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Domino's wins pizza wars amid an ever-crowded field

Domino's wins pizza wars as new entrants increase

The pizza wars are heating up. But one name is coming out on top: Domino's (DPZ). The company has continued to dominate against Papa John's (PZZA) and Yum Brand's (YUM) Pizza Hut, and take market share from independent operators. With 12,000 stores worldwide and half of its sales coming from outside the U.S., Domino's is in a prime spot to capitalize on international growth.

Domino's has continued to take share from Pizza Hut, the largest limited-service pizza chain, as that concept's dine-in business has eroded and, in its shift to focus more on take-out has not matched Dominos' digital capabilities.

"That relaunch of the brand, the relaunch of the food, getting that right clearly started this momentum-- it's driven the growth and frankly it's given us the credibility to do a lot of other things," CEO Patric Doyle told Yahoo Finance at the ICR Conference in Orlando, Fla.

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In its latest quarter reported in October, Domino's posted 10.5% same-store sales growth domestically and 7.7% same-store sales growth internationally, marking its 87th consecutive quarter of international sales growth.

Internationally, Domino's has a strong reach with targeted unit growth of 5%-7%. You can find Domino's stores everywhere from India to Mexico to Turkey -- and pizza with regionally appropriate toppings. Bananas are offered in Brazil, potatoes in South Korea, and stir-fried noodles in Taiwan. From 2010 through 2014, Domino's opened 2,490 international stores, outpacing Pizza Hut, which opened 2,065 stores and Papa John's, with 688 stores.

Because 97% of Domino's locations are franchised, the company has been able to expand more rapidly in international markets, while producing strong free cash flows. Broader factors going for Domino's are the global appeal of pizza and a strong middle class growing in emerging economies, which comes with a rise in disposable incomes.

What sets Domino's apart from other chains -- and especially mom-and-pop shops -- is its lead in technology. While its core product is pizza, in many ways it's a "stealth technology" company, with a popular ordering and tracking app that has allowed the majority of its business to be digital. Digital channels now comprise 55% of U.S. sales, and the adoption of digital ordering is growing at a 5% pace per year. Domino's is at the forefront of the digital revolution in ordering pizza delivery, according to Nomura analyst Jennifer Will. These digital transactions drive significant lift in both traffic and check size.

"For consumer interaction, we're thinking like an e-commerce company. We're looking at what are the Amazons and eBays and Zappo's doing with their business," Doyle said. "It is central to our strategy and thinking about the business."

Domino's is considered one of the most innovative companies in the restaurant industry. Current features include voice ordering on the app, the GPS Driver Tracker, and Piece of the Pie Rewards loyalty program. It also offers pizza profiles that lets customers to save their favorite orders to speed up the process.

Domino's is also rolling out its own fleet of vehicles. The chain hired Roush Enterprises, the company behind Google's (GOOGL) self-driving cars, to retrofit General Motor's (GM) Chevrolet Spark models for the project.

In the U.S., Domino's still has room to grow despite its dominance. Quick-serve is the most fragmented category in the industry, with major chains like Domino's, Pizza Hut, and Papa John's representing only 40% of units versus other categories in the 70%-75% range.

Source: The NPD Group/CREST- year-ending Dec 2014 share of dollars, Domino's company presentation
Source: The NPD Group/CREST- year-ending Dec 2014 share of dollars, Domino's company presentation

Domino's has been taking share from former behemoth Pizza Hut but also notably from the fragmented remainder of the industry made up of independent operators. "Large players are taking share from the smaller players, and I'm hopeful that we're going to see that continue," Doyle said. He referenced digital as they key reason behind that, because it's harder for smaller names to incoroporate technology into their businesses.

Take-home pizza gaining traction

Meanwhile, non-traditional competitors have emerged. Papa Murphy's (FRSH), which went public in 2014, is the largest player in the growing take-and-bake model -- consumers come in and have the pizza made for them, take the pizza out fresh and put it in the oven at home. The company currently has 1,500 stores across 37 states, and sees over 4,500 stores in the U.S. alone, according to CEO Ken Calwell.

The take-and-bake category has grown from nearly zero in the 1990s to more than $3 billion in total sales currently, or just under 10% of the total pizza quick-serve cateogry. This group has garnered customer favor recently, according to Maxim Group analyst Stephen Anderson, because of lower prices, convenience of home preparation, and the acceptance of food stamps and EBT Cards (accepted because the pizza is cooked at home).

Papa Murphy's is launching online ordering on Feb. 15, which should further boost sales. The Vancouver, Wash.-based company likely won't threaten Domino's supremacy, though, because it would pull share from supermarkets and wholesale clubs, not the bigger quick-serve names.

Comp-store sales at the company have increased 19 straight quarters, both in traffic and in guest check amounts.

A new take on dine-in fast-casual

Other names have aimed to target another non-delivery category: the fast-casual pizza market. Blaze Pizza and MOD Pizza, both private companies, are two examples. MOD Pizza, founded in 2008, is a make-your-own fast casual pizza shop with nearly 100 locations, serving premium individual artisan-style pizzas, which are hand-cooked in an 800 degree oven in less than three minutes. Co-founder and CEO Scott Svenson, who sold his Seattle Coffee Company in London to Starbucks, says there is ample room for his company to grow.

While traditional names like Domino's have focused on delivery growth, Svenson says that his company is attempting to modernize the eat-in pizza category, which has had a "shocking lack of innovation." (Chipotle (CMG) has been slowly rolling out a make-your-own pizza concept, called Pizzeria Locale, with just three locations so far.)

At these early stages, it's unclear who could win the fast-casual pizza game, but as more brands build, there could be room for multiple winners -- albeit at the expense of mom-and-pop chains. "This is going to be a big category over time," Svenson says. "We don't need someone else to lose in order to win."