Large pizza chains stand to gain greater slices of the U.S. market as they push contactless delivery methods for consumers staying home during the coronavirus pandemic, analysts said.

Domino's Pizza Inc., Papa John's International Inc. and Yum! Brands Inc.-owned Pizza Hut have all ramped up the zero-contact service in recent weeks as states across the country restrict in-person dining at restaurants. Eateries across cuisine styles and third-party delivery services like Uber Technologies Inc.'s Uber Eats service and Grubhub Inc. have also embraced the service to protect customer and worker safety while they continue to seek sales opportunities.

While pizza delivery drivers are used to directly handing customers their pizzas, the contactless method allows both parties to maintain distance and still fulfill those orders. The shift also allows companies to provide greater protection to their employees as workers ramp up their own efforts by wearing gloves and facemasks and boosting the use of hand sanitizer.

The pizza chains accelerated their technology efforts ahead of the virus to capitalize on changing delivery trends, analysts said. Smaller, independent chains that lack the same resources stand to lose share to their larger peers, according to experts.

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Contactless delivery may not be a game-changer by itself, but the service will become "table stakes and par for the course" across the pizza industry as the virus continues to spread, said Peter Saleh, managing director and restaurants analyst with BTIG, in an interview.

"If you don't have that in this environment, you are going to lose share," he said.

In recent weeks, pizza chains began offering contactless delivery methods to avoid transmission of the virus through contact points. Pictured here is a Domino's pepperoni passion pizza. Source: Domino's

Lucrative slice of the pie

Domino's and Papa John's confirmed that they have begun contactless delivery, but declined to comment further. A Pizza Hut spokesperson told S&P Global Market Intelligence that the company has seen an uptick in delivery demand and "with it [we] are seeing customers utilizing contactless methods to reduce risk."

The companies are betting on the contactless delivery strategy as they boost hiring efforts. Domino's plans to hire 10,000 employees including more delivery staff, pizza-makers, customer service representatives, managers and assistant managers across the U.S. Papa John's is hiring 20,000 team members, while Pizza Hut said it has more than 30,000 positions open.

The U.S. pizza market in 2019 was about $39 billion, according to BTIG. Domino's led all companies with an 18.7% share, as total pizza sales including franchisees reached $7.05 billion.

It was followed by Pizza Hut with $5.50 billion in pizza sales in 2019 making up a 14.6% share. Privately held Little Caesars, which announced it began contactless delivery in March, had $3.80 billion in total pizza sales that accounted for a 10.1% share.

Papa John's had $2.65 billion in pizza sales in 2019, accounting for a 7% share. Independent pizza shops and chains make up about half of the U.S. pizza category, or roughly $20 billion.

Larger pizza chains can more easily pivot to contactless delivery given they have more technology resources, armies of drivers and digital sales that already account for the bulk of orders. In the U.S., Domino's generates more than 65% of sales via digital ordering channels, while more than 60% of Papa John's sales come from digital orders.

Domino's' "infrastructure is set up for something like this," said R.J. Hottovy, an analyst with Morningstar who covers Domino's, in an interview.

Despite this, they are not immune to the effects of the virus. Both Domino's and Papa John's withdrew their fiscal 2020 guidance and said the virus was impacting sales.

Meanwhile, Yum! Brands missed its fourth-quarter EPS estimates and warned the outbreak would negatively impact its growth in 2020.

Any success the larger chains do see with contactless delivery may come at the expense of independent pizza chains and mom-and-pop pizza shops that often lack even a basic website, experts say. Saleh, of BTIG, said independents don't have the technology to jumpstart contactless delivery so they may outsource that service to online ordering companies like Grubhub, which offers contactless delivery.

"They are not going to build their own app and their own website," he said. "It's just too expensive."

Independent pizza chains also rely largely on dine-in customers, but their restaurants are closed due to dine-in restrictions across the U.S. That may lead to extinction among some, Saleh said.

"How many will go away? We're still not sure," he said.

The independent operators that remain will be forced to compete on quality and charge a premium for that quality to "make the math work," he said.

Meanwhile, Domino's can take over the "value end of the segment," Saleh said. The company has benefitted tremendously from offerings such as its $5.99 mix-and-match platform that offers menu combinations for pizza, pasta, wings, salads, and desserts, he said.

"They can charge less; that's why they have had the same $5.99 platform for the past 10 years, going on 11," he said of Domino's.

Positioned for growth

Domino's is in a better financial position than its peers to weather the pandemic as consumers shift purchasing habits during the outbreak. The company brought in $3.62 billion in revenue in 2019, including franchise royalties and fees but not retail sales from its franchise locations.

Papa John's trailed Domino's with $1.62 billion in revenue in 2019, down from $1.66 billion in 2018 and $1.78 billion in 2017. Part of the decline can be traced to a controversy over the company's founder and negative customer sentiment that weighed on the company over the last two years, Saleh said.

Papa John's is now benefiting from a new leadership team headed by new CEO Rob Lynch and new board director NBA champion Shaquille O'Neal who is helping engineer a turnaround for the company.

Yum! Brands' Pizza Hut chain is the smallest of the three, with 2019 revenue reaching $1.03 billion. The company is in the midst of a business model transition to accommodate a growing number of consumers who prefer carryout and delivery over dining inside a restaurant.

Pizza Hut has been a "step behind" Domino's in terms of innovation with recipes and technology, said Cathy Novelli, vice president of marketing and communications for Rakuten Ready, a mobile commerce platform that works with brands including Pizza Hut, Kroger, Chick-fil-A and Nordstrom to scale their mobile order-ahead programs.

That said, Pizza Hut has made significant investments in research and technology, Novelli said in an interview.

"They are heavily focused on it globally and looking at it market by market," Novelli said, adding that Pizza Hut was starting to think differently about its business model before the coronavirus outbreak.

Yum! Brands is also experimenting with Pizza Hut orders through Grubhub, the delivery company Yum! bought a stake in. Customers can place orders on the Grubhub app or website, while deliveries are fulfilled by Pizza Hut drivers.

Online pizza delivery catalyst

While contactless delivery is booming, the prevalence of the service for pizza chains and other restaurants depends on several factors, including how quick employees and customers accept the practice and how long the threat of the virus remains in place, said James McCann, CEO of McCann Investments, which invests in early-stage companies in the grocery tech, food tech and consumer goods space.

"If we have nine months of high virus threat, then physical distancing will be normal," McCann said. "We will have forgotten what the pre-normal was."

Comfort levels will rise if contactless delivery becomes a habit, which could happen in as few as six deliveries, McCann said.

"Why would you want the driver to stand there for 15 minutes while someone gets dressed, gets to the front door, realizes they forgot the money, goes back for the money and then wants to chat for 10 minutes?" McCann said.