Domino's (NYSE:DPZ) has recorded 34 consecutive quarters of same-store sales growth in the U.S., an impressive record in these challenging times for restaurants. But the rate of growth is slowing dramatically, and it may have only itself to blame.
Because of its fortressing strategy (i.e., building out more new locations even if they encroach on an existing store) as well as the rise of third-party delivery apps, the pizza shop is seeing sales weaken. Domino's relies upon its own employees to deliver pizza, viewing them as a competitive strength, but it may need to change its thinking if it wants to halt the slide in sales.
Slowing delivery gains
Third-quarter earnings showed currency-adjusted global sales rose 7.5% on comps growth of just 1.7%. U.S. sales were up 6% and 1.7%, respectively.
CFO Jeffrey Lawrence told analysts on the earnings call, "While we continue to grow our overall delivery business, we continue to experience pressure on the delivery business comp from our successful fortressing strategy as well as from aggressive competitive activity."
Domino's opened 214 new stores during the quarter, and though most were in international markets where it is just getting underway with fortressing, there were 43 locations opened in its mature U.S. market, with three closures, for a net of 40 new stores. It now has over 5,900 restaurants here, and well over 10,300 internationally. It has opened 1,174 net new pizza joints in the last 12 months.
The purpose of fortressing is to get closer to where the customer lives. While it potentially cannibalizes sales at individual locations, Domino's believes overall sales will rise. It also makes delivery or carryout quicker since stores are nearer to where customers live or work.
Third-party apps mean everyone delivers
Delivery has always been Domino's specialty, but as it builds out its footprint, it says carryout is now approaching 45% of its business. The model is certainly successful, and Yum! Brands (NYSE:YUM) is attempting to emulate that by converting its Pizza Hut chain over to a delivery/carryout format. It will be remodeling 500 stores over the next two years (some 8% of all its restaurants) to use that better model.
Yet the rise of delivery apps like DoorDash, Uber Eats, and Lyft is making it easier for Domino's rivals to compete, while offloading the delivery risk to a third party.
Right now, Pizza Hut will continue delivering its own pies, just like Domino's. But Grubhub is the exclusive delivery partner for Yum! Brands KFC and Taco Bell chains, and it's not a stretch to see it eventually assume additional delivery responsibilities for Pizza Hut, too.
Papa John's (NASDAQ:PZZA) has that kind of mixed delivery business, using a DoorDash deal signed earlier this year to supplement its in-house service.
The pressure is on
There's something to be said for Domino's keeping delivery in-house in that it continues the connection with the customer throughout the entire order process, but delivery apps have leveled the playing field. CEO Richard Allison said Domino's still feels "some pressure from the entry of many non-pizza [quick-service restaurant] players, who are enabled by the third-party aggregators."
Whereas ordering takeout from Domino's used to be the most convenient option, consumers can now get just about any type of food from just about any restaurant.
The pressure is evident in its updated long-term growth guidance. Where it previously said that over the next three to five years, it expected U.S. comps to grow 3% to 6%, it now says over the next one to three years, it believes they'll only expand by 2% to 5%. However, it still intends to open stores at the same 6% to 8% growth rate it previously did.
As Domino's growth slows (with comps perhaps soon declining), the pizza giant will consider the benefits that extend from third-party delivery apps. In the meantime, it's clear they're just going to take a bigger slice of Domino's pie.