If you suspect that you're seeing more Domino's (DPZ 1.36%) locations around these days, you're right. The pizza delivery leader long ago blanketed most of the U.S. with its restaurants. Yet it's still adding new stores today -- and at a faster rate than usual. In fact, the company counted 5,900 locations at the end of 2018, up from 5,200 just three years earlier.
The 258 openings in the past year represented an acceleration from the 216 that Domino's added in 2017. It also marked the chain's fastest unit growth since 1988, according to management.
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Bigger is better
Domino's is aggressively adding to its store footprint right now despite the clear risk of saturating its existing territories. A bigger scale allows it to set low prices, for example, which has been a key factor in its decadelong streak of market share gains. A large sales footprint makes advertising and marketing spending more efficient, too. And having more locations means closer proximity to diners, which generates lower delivery times and boosts customer satisfaction. The company also sees take-away as a major growth avenue for the near future, and pizza fans usually aren't willing to travel much more than 8 minutes to pick up their food.
But there's a simpler reason for the buildup: defense. As the market share leader in the $37 billion pizza industry, Domino's has the most to lose from rivals aiming for a bigger piece of the pie. That's why management is engaged in a strategy it calls "fortressing," or adding locations right within the delivery territory of an existing restaurant.
Competing with yourself
The move hurts sales at established locations in the short term, and executives estimate that the strategy reduced comparable-store sales by between 1% and 1.5% last year. The chain reported a 6.6% comps increase in 2018, down from 7.7% in the prior year and 10.5% in 2016. It's also likely to pressure results in 2019.
However, executives believe it's good for both the wider business and for individual franchisees over the long term. Fortressing has helped protect markets from competitors in places as varied as India, the U.K., and Las Vegas, Nevada, where minor sales cannibalization cleared the way for increased delivery and takeaway business as customer satisfaction scores improved.
The strategy has risks that go beyond the short-term sales hit, though. It could expose franchisees to painful profit declines if industry growth stalls quickly. It's not the conservative path, financially speaking, either, since Domino's has to support all these locations with a more robust supply chain and elevated capital spending. The strategy makes it likely that the company will continue to employ lots of debt, and its liabilities today stand at $3.5 billion, or about one-third of its market capitalization.
CEO Richard Allison and his team think those risks are worth taking and they believe that a few factors should help Domino's avoid the same over-building blunders that hurt shareholders of companies like Subway, Chipotle, and Starbucks in recent years. Domino's stores are cheaper to build and maintain, after all, and that sets the bar low for the level of revenue needed to produce decent returns.
Executives say one of the best metrics that supports their bullish reading on store growth is the fact that just 125 store closures happened last year on a base of over 15,000 global locations. Only nine U.S.-based franchisees closed their shops last year -- out of almost 6,000 restaurants. Adding more stores adds stress to that system, but it does appear that Domino's has room to run before that might become a problem for the business.
Check out the latest Domino'searnings call transcript.
