Domino’s to eat into Eagle Boys’ market share

Domino’s Pizza is seen by the market as a big winner out of the bankruptcy of pizza chain Eagle Boys this week.

Morgan Stanley says Domino’s will gain market share following Eagle Boys’ banktruptcy.

Domino’s Pizza (DMP) is seen by the market as a big winner out of the bankruptcy of pizza chain Eagle Boys this week, with more than $300 million added to its market value in the two days since its rival’s collapse became known.

The pizza maker’s shares struck a record high yesterday as analysts were quick to note the potential market share gains available to the already dominant Domino’s after Eagle Boys, the nation’s fourth largest pizza chain by sales, this week entered voluntary administration.

Eagle Boys’ 120 franchisees will continue to operate their stores as normal while a buyer is sought for its head office, but market watchers contend it leaves the group vulnerable to leaking more sales to Domino’s.

“While most Eagle Boys franchisees are likely to continue to trade, the issues already faced by store operators could intensify to the point where the chain loses even more market share, either at a store level or through further store closures,” said Deutsche Bank’s Michael Simotas in a note to clients.

The Albury-based Eagle Boys, which is 85 per cent owned by private equity group NBC Capital after it gained the majority stake in 2007, was once the country’s second biggest pizza chain with 340 stores at its peak.

That number has since dramatically reduced amid fierce competition from cut-price rivals Pizza Hut, Domino’s Pizza and newer entrants such as Pizza Capers and Crust.

Deutsche, which has a “hold” rating on Domino’s stock, said the firm was aided by its size, with scale benefits allowing it to win customers with low prices.

It estimates Domino’s market share is around 50 per cent of the chain pizza market, dwarfing the less than 10 per cent held by Eagle Boys. Morgan Stanley analysts were even more bullish, maintaining an “overweight” view on the pizza chain.

“We believe that this is both a sign of Domino’s dominance and creates a 6 per cent market share opportunity,” Morgan Stanley’s Thomas Kierath said.

“While we already predict solid market share consolidation, we believe the potential closure of Eagle Boys would further accelerate Domino’s market share gains.”

Domino’s has been listed as a potential buyer for Eagle Boys, although Deutsche noted it may be unwilling to take on a company with a large number of disgruntled franchisees.

Mr Simotas said competition issues could also arise, adding the collapse could turn into a negative for Domino’s if Eagle Boys was bought out by a strong competitor.

“There is some risk, depending on the outcome of the sales process, that the Eagle Boys system becomes stronger and no longer starves the brand of marketing investment which could stem its market share loss.”

Domino’s shares rose 2.2 per cent to a record high $73.35 yesterday after a 2.6 per cent jump on Tuesday. The share price has risen 12-fold over the past five years, delivering a market value above $6.4 billion.