Whether you like Domino's Pizza (DPZ 2.90%) or not, you probably know the restaurant chain and its top-selling product: pizza. The pandemic was a very good time for the company as consumers -- stuck at home -- found its relatively inexpensive food offering an attractive option while they were unable to go out to eat.
Now, the world has reopened and Domino's is looking for ways to stay on the growth path. One experiment is selling through Uber Eats, which is a bigger move than you may think.
Dominos' simple business model
It isn't exactly hard to understand what Domino's does to make money. That said, although the restaurant offers more than just pizza, takeout is a huge portion of the top line. For the most part, Domino's controls the relationship with its takeout customers when they order remotely. That means that customers either call the restaurant directly or use the restaurant's website or app. There is no middle-man -- Domino's "owns" that customer.
Image source: Getty Images.
There's a little wrinkle here. That's because Domino's the company doesn't actually own and operate all of its restaurants. In fact, the company barely runs any of them, with a full 99% owned and operated by franchisees. This changes the game in a big way for Domino's the company. While any single customer may not be all that important to Domino's, every single customer is important to its franchisees.
This is why controlling the customer relationship is so important. Domino's adds value to its franchisee relationship by knowing who its costumers are and being able to directly market to them via things like email and through its app. If there were a middle-man involved, Domino's would lose that valuable connection. Up until now, it has looked to avoid that risk.
Bringing on the Uber Eats team
The big change that's being rolled out in more and more markets is Domino's offering its food through Uber Eats, the food delivery business of Uber Technologies (UBER 1.90%). There are several reasons for this move, and the company is taking some steps to ensure that its franchisees are protected.
So why risk losing the connection with customers if it is so important to the business and keeping franchisees happy? First off, the management team believes that Uber Eats customers are a different demographic, sitting at a higher income level than its normal customer. So the effort is, essentially, an attempt to broaden its customer base.
NASDAQ: DPZ
Key Data Points
There are two pieces to that approach. First, people who may not normally consider Domino's could start seeing the option. But, secondly and perhaps more importantly, if there is an economic downturn, Uber Eats customers who want takeout but also want a cheaper option might step down to the cost-effective fare offered by Domino's. So there's a potential benefit here for franchisees during tough financial times.
That said, Domino's isn't ignoring the risk of losing control of its customer relationships. For example, the menu options on Uber Eats will be limited in some ways. Basically, the best deals will be reserved for Domino's customers who use its website and app. That way, franchisees don't have to fret about loyal customers just shifting to an outside platform, which takes a cut of the sale.
That cut means less profit for franchisees and less revenue for the parent company, not to mention a potential fracture in the relationship between Domino's and its franchisees.
Domino's is taking a risk that investors should watch closely
With the pandemic in the rearview mirror, investor sentiment around Domino's has cooled considerably. It has been forced to work harder to attract customers. Product innovation has been a part of that, but it is also looking for other ways to drum up business. Partnering with Uber Eats is an unusual approach for Domino's, given its insistence on controlling the customer relationship.
There's clear potential for this move to expand its business, but also a risk that it could hurt its individual franchisees. As investors watch the progress of the company, it will be important to pay attention to what happens with Uber Eats because it's just too soon to call it a good or bad decision. The problem is that it could very well be a significant choice regardless of the outcome.
