Entering the Delivery Segment

Presented by Group 7

Background

1986

Pizza Huts leadership of the overall pizza market is being challenged by Dominos, 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 Huts 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
Eat-In

Carryout

Delivery

Benefit

Atmosphere, Quality

Time

Time factors

Price Sensitivity

Lowest

Modest

Highest

Demographic Profile

Non-families

Families, timestarved

Families,
convenience

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

Pizza Huts operational approach to

delivery
They began opening small delivery-only units in 1985
Due to pressure from Dominos 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 deliveryonly 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 wouldnt 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 gain from home delivery:
Assumption: Pizza Huts delivery share equal to its overall share (15.4%)

% 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

Lost sales due to not offering home delivery:

Assumptions: 10% of current sales lost to competitors
Sales

Lost to Competition

Lost Sales

Margin

Profit (Loss)

$1,934mm

* 10%

= $193.4mm

* 13.1%

= ($25.3mm)

THANK YOU!