Barriers to Entry

Barriers to entry are relatively low for the restaurant industry, but rivalry (competitiveness) among firms is exceptionally high. One large contributing factor for the low barriers to entry is many small entrepreneurs can open mom-and-pop establishments and bypass the franchise fees, royalties, selection process, and so on of owning a franchised restaurant and lease an existing building relatively cheap. However, even avoiding high fixed costs, variable costs are often high and small-scale entrepreneurs are not able to compete with larger franchise stores, who can better negotiate pricing on food, packaging, and other supplies. In the QSR industry, the bargaining power of consumers is quite powerful, availability of restaurant options in most places is abundant, and consequently there is intense price competitiveness among rival firms. Even if you are sure you want pizza for lunch or dinner, you likely have many options.

Economic Factors

The current landscape in the QSR business is a bimodal population distribution with a large population of bargain-minded customers seeking deals on cheaper end fast food options, and another population of more affluent consumers targeting middle to higher-end restaurants. Domino’s is well positioned strategically to target the first group of consumers because there are many more of them; Domino’s often has excellent sales and discounts to target this group.

Among the subset of customers who are value shoppers, many of these are also shoppers of quality and are willing to wait in line a little longer or pay a little more for better quality food products. Domino’s has recently capitalized on this well with the introduction of its artisan pizzas and new recipes (or higher quality products) for its crust, sauce, and cheeses. In addition, Domino’s offers many pick up specials. Although an inconvenience over delivery, many customers in today’s climate are willing to tolerate a degree of inconvenience that they historically were not if they can get a better deal.

Similar to Domino’s, many restaurant owners in the fast-food industry have experienced stronger growth in international markets than domestic markets. This trend is expected to continue, especially in China and other developing nations because many U.S. fast-food options are still novel, even in Europe. According to the S&P Industry Surveys, QSRs are expected to see a sales increase of 3 percent in 2012 and orders to increase 1.5 percent as a result in large part of consumers trading down to cheaper restaurant alternatives. There also is a steadily growing international appetite for U.S. fast food and an improving global economy. These positive trends are expected to continue into 2013 and should bode well for Domino’s with its strong international presence.