Financing

Domino’s is betting that inflation will hurt delivery sales

The pizza chain is raising the price of its $5.99 carryout offer to $6.99 as those sales continue to perform well. It argues that inflation will be bad for the delivery business.
Domino's carryout
Domino's believes carryout service will only grow as delivery sales falter. / Photo courtesy of Domino's Pizza.

Inflation will lead more consumers to opt against restaurant delivery in favor of making their meals at home.

So says the restaurant industry’s leading delivery player, Domino’s Pizza. On Thursday, the Ann Arbor, Mich.-based pizza chain said that delivery sales will be harder to come by in the coming months as inflation continues to eat into the average consumer’s paycheck.

“We believe that inflation will impact delivery more than carryout due to the added expenses of fees and tips in that channel,” Domino’s CEO Russell Weiner told investors on Thursday. “Our research shows that a relatively higher delivery cost might lead some consumers to prepare meals at home. This could be exacerbated as consumer spending becomes more constrained around the holiday.”

Domino’s own sales numbers suggest that may already be happening. Carryout same-store sales rose nearly 20% in the third quarter ended Sept. 11, when compared with the same period a year ago. On a three-year basis, sales from that channel are up 35%, the company said.

By contrast, delivery same-store sales declined 7.5% in the period. They were up 8.4% on a three-year basis despite remarkably strong demand during the pandemic.

The sales were strong enough that the company said it is now the top carryout player in the pizza business, based on data from the information firm NPD Group.

With that in mind, the company has opted to raise the price of its key carryout deal from $5.99 to $6.99. The deal enables customers to choose three or more medium pizzas, pastas or sandwiches for $5.99 apiece.

The company has already raised the price of its $5.99 offer for delivery customers. Weiner said research suggests now is the time to do the same thing for its “Mix and Match” carryout offer. “Going from $5.99 to $6.99 on our delivery mix-and-match deal was the right move,” he said. “Given the continued inflation we have seen, our analytics indicate we should take pricing on our national carryout deal as well.”

Domino’s has been aggressively courting carryout customers for years, with remodeled restaurants, special carryout offers and even “carside delivery,” which is similar to curbside service at fast-food restaurants. That emphasis has increased more recently as the company has struggled to hire enough drivers to meet demand and delivery sales have fallen.

Delivery sales are typically more expensive overall because of the fees and tips. With inflation squeezing more Americans’ paychecks, the company believes that customers are choosing the higher value of carryout.

The company also believes that it could get sales from other quick-service restaurant chains as consumers seek out more value-focused offers. “The fact is, we also source a lot of our carryout volume from other QSRs,” Weiner said. “So during times globally, when pricing is going up, our carryout business should be a source of volume.”

The commentary also represents something of a shift for the chain, which had been saying that delivery was being hurt by a lack of drivers. Yet the 7.5% same-store sales decline from that end of the business came even though its delivery service was improving.

Domino’s has been working to improve staffing around the country, hoping to erase a performance gap between the strongest stores and the weakest.

Same-store sales for its top 20% of restaurants were 8 percentage points higher than the bottom 20%. That gap was 11% the previous quarter and 17% the first quarter of the year. That suggests that delivery sales are falling for reasons other than just pure service.

Yet the company still faces cost headwinds. Labor costs continue to increase. And food costs rose 13.4% in the quarter in the U.S.

Inflation led Domino’s earlier this year to raise its longtime $5.99 delivery offer. And it reduced what was available for carryout. The company is raising that key carryout price now, believing that it needs to do so to protect the profit margins of its franchisees. “We will continue to balance customer value and franchisee profitability,” Weiner said.

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