s operational approach to delivery

• They began opening small delivery-only units in 1985• Due to pressure from Domino’s rapid expansion, by august

1985, they opened 51 fully owned delivery units. • To handle large markets and to make processes easier a

computerized ordering system , Customer Service Center, was opened.

• Issues – Expensive, initial installation problems caused losses, higher waiting time.

DECISIONS

Delivery only units V. Retrofitting• Retrofitting existing restaurants:

– Requires less investment capital than installing delivery-only units. – Alleviates some of the concerns mentioned by Pizza Hut

management related to oversaturation of total pizza units. – Stronger appeal for the franchises, some of which have already

experienced success with this strategy.

• Delivery Only Units:– Requires establishing a parallel business system for marketing and

operations. – Restaurant managers felt they wouldn’t enjoy running a delivery unit

in isolation

Customer Service Centre• The one number call center would increase operating

efficiencies of the delivery units. – Identify the correct distribution outlet as opposed to customers

trying to identify for themselves the appropriate outlet. – Allow for marketing efficiencies. National advertising could

focus on one number and feature consistent specials. – Given the costs associated to the franchises with marketing and

advertising, these efficiencies should help to offset the high costs of the system itself.

– Ability to use the information collected from the system to make targeted marketing appeals to existing customers.

Upsizing• Delivery only units had an excess cost of 12%. Up-pricing was was expected to offset these

costs.

• Operational changes and costs associated with these changes:– Larger pizzas require larger pans, more dough, more ingredients, and possibly a change in boxes. – Would carryout receive the upsizing strategy as well? If so, would customers in the store become aware of the size

and price differences? – With only delivery-only units it would be easier to manage the differences in the operations, but with retrofitted

stores as part of the delivery system, these changes could lead to confusion and frustration among customers.

Recommendation• Operational Approach:

– Roll out retrofitting of existing stores for delivery initially– Control costs to the franchises and arouse interest

• CSC system:– Continue with it since it can provide long-term benefits – Retrofitted existing stores would allow franchises to accept the costs of these system

more readily• Upsizing:

– Not recommended although it may help spread the operational costs over a larger dollar amount

– Benefits would be minimized in the short-term due to changes in the organizational operations.

– Suggested to continue operations in existing stores with the current product mix.– Sell add-ons such as appetizers and dessert options to increase the average delivery

purchase amount.

Profit Impact on Pizza Hut of Delivery

% Potential Share Ind. Delivery Sales New Sales

15.4% * 2.6 bil. = $400.4mm

New Sales Margin Profit (Loss)

$400.4mm * 8.8% = $35.2mm

Sales Lost to Competition Lost Sales Margin Profit (Loss)

$1,934mm * 10% = $193.4mm * 13.1% = ($25.3mm)

• Potential gain from home delivery:– Assumption: Pizza Hut’s delivery share equal to its overall share (15.4%)

• Lost sales due to not offering home delivery:– Assumptions: 10% of current sales lost to competitors

THANK YOU!