Fallen flat: IBISWorld explores Pizza Hut’s acquisition of Eagle Boys

Posted by AFN Staff Writers on 23rd November 2016
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Analysis piece by IBISWorld 

Pizza Hut’s acquisition of the Eagle Boys franchise in November 2016 and the possible expansion of its dine-in service offerings are expected to be costly for a franchise that has lagged behind Domino’s, its main competitor, over the past five years.

“While both initiatives may benefit the franchise at great cost, they are unlikely to fix the underlying problems that have caused it to underperform compared with the wider industry,” said IBISWorld Senior Industry Analyst, Andrew Ledovskikh.

The Pizza Restaurants and Takeaway industry is expected to grow 2.8 per cent over the five years through 2016-17. Domino’s has gone from strength to strength over the same period, with sales growing at an annualised 11.3 per cent. Meanwhile, Pizza Hut has lagged behind the industry in nominal terms, with growth of 2.8 per cent.

New technology

Much of Domino’s success can be attributed to ongoing innovation and enhanced ordering methods. Over the past five years, the company has established a Facebook pizza-ordering platform, an iPad app and an ordering platform compatible with the Apple Smart Watch. This constant investment in new technology, coupled with ambitious timed delivery guarantees, has given the company the upper hand.

“Domino’s has established a significant competitive advantage with online sales over the past five years,” said Ledovskikh. “The company’s uptake of new and innovative ordering platforms has meant that almost 60 per cent of its orders are generated online, with about half of these made through mobile devices,” he said.

Meanwhile, Pizza Hut has lagged behind and lost market share to its rival. Domino’s has captured market share through price and convenience, smaller takeaway stores and chains have captured consumers looking for healthier and higher quality offerings.

4 main elements

“Four main competitive elements exist in the fast food sector: price, convenience, quality and healthiness. Currently, Pizza Hut is struggling to stake out a distinct advantage in any of these areas. Its aggressive discounting in 2014-15 failed to boost its market share and also made many of its franchisees unprofitable,” added Ledovskikh.

The recent acquisition of Eagle Boys is expected to increase economies of scale, boosting the value of advertising expenditure and improving the company’s ability to compete on price. However, their aggressive discounting strategy has failed in the past and is unlikely to strongly affect price competition in the industry.

Expansion of dine-in and ‘health’ options

Currently, Pizza Hut only offers dine-in services in 15 stores across Australia, mostly in rural areas. Following the acquisition of Eagle Boys, the company has suggested it might expand this offering. This initiative could open a new avenue for the franchise to compete against Domino’s. The potential rollout has been met with some excitement, particularly as some older consumers fondly remember the dine-in Pizza Hut that offered all-you-can-eat buffets in inner-city locations. This move could boost short-term sales through this excitement, but it also runs counter to trends among consumers and may struggle to be a profitable venture for the franchise over the long term.

Over the last five years, consumers have become increasingly health-conscious and have looked for premium products. Operators including Grill’d and Sumo Salad have found large markets, while traditional operators including McDonald’s and Burger King have underperformed the market despite adapting their menu to appear more health-conscious.

“All-you-can eat operators have found that these trends challenge their business model, indicating challenges if Pizza Hut takes a similar approach,” said Ledovkikh.

A larger store footprint and consumer interest in the rollout of dine-in services will give Pizza Hut access to a wider market and generate some excitement around the brand. This will be beneficial in the short-term and Pizza Hut would have to capitalise on this excitement to market further initiatives if it wants to regain ground in the industry.

“The Pizza Restaurants and Takeaway industry is facing a difficult market and Pizza Hut will need to be innovative to make this acquisition a success,” concluded Ledovskikh.