Domino’s sticking to growth plan despite sales pressures
ANN ARBOR, Mich. (AP) — Domino’s Pizza is sticking with its aggressive growth plans — and its own army of U.S. delivery drivers — despite mounting pressure from services like UberEats and DoorDash.
The world’s biggest pizza chain is rapidly opening new stores in order to shorten delivery times, increase carryout business and push out weaker competitors like Pizza Hut and Papa John’s. The company has opened 1,174 new stores worldwide over the last year; it opened nearly 250 stores in the July-September period.
“We’ve got a unique opportunity right now to solidify market share gains for the long term,” CEO Ritch Allison said in a conference call with investors. “We firmly believe that now is the time to go on offense.”
But in the short term, those new stores are cannibalizing existing locations. On Tuesday, Domino’s Pizza Inc. reported its fourth consecutive quarter of declining same-store sales in the U.S. Sales at U.S. stores open at least a year rose 2.4%, shy of the 2.7% growth Wall Street had anticipated, according to analysts polled by FactSet.
Third-quarter net income rose 3% to $86.4 million, or $2.05 per share, 2 cents short of Wall Street forecasts. Revenue rose 4% to $820.8 million, also lower than expected, according to FactSet.
Domino’s was a pioneer in recognizing the value of getting food to the doorstep of customers fast. It’s one of the biggest national chains to maintain an in-house delivery infrastructure, with more than 120,000 drivers in the U.S.
But it’s facing an onslaught of startups that are offering rebates to use their delivery services from thousands of smaller, local pizzerias and other types of restaurants, including national fast food chains like McDonald’s.
Allison said companies like GrubHub are currently pricing delivery below what it actually costs, thanks to subsidies from investors. But he thinks that model will eventually collapse.
“We believe that a significant shakeout is coming to the industry,” he said.
But in the meantime, the company is tightening its outlook. On Tuesday, Domino’s introduced a new two-to three-year outlook, replacing its three- to five-year one. In that new time frame, the company expects U.S. same-store sales growth between 2-5%, international same-store sales growth between 1-4% and global retail sales growth between 7-10%.
Allison said a five-year time frame is too long in such a rapidly changing landscape.
“It is an evolving competitive and operating environment in the U.S. right now,” Allison said.
Domino’s shares fell initially but then rebounded, adding 6% to $256.07 in the early afternoon following Domino’s conference call.
Maxim Group analyst Stephen Anderson, who has a “buy” rating on Domino’s shares, said it was a good sign that Domino’s didn’t scale back its growth plans. Anderson said some Domino’s stores are capacity constrained, so Domino’s can manage the cannibalization from its growth strategy. Anderson believes third parties have several disadvantages, including longer delivery times than Domino’s and a mixed level of service. He also says Domino’s could benefit in an economic slowdown, since some consumers would order pizza instead of more expensive meals.
Allison reiterated that he has no plans to use third-party delivery services in the U.S. Papa John’s signed on with DoorDash in March, while Pizza Hut works with GrubHub.
Domino’s stores in some countries, like China, are using third-party drivers because those systems are dominant and Domino’s is a smaller player. But Allison said Domino’s doesn’t want to share its data with third parties and can only guarantee the safety and quality of its food with its own drivers.
“That is an unbending and unyielding position,” he said.