88-An Answer for Pizza Problems?

There is a natural tendency for a successful company to exploit its outstanding reputation by adding an ancillary product to its core product line. It seems that this succeeds only half the time in this industry. The experiences of these competitors in adding a new product have much to tell us about how to make an ancillary product succeed.

Posted 3/16/09

The pizza industry is struggling. It has been struggling for some time, well before the recession put its icy grip on the industry’s throat. The costs of pizza ingredients have caused the prices in the industry to rise. The industry has always had to struggle with its less-than-healthy reputation. So, for some time, the industry has been losing share to healthier and fresher competition on the one hand, and less pricey hamburger and sandwich competitors on the other.

One company, Domino’s, is responding to these challenges by broadening its menu. It is beginning to sell toasted sub sandwiches in competition with Subway and Quiznos. This is not a promising development for Domino’s.

Subway and Quiznos are already fighting a price war. You have probably seen the ads for “A Footlong For $5” at Subway. The sandwich business, while apparently similar to pizza as a fast-food business, is still a different business than is the pizza business. Other very good fast-food firms have entered different fast-food businesses without success. One notable example is McDonalds. Several years ago, it tried to sell pizza in its stores and failed miserably.

You may see other companies expanding into new businesses that are apparently related to their own business. When you see that, beware. (See the Perspective, “Finding the Open Door” on StrategyStreet.com.) Some years ago, a manufacturer watched as its competitors began buying into the distribution channel for its product. In a panic, the company decided that it had to do the same thing or lose its customer base. So it, and most of its competitors, entered the distribution business. The manufacturer had assumed that it would have an advantage in the distribution business because it made the product that would be sold there. Naturally, the distributors who were not purchased by the manufacturers became very upset. In addition, the manufacturers knew little about how to make a success of the distribution business. The result was a very expensive failure for all of the manufacturers who entered the distribution business. The distribution business had different customers with completely different needs than the customers of the manufacturing business. The manufacturers had no real advantages in this business.

Before a company expands into a related business, it needs to be clear on exactly where it has advantages over people already in the business. Otherwise, disaster awaits.

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Update 2022:

Domino’s stores in 2009 offered 8 Oven Baked sandwich options, including Italian sausage Philly cheese steak, Buffalo chicken and Mediterranean veggie.  In part, this initiative helped get all the Domino’s stores open for lunch.  The company also hoped that sandwiches would attract new customers and generate additional foot traffic in the stores.   In 2022, Domino’s continues to offer 8 sandwiches.  However, no one considers Domino’s a serious contender in the larger sandwich market.  The sandwiches certainly helped the company even if they did not pose a serious threat to Subway.

Domino’s is a very successful company operating 6500 stores in the US and a total of nearly 19,000 stores worldwide.  The company is the leading pizza restaurant chain in the US, followed by Pizza Hut and Little Caesars. In 2020, Domino’s menu in the US featured a variety of Italian American main and side dishes.  Pizza was the primary focus, with traditional, specialty and custom pizzas available in a variety of crusts, styles and toppings.

Earlier, in 2010, Dominoes made significant changes to its pizza recipe to improve it and respond to a poor public perception of Domino’s product taste.  The chain also rooted out poor performing franchisees. Domino’s aggressively embraced digital technology to make ordering more efficient and customer friendly.  After implementation of these changes, an investment analyst concluded that Domino’s offered “an every day value and a good quality product and a good experience in ordering and reordering.”

Domino’s added the non-pizza products in order to keep its larger pizza consumers. See HERE for more perspective on this issue. Obviously, Domino’s succeeded with these product innovations

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Update 4/26

Domino’s added sandwich products to provide better margins in the rather slow lunch daypart. The addition seemed to be successful as those products are still around, helping the margins at Domino’s. We decided to take a broader look at the addition of related products in the Quick Service Restaurant (QSR) industry. There have been several of those, some successful, others not. For context we should note that each of the companies we discuss is a leader in some part of the QSR industry. They know the industry well, are well-versed in how to succeed in it and have proven themselves good competitors. Further, these competitors usually get the majority of their revenues from drive-thru and delivery orders. Each new product must support those sources of revenues.

Our survey includes nine examples of QSR companies adding ancillary products. We have four examples of failed initiatives: Wendy’s tried twice to add breakfast before it succeeded, Dunkin’ Donuts added burgers and chicken sandwiches as a lunch daypart, Subway added pizza and Burger King added hot dogs and tacos. We have five examples of success: McDonald’s with McCafé, Taco Bell with a new breakfast daypart, Wendy’s with a new breakfast daypart, Starbucks with the addition of warm food, and Chick-fil-A with a new breakfast daypart. Then we have two examples where the ancillary products were broader market failures but tactical margin successes: Pizza Hut with pasta and sandwiches, and Domino’s with sandwiches. We will briefly review what each QSR company did, discuss reasons for the success or failure of each, and propose rules for success for any competitor.

We begin with the failed initiatives.

Wendy’s twice introduced an extensive breakfast menu to establish a breakfast daypart and compete with McDonald’s. The menu was too complex. The complexities of the menu led to inconsistent execution and undertrained breakfast staff. Further, the equipment was not optimized for breakfast. Neither initiative had support from franchisees and both were failures leading to the withdrawal from the daypart.

Dunkin repeatedly tried to add lunch and dinner dayparts, offering chicken sandwiches and grilled items that were not breakfast-centric. Even with their traditional customers, the products were slower in delivery, less fresh, less flavorful, and inconsistent across franchisee stores. Dunkin has a system built for speed and simplicity. The new products required longer cook times, and additional labor and equipment. Franchisees considered the products of low quality.  Dunkin withdrew back to its breakfast specialty.

Subway decided to make its sandwich business more lucrative by adding pizza. By all accounts, the product was mediocre, with substandard ingredients. The company’s sandwich ovens did not work well with pizzas. Orders slowed in the core product. The company discontinued pizzas.

Burger King introduced hot dogs and tacos. These new products were of lower quality and consistency than BK’s core business and clearly had lower quality than competitors Sonic and Taco Bell. The products were an operational mismatch for BK because hot dogs and tacos required different prep than hamburgers. BK put little marketing support behind these products. The initiative failed and BK removed the products.

These four examples of failed initiatives were the result of a combination of Function and Reliability failures. Many of the products did not fit with the Function expectations of the current customers. None of these products became signature items for the parent company. There was little differentiation from competitive products. They also had to compete on quality with strong parent core products and even stronger dedicated specialist competitors. They each created operational constraints and cost trade-offs that degraded the company’s core product performance and damaged company margins. Hence, they all failed. The overall impression we get is that the company’s lack a real commitment to these product additions.

Some initiatves brought new profits.

McDonald’s introduced McCafé to siphon off some of Starbucks’ customers. The company already had a very successful breakfast daypart and was able to operate comfortably under the Price umbrella set by Starbucks. The new espresso drinks required minimal investments in machinery and additional labor. The innovation operated within the store footprint and operations. This was especially helpful due to the drive-thru dominance of their operations. The product offered higher quality than that offered by McDonald’s typical competitors, with faster service and better overall Value. The initiative was a massive success.

Taco Bell created a new breakfast daypart by introducing AM Crunchwraps, breakfast burritos and hash brown items. Customers found these products flavorful, unique and well worth the money. The products used the same ingredients and labor the company used in its core products. An ideal addition. The company simply used its existing infrastructure to add high quality products at low cost. This initiative was a great success.

Wendy’s learned from its two earlier attempts to add a breakfast daypart. With its third attempt, it presented a much-simplified menu built around two new signature products, the Baconator and the Honey Butter Chicken Biscuit.  Rather than copy McDonald’s, Wendy’s introduced its own flavorful products, using quality ingredients also used in its core products. Its customers were delighted. Wendy’s had found a new profitable daypart.

Starbucks added warm food to both its morning and lunch dayparts. The food used high quality ingredients that impressed the company’s current customers as clearly premium and worth the cost. The company prepared the food in warming ovens which did not disrupt the other operations of the stores. The products improved the company’s relationship with its customers, especially aiding the stores’ lunchtime traffic. Their premium pricing increased both ticket sizes and store margins.

Chick-fil-A exploited its quality chicken reputation by introducing chicken biscuits as a morning daypart.  The product was high-quality, fresh and consistent across stores. It fit perfectly with the tastes and expectations of its current customers. The new product was better than the chicken offerings of other QSRs and local chicken competitors. It was a simple menu that complemented the company’s strong operational discipline. The daypart was a success.

There are also two examples of menu expansions which were strategic failures because they had virtually no impact on market shares for that product. However, they were tactical successes because they did add something to store margins.

Pizza Hut introduced pasta and sandwiches. Unlike the other QSR restaurants, Pizza Hut is primarily a dine-in operation. People come there for pizza. Pizza Hut wanted to add products to avoid the veto factor when a group is considering a visit to the store or an online order. The new sandwiches and pastas were unremarkable. They did not reach the quality of the company’s core product nor come close to the products of specialty competitors. The products added to operational complexity, requiring new pans, sauces, prep steps and ingredients. Predictably, they slowed delivery and dine-in throughput. They did not move the strategic market share needle in either the pasta or the sandwich business. Still, the products continue to exist in some form, so they have added enough to revenues and margins to stay on the menu.

Domino’s sandwiches have come to fill a tactical role similar to that of pasta and sandwiches at Pizza Hut. They do not appear on any market share table for the sandwich business. They are not strategically important. These products compete with heartily popular products from strong competitors such as Subway, Jersey Mike’s and Jimmy John’s. However, while they are oven baked, pizza oven products rather than deli style or sub shop style sandwiches, they used existing labor, ovens and delivery infrastructure. They increased average ticket size, especially at lunch where pizza is weak. These sandwiches continue to exist so they are adding to revenues and margins at Domino’s stores. They are a tactical success.

What can we infer as rules for success in  the QSR  industry when a company wants to add a new product to an existing successful line? Here are a few suggestions:

–First, fill a clear Function need for current customers. These are the customers that make the company go. If the product succeeds with them, it is likely to appeal to other customers as well. All the winners succeeded here.

– Second, create a product that has quality, at least as good as the core product and, preferably, equivalent to products of competing specialists.  Each of the clearly successful initiatives produced a product as good as the company’s core product. Usually, this new product became a distinctive signature product for the company.

–Third, do no harm. The new product should not degrade the quality, speed of delivery, or reputation of the core product. These are Reliability failures that particularly upset customers. Only Pizza Hut seems to have skirted this rule.

-Fourth, keep new costs low. These products are potentially valuable, but minor, additions to the company’s core product offerings.  They should require limited additional capital and labor to create attractive margins in price competition with other products, especially with the products of market specialists.

The track record suggests that failure is as likely as not when a QSR introduces an ancillary product. The failure rate would certainly fall if the QSR made a real commitment to the new product by ensuring that the product has the Function, Reliability and Cost/Price characteristics to succeed.

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