Pizza Hut’s Eagle Boys deal ‘falls flat’

THE acquisition of the failed Eagle Boys chain by Pizza Hut will be a “costly move” unlikely to fix its deep-crust problems.

Pizza Hut chief executive Lisa Ransom and Collaroy store franchisee Michael Cooper at the first Eagle Boys store to be converted. Picture: Adam Yip

THE acquisition of the failed Eagle Boys chain by Pizza Hut won’t fix the underlying problems that have seen the business lose market share to Domino’s, one expert has warned.

IBISWorld senior industry analyst Andrew Ledovskikh said Pizza Hut, which confirmed the acquisition of Eagle Boys stores last week, was playing “catch-up” by refocusing on dine-in service while Domino’s “leaps ahead with technological advancements”.

Mr Ledovskikh argued the acquisition of the Eagle Boys franchise would be a costly move for a business that has lagged behind its main competitor for 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,” he said.

The deal will add more than 50 stores to Pizza Hut’s existing 270. Domino’s, with 714 stores, has about 25 per cent market share of the $3.7 billion industry, with Pizza Hut lagging behind at 10.7 per cent, according to IBISWorld.

Over the past five years, Domino’s has grown sales at an annualised 11.3 per cent, while Pizza Hut has lagged behind the industry with growth of 2.8 per cent.

IBISWorld said much of Domino’s success can be attributed to ongoing innovation and enhanced ordering methods such as mobile, Facebook, iPad, Apple Smart Watch, coupled with “ambitious” timed delivery guarantees.

“Domino’s has established a significant competitive advantage with online sales over the past five years,” Mr Ledovskikh said. “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.”

Domino’s has captured market share through “price and convenience” at the expense of Pizza Hut, and smaller takeaway stores have attracted consumers looking for healthier, higher-quality offerings.

“Four main competitive elements exist in the fast food sector: price, convenience, quality and healthiness,” he said. “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.”

While the Eagle Boys acquisition is expected to increase economies of scale, improving its ability to compete on price, Mr Ledovskikh said Pizza Hut’s aggressive discounting strategy had failed in the past and was unlikely to strongly affect price competition in the industry.

Last week, Pizza Hut’s new chief executive Lisa Ransom suggested by expanding its dine-in restaurants. Pizza Hut currently offers dine-in services at 15 stores, mostly in rural areas.

IBISWorld said the initiative could open a new avenue to compete against Domino’s and boost short-term sales through excitement, “particularly as some older consumers fondly remember the dine-in Pizza Hut that offered all-you-can-eat buffets in inner-city locations”, it “also runs counter to trends among consumers and may struggle to be a profitable venture for the franchise over the long term”.

Premium fast-food outlets like Grill’d and Sumo Salad have found large markets among health-conscious consumers over the past five years, while the likes of McDonald’s and Burger King have underperformed the market.

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

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