A slice of good fortune amid the economic gloom

Credit-crunched consumers are shunning restaurants in favour of cheaper fare offered by the likes of Domino's. James Thompson reports

Domino's Pizza delivered another tasty set of trading figures yesterday, reinforcing the unmistakeable evidence that UK and Irish consumers are trading down to cheaper, but quality, brands they trust, as the recession bites.

But beneath the surface, Domino's is also benefiting from a growing social phenomenon of people staying in at the weekend to watch popular reality TV series, particularly Strictly Come Dancing, The X-Factor and Britain's Got Talent. It seems that if twinkle-toes John Sergeant or the acerbic Simon Cowell are on the box, staying in is the new going out and pizza is on the menu.

Yesterday, Chris Moore, the chief executive of Domino's, revealed that sales on Saturday night are now 5 per cent higher than Friday evening, whereas previously it was the other way round. He said: "In the past, Friday used to be the biggest night of the week, but with these big shows, such as Strictly Come Dancing and The X-Factor, it is now Saturday – people are in the living room watching TV and it definitely helps."

However, there is a great deal more to Domino's, which has been growing for a number of years, than The X-Factor judge Cheryl Cole and Strictly's Bruce Forsyth.

Domino's Pizza UK and the Republic of Ireland, the international franchisee of its parent in the US, opened its first store in Luton in 1985, followed by the first outlet opened in Ireland six years later.

Since then, Domino's has grown, and now runs 553 stores in the UK and Ireland. It opened 52 stores this year, creating about 1,500 jobs. In 1999, Domino's partially floated its shares on London's Alternative Investment Market and last year it was added to the FTSE 250 Index.

For the 13 weeks ended 28 December, Domino's grew its like-for-like sales by 8.6 per cent. While this growth has slowed compared to the 14.8 per cent for the same period last year, most consumer-facing companies would give their right arm for such numbers during the credit crunch.

So why is Domino's managing to thrive during a sharp consumer downturn? The core ingredients in its successful recipe are a strong focus on customer service, its franchisee model, hefty marketing, frequently improving the massive menu, a keen pricing strategy and a booming home-delivery service.

John Beaumont, the leisure analyst at Singer, says: "It [their success] is not just over the past 12 months. It has been the strategy that they have adopted over the past five to six years. You have to say they are very good at what they do in terms of the take-home or delivery market for pizza and frankly the competition is very weak it that space." Among its competitors for home delivery are the likes of Pizza Hut and Perfect Pizza.

Given that more customers are eating at home during the credit crunch, Domino's' early move to offer online ordering was significant. In 1999, it claimed to be the world's first pizza delivery company to offer nationwide internet and interactive TV ordering. For the 52 weeks to 28 December, Domino's grew its e-commerce sales by 73.7 per cent to £55.9m.

Its internet promise is to deliver within 30 minutes of customers ordering them online, but the average delivery time is 23 minutes from a click of a mouse to the front door. The beauty of the internet is that the sales value of online orders is 25 per cent higher than for customers who pop into its shops or order online.

"When customers are online, they upsell because they have all the time to look through the menu," said Mr Moore. In fact, the company claims that its menu offers a combination of a remarkable 88 million different options of pizza, including different toppings, base and sauce.

Initially, the company forecast that online orders, which accounted for 26 per cent of total sales in December, would account for 35 per cent of sales by 2015, but Mr Moore now thinks it will hit this target much earlier.

Domino's' marketing campaigns, of which it typically runs six a year, also have a reputation for delivering the goods. At the end of last year, the company launched a slick campaign for its Premier Pizza of four meats, which featured a pizza emerging from a limousine and the paparazzi snapping away at the star attraction.

Perhaps more significantly, in 2008 Domino's signed up for a three-year contract to sponsor Britain's Got Talent, which it says has helped deliver "significant growth" for the business.

The combination of the country's love of reality TV shows and the credit crunch is a killer recipe for Domino's. But this is only part of the growing trend towards entertaining at home, as more people spend time with their flatscreen TVs and Nintendo Wiis. Mr Beaumont said: "Home comforts and home convenience has improved a lot so people are happier to sit at home, eat pizza and drink their cheap lagers from Sainsbury's, Tesco or whoever. It has been an amalgam of factors that have played to Domino's' strengths."

Its growing number of middle-class customers has been another key element of its growth over the past 12 months, as they feel the pinch and trade down away from eating at restaurants two or three times a week.

"There has been this whole trading down phenomenon in the past 12 months," says Mr Moore. Domino's has seen a clear change in the type of customer coming on to its database. In simple terms, its new middle class customers started spending more than its typical brethren from the start, whereas typically this does not happen for a while until they get used to the menu.

"In the first six months of this year, there was a 19 per cent increase in new customers and a lot of these came from households that had less of a mortgage overhang and less debt problems," said Mr Moore.

But he concedes that Domino's will find it difficult to match the strength of its sales over the past year. Its like-for-like sales could almost halve to between 4 and 5 per cent later in 2009. Despite this, Domino's said yesterday that it was "confident" of delivering profits for the year to 28 December "ahead of current City expectations" of £23.2m for the year.

No doubt, Mr Moore can't wait for Britain's Got Talent to return in the spring to help fill the stomach of TV addicts, as well as the empty slot left by a lack of The X-Factor and Strictly Come Dancing. But Domino's senior management team have been hitting the sweet spot for a long time before Cheryl Cole and John Sergeant came along.

Biting back: Greggs defies the economic gloom

Domino's is not the only retailer cashing in on problems elsewhere in the sector. Greggs, the bakers, saw strong Christmas sales and overall growth of nearly 5 per cent last year as people traded down from more expensive food shops.

Defying the gloom elsewhere on the high street, Greggs saw a like-for-like sales grow by 5.3 per cent for the four weeks of the festive period, pushing overall growth to 4.4 per cent. The company added 41 shops to its 1,400-strong chain in 2008.

Across the retail sector, consumers' recession-hit spending is upsetting usual sales patterns. When it comes to clothes, the trend is either to trade down to cheaper alternatives, or to trade up and buy fewer, more expensive items. In food, supermarkets are heavily marketing own-brand alternatives to dearer A-list brands. Greggs is winning for similar reasons, said Nick Coulter, an analyst at Numis. "Greggs have very good reputation for value, and it has taken a bloody nose on gross margins this year to maintain those credentials," Mr Coulter said. "But now there is a theme of trading down, Greggs can expect to be a beneficiary."

Ken McMeikan, the Greggs chief executive, said. "I am pleased with our Christmas trading performance, particularly given the current economic environment and that we were building on strong like-for-like sales in the same period last year. The trading outlook for 2009 is demanding and customers will continue to feel the impact of the economic downturn. As a cash-generative business with no debt we remain well placed to weather the recession."

Mr McMeikan took over as the Greggs chief executive in August after a stint as retail director for Sainsbury's and a 14-year spell with Tesco.

Sarah Arnott