Domino's Unsafe Strategy and Why It Matters to Investors

Fast-food franchisor Domino's Pizza (NYSE: DPZ  ) is getting better press than it deserves. The pizza chain last week introduced gluten-free options for everyone but those who need it most: food allergy and celiac disease sufferers.

"While Domino's new Gluten Free Crust is appropriate for those with mild gluten sensitivity, Domino's and the NFCA [National Foundation for Celiac Awareness] do not recommend it for those with celiac disease. Domino's and the NFCA found that while the crust is certified as gluten free, current store operations at Domino's cannot guarantee that each handcrafted pizza will be completely free from gluten," the company said in a press release announcing the new option.

Seriously? Is this a tease? Why even offer gluten-free crusts without reorienting kitchens to cook them separately from crusts slathered in flour and wheat dough -- exactly the ingredients that keep most celiac sufferers from even thinking about ordering a pizza? No wonder the Center for Celiac Research is recommending that those with gluten-related disorders avoid the new Domino's crusts.

As I see it, Domino's wants to appear to serve the estimated 18 million Americans with some form of gluten sensitivity without putting in any of the actual work. A publicity stunt, in other words. One that probably wasted precious shareholder capital that could have been used to gain an edge on Papa John's (Nasdaq: PZZA  ) and Yum! Brands (NYSE: YUM  ) , parent to the Pizza Hut franchise, especially considering that Papa John's spiked 20% higher on impressive earnings last quarter and Yum! Brands has outpaced Domino's by more than 20% so far this year.

Cynical, you say? Perhaps. But we've seen this sort of nonsense before from no less than McDonald's (NYSE: MCD  ) , one of the biggest names in fast food. This time, Domino's is trying to cash in on gluten-free dieting becoming fashionable, while genuine efforts, such as the separate fryers you'll find at Red Robin Gourmet Burgers (Nasdaq: RRGB  ) , tend to go unnoticed.

And yet, as troubling as the strategy is, Domino's shareholders can probably rest easy. Failure to win a gluten-free following isn't likely to have much of an impact, if only because Domino's has done so well at generating high returns on its capital up to this point.

The bigger lesson here is there's a large and growing opportunity for serving those with medically challenging diets. It's a niche, sure, but sometimes niches grow to become chasms, which expand to become canyons that must be bridged. Here are 3 bridge builders that might help you retire rich.

Fool contributor Tim Beyers has family members who suffer from food allergies and celiac disease. He is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Check out his web home, portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Red Robin Gourmet Burgers and Papa John's International. Motley Fool newsletter services have recommended buying shares of Yum! Brands and McDonald's. Motley Fool newsletter services have recommended writing covered calls on Red Robin Gourmet Burgers. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 15, 2012, at 2:26 PM, WallStreetBadBoy wrote:

    What a waste of an article. Many people have gluten intolerance's and can easily handle a small dust of gluten touching their gluten free crust. But instead you want Domino's to spend an ENORMOUS amount of money on buying a completely separate oven to handle less than 1% of the population? Your strategy is juvenile which is why you are critiquing good business moves rather than making them.

  • Report this Comment On May 15, 2012, at 2:59 PM, TMFMileHigh wrote:

    @WallStreetBadBoy,

    >>Your strategy is juvenile which is why you are critiquing good business moves rather than making them.

    Except this is anything but a good business move. Pretending to cater to people with gluten sensitivities is not only reckless, it risks causing damage to an otherwise good brand. Domino's would have been better off ignoring this segment of the population.

    >>Many people have gluten intolerance's and can easily handle a small dust of gluten touching their gluten free crust.

    The worst part of your comment, because we aren't talking about specks. We're talking about cooking gluten free crusts in ovens covered in wheat dough.

    Much as I generally appreciate feedback and criticism, this one gets a firm -1 for ill-conceived, ill-informed commentary.

    Foolish best,

    Tim

    --

    Tim Beyers

    TMFMileHigh, Motley Fool Rule Breakers Analyst, Supernova Odyssey I Portfolio Contributor

    Web: http://timbeyers.me

  • Report this Comment On May 15, 2012, at 5:20 PM, Gregx2000 wrote:

    Everything that comes out of Domino's is a PR stunt. You should also do an article on what a joke it is that they have a new iPad game to "find new employees" - these are their own words. However, how many people who are potential Dominos employees even own an iPad? 1%?

    PR stunts get you no where in the long run - only real news.

  • Report this Comment On May 15, 2012, at 10:00 PM, ZMan57 wrote:

    Couple things, three, actually...

    There is the "Celiac disease" and there is "gluten sensitivity"... The difference between the 2 is similar to that between the common flu and, say, H5N1. Further, only a small percentage of people with gluten sensitivities actually have the Celiac disease. For that reason the NFCA approved Domino's gluten-free crust for people with gluten sensitivities, but NOT for the Celiac disease sufferers.

    Second, Domino's doesn't use flour as a "dusting agent" in production - cornmeal is used for that purpose instead, which - big surprise - is made from corn, not wheat, and doesn't contain gluten.

    Finally - have you ever seen the interior of a commercial pizza oven, Tim?.. My guess, based on your comment about them "being covered in wheat pizza dough" is that you have not.

    It is amazing what sort of exotic details can be unearthed by doing a little research before writing about a topic outside of our area of expertise...

  • Report this Comment On May 16, 2012, at 9:06 AM, Gregx2000 wrote:

    You can pick Tim's specific words apart but the fact is the article is on point. Domino's gluten-free pizza is not gluten-free and while it might not encounter contamination in the oven, it will in other places like the table they make the pizzas on, the freezers and employee's hands. It's just another PR stunt to try and pump sales due to a crappy first quarter.

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