Get A Slice of This Forward-Thinking Food Provider
Self-checkout and cashier-free stores are disrupting retail. Delivery aggregators are wreaking havoc among fast-food chains. Everything is upside down.
Domino’s Pizza (DPZ), the world’s leading pizza brand, reported dismal same store sales Oct. 8. Managers blamed food delivery companies, then offered a way forward: More tech, and more stores.
It may seem counterintuitive, but it makes good sense … in a Domino’s sort of way.
The Michigan-based pizza company has been through countless interactions in its relatively short lifespan. Founded in 1960 as DomiNick’s by two Irish American brothers, the idea was always to build a chain of stores with similar branding and products.
Five years in, Tom Monaghan had bought out his brother, purchased an additional two locations and changed the name to Domino’s. By 1978, franchising and aggressive expansion pushed the number of storefronts to 200.
The cornerstone of Domino’s pledge to customers was fast service and reasonable prices. Meeting those commitments has not always been easy. But the company has already proven capable of finding new solutions and adapting.
In the early 2000s, new self-rising crust recipes and clever marketing from giant food processors Kraft Foods and Unilever made frozen, make-at-home pizzas more enticing. These deflated the entire delivery sector.
To make matters worse, Domino’s executives turned to canned and frozen ingredients to reduce overhead. The outcome was pizza that customers didn’t like. They complained of crust that tasted like cardboard. The sauce was compared to ketchup.
The way back into customers good graces began with technology.
Domino’s released a pizza tracker in 2008.
It was silly idea but following the progress of orders on computer screens, and later smartphones, gamified the process. It won new fans.
A year later the company spent millions re-imagining all its pizza recipes. When Patrick Doyle, a Domino’s veteran, became CEO in 2010, he doubled down on technology. His teams implemented a digital strategy that led to orders on smartphones and a zero-click purchase experience through smart TVs. Overall sales zoomed from $1.6 billion in 2011, to $3.4 billion in 2017.
Digital orders were more profitable. With the entire virtual menu laid out in front of them, customers are more likely to add to their orders, including a side of high-margin cheesy breads and soda to make a meal of it.
The business was positioned perfectly for digital evolution. Then the quick service restaurant world abruptly went analog.
Uber Eats, a division of Uber Technologies (UBER), GrubHub (GRUB), privately-held Door Dash and other companies started offering door-to-door, human delivery service.
Suddenly, every restaurant could match Domino’s core competitive advantage of fast delivery. McDonalds (MCD), for example, joined forces with Door Dash earlier this year.
The Wall Street Journal reported in July that Domino’s had its slowest quarterly sales growth in seven years. This trend continued into October, when the company missed both its revenue and profit targets for the third quarter.
|Domino’s quarterly growth over the past five years. Source: macrotrends.com|
Sales rose 4.4% to $820.8 million, well off the forecast of $823.9 million. Profits were $92.4 million.
Domino’s managers have always been at the forefront of technology, so that’s where they’re looking for a solution now.
They’re investing in new methods for delivery in order to complete. In New Zealand, Domino’s has already used delivery drones to get pizza to hungry customers quickly. And around the U.S., they’ve tested autonomous vehicles to reduce future costs and still compete with delivery services and competitors like Pizza Hut and Papa John’s (PZZA).
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Through the first quarter of 2019, 65% of all Domino’s sales came from digital channels. This includes through new platforms like Alphabet’s (GOOGL) Google Home, Facebook’s (FB) Messenger, Apple’s (AAPL) Watch and Twitter (TWTR). Credentialed customers can even order Domino’s by texting a pizza emoji on their smartphone.
But the company isn’t focusing only on its tech. They see the irony that human couriers are having such a big impact on growth. So, they’ve given just as much thought to a curious analog solution: More stores.
As most companies race to reduce brick and mortar locations, Domino’s is taking the opposite trek, in a big way.
Rich Allison, the new chief executive officer, believes 10,000 new stores with ensure faster delivery times. He claims saturation will reduce overall unit costs and improve wages for workers. Another benefit is it will encourage customers to pick-up orders.
Carryout is a new business model with 2.5x the market opportunity of delivery, according to an October CNBC story. The goal is to entice the customer to come in to pick up their orders by reducing the price of a limited number of items.
So far, it’s working. Nearly 45% of third-quarter sales came from carryout this year.
The strategy also offers the unique benefit of better margins, because no delivery costs are incurred. Allison expects use these savings to offer a wider variety of new $7.99 carryout menu items.
In other words, he’s re-upping the original pledge to customers of fast delivery and reasonable prices.
The payoff could be big. Allison is projecting $25 billion in sales by 2025.
Domino’s is an unconventional company. Managers once embraced new business models and technology far before competitors, and it paid-off big. They set the standard back in the late 2010s.
Now, they’re looking to do it again.
Shares trade at 24x forward earnings and less than 3x sales. Investors should not count out Domino’s.
Jon D. Markman