Earlier this week, Wingstop executives told analysts that they are planning to build more locations in 25 of their strongest markets to build customer awareness and, they believe, unit volumes while keeping out potential competitors.
They used the term “fortressing” to explain the strategy, joining Domino’s in deploying a term many of us industry long-termers hadn’t heard until the pizza chain began using it a year ago.
In short, both chains believe that by building more locations in key markets they can improve their operations and sales and put more pressure on competitors.
“You don’t get to be the dominant No. 1 in the world without being the dominant No. 1 in your neighborhood,” Ritch Allison, CEO of Domino’s, said in January.
But fortressing comes with risks. Done poorly, it could hurt unit volumes over time and can be difficult to support every location. It can also anger franchisees who view fortressing as simply another word for cannibalization.
“It almost seems like over-development, to lack a better phrase,” said John Gordon, a restaurant consultant out of San Diego.
But, he said, “If it is an above-average unit volume market, then this fortress hub may make some sense. It keeps competitors out. And it enables some growth.”
The opportunity can be seen at McDonald’s, which used world-class real estate strategies and franchising to build a lot of locations and generate incredible market dominance. It now has unit volumes of $2.5 million, far above rivals Burger King and Wendy’s, even though it has the same number of locations as both chains combined.
On the other hand, there is Subway, which built locations anywhere and everywhere, becoming the world’s most prolific chain. It worked in the U.S. to push out rivals like Blimpie and Quiznos, but the growth didn’t come with stronger unit volumes, which are now around $400,000. As sales have struggled it closed locations and is now losing business to Jimmy John’s, Jersey Mike’s and Firehouse Subs, all of which have much higher volumes.
Both Wingstop and Domino’s can make strong arguments for their need to build more locations, and their respective data and analysis capabilities make it far more likely they will act more like McDonald’s and less like Subway.
Wingstop’s same-store sales have been rising for 15 straight years. In 2015, the company had 80 restaurants in its home Dallas-Fort Worth market. Today it has 109, and the company’s unit volumes there are about $1.4 million, higher than average.
The added locations, CEO Charlie Morrison said, give the company more market awareness and makes Wingstop a consideration for more customers. In Dallas, he said, market awareness is nearly 90%, or double what it is in emerging markets.
“It’s not one designed to introduce cannibalization,” Morrison said. “It can accelerate awareness and unit volumes.”
The company’s plan is to fortress in 25, large metro markets. But Wingstop plans to expand in those markets with franchisees carefully. “It’s better than scattershot,” Morrison said. “We can build scale in markets and build awareness at a faster pace.”
At Domino’s, the strategy is even more aggressive—to build 2,000 more units in the U.S. by 2025, which would increase the 5,800-unit chain’s domestic footprint by more than a third in less than a decade.
Essentially, the Ann Arbor, Mich.-based company plans to spend the next seven years adding a $2 billion chain to the saturated U.S. pizza market. And it is targeted at pushing out competitors.
“There’s a competitor out there that exists because we stopped growing stores in the 1990s,” Russell Weiner, president of Domino’s USA, told investors in January.
Like Wingstop, Domino’s can demonstrate a need for more supply. Its unit volumes have grown by about two-thirds over the past decade, and its unit-level profitability far outstrips any of its rivals.
And the company believes it can increase carryout business by building more locations because consumers will only go so far to get their pizza. The strategy would make delivery times quicker and more efficient and enable the company to improve quality as consumers yearn for more delivered food.
Domino’s estimates that fortressing would impact same-store sales by 1% to 1.5%.
Investors have already grown worried about this. Last month, the company reported U.S. same-store sales growth of 5.6%, below expectations. Investors worried some about the impact of market “splits” on the chain’s comparable sales, at least in part, and the stock fell about 9% that day.
Indeed, maybe the more immediate risk for both chains is whether they can convince Wall Street that more units is a good thing.
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