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Can Domino's Win in the Drive-Thru Segment?

By Demitri Kalogeropoulos and Parkev Tatevosian, CFA – Oct 21, 2021 at 11:30AM

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The pizza giant believes its carryout and car-side delivery business can grow much larger over the next several years.

Domino's Pizza (DPZ 1.02%) recently announced solid operating results in its fiscal third quarter even though growth slowed in the core U.S. market as competition flooded into the delivery niche.

In this video from "Beat & Raise" from Motley Fool Liverecorded on Oct. 14, Fool contributors Parkev Tatevosian and Demitri Kalogeropoulos discuss why Domino's thinks it has a huge opportunity to grow its drive-thru sales using carryout and car-side pickup.

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Parkev Tatevosian: Delivery versus carryout. It's essentially two businesses they have. The big story here in delivery versus carryout was the surge in delivery orders at the pandemic onset. All of a sudden you had a ton of folks who were hesitant to leave their homes. They didn't want to go to restaurants, and so the delivery business really surged.

Like I mentioned earlier, it's still at elevated levels, it's still above 2019 levels to delivery versus carryout mix. It's sustaining here, but Domino's obviously notices that the trend is moving in the opposite direction, where thankfully we're coming out of the pandemic. Domino's is working on initiatives to increase carryout orders. One of the reasons is to reduce the reliance on drivers, which management has been noting that the drivers are in very short supply right now. When you look at it, there's labor shortages in general.

But the shortages in drivers are much worse than the labor shortage overall. One way Domino's is doing that is like we mentioned earlier, the car-side delivery. They spent heavily in marketing and advertising to raise awareness of that feature and trying to improve delivery times to your car. They are working on that average delivery to your car starting at the two minutes and they're trying to drive it down to one minute. This initiative has a potential to improve profits for franchisees as well.

It will save delivery costs for them and it can also increase value for customers. If you're looking at ordering Domino's Pizza and you see, for example, the delivery fee varies by region. If you're looking at an order for $10 and your delivery fee is going to be $7 on that order, you may be more motivated to drive to the Domino's and pick up your order, especially if they make it more convenient for you. The goal is to raise the convenience factor enough to where the customer would rather drive up to a Domino's versus paying the $5 or $7 or whatever that delivery fee may be.

If they're successful from the corporate standpoint in driving that change, raising that awareness, we already said they have a strong pipeline of franchisees that are wanting to invest in opening more stores. If this becomes more proliferate, that can even increase the demand to open new stores because if you're looking at it from a franchisee perspective, if now you have less of a need for drivers, that's going to drive profits for your stores.

Demitri Kalogeropoulos: Good points there. It's an interesting balance there because I do believe they raised their delivery fees across the board, but like you said, it's regional, but still with that fee going up, like you said, it's a balance there because you'd like to push people to do more of those carryout orders in that case. But also you don't want to raise the delivery fee so much that they look somewhere else.

But I do like how Domino's is very transparent about their delivery fee. It's pretty clear on the app about how much you're paying for delivery. Other places might tuck it under the things you're not really sure how much you're paying and it just seems like you're paying, roll it into the price of some of the food. But I think that's one of those things customers like to see, anyway.

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool recommends Domino's Pizza. The Motley Fool has a disclosure policy.

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