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Domino’s defends its delivery turf

Facing mounting competition from third-party providers, the company is bolstering technology and service to solidify its position.
Photograph courtesy of Domino's Pizza

Facing sudden cracks in its sense of invincibility, pizza delivery giant Domino’s is turning to more technology, and better service, to defend its turf against the encroaching threat from third-party delivery services.

The company said this week that it plans to add GPS tracking technology nationwide by the end of the year, a move that takes a page directly out of the third-party services’ playbook.

Domino’s has already announced plans to test self-driving delivery in Houston through Nuro, and it is testing voice order-taking in 40 company-operated locations.

The company is also pushing its franchisees to improve service and get pizzas delivered on time.

“We are pushing very hard on service within our system because it’s a critical element as we look forward into this new world where you can get anything delivered,” CEO Ritch Allison said on the company’s second-quarter earnings call Tuesday. “We not only have to be the most economical and lowest-cost delivery provider, but we’ve also got to be the best getting to the door on time, every time.”

Those efforts also extend to how the company delivers its pizzas. Domino’s is using more bicycle deliveries in the U.S.—they are far more common in more urban international markets—and recently expanded the use of e-bikes started by an operator in Seattle.

Those efforts tend to cost less. They also expand the potential pool of delivery drivers at a time when competition for such workers is intense. Again, that competition is coming from third-party aggregators.

“Not only is it a lower-cost way to deliver food, but also it opens up some additional workforce to us,” Allison said. “Not everyone has an automobile, and, increasingly, [fewer] young people in the 18- to 20-year-old range … have cars.”

Domino’s finds itself under more pressure than it’s been in for most of the past decade, as delivery services such as DoorDash, Uber Eats and Grubhub have greatly expanded the types of food that can be delivered.

The company said that its U.S. same-store sales in the quarter ended June 16 rose 3%. While that was its 33rd straight positive quarter, it was also the lowest in seven years and the fifth straight in which the key metric slowed from the previous period.

More disconcerting to investors: The sales came purely by customers paying higher prices for their pizzas and not from traffic. Growth in order count had been a hallmark of Domino’s decadelong run of growth.

The slowdown in sales has come as third-party delivery providers have ramped up marketing, often using major fast-food brands such as McDonald’s, Taco Bell, Chipotle Mexican Grill and Wendy’s.

Allison said the company saw “a significant amount of pressure” from third-party services.

“That group of aggregators has taken a fairly significant share of voice out there in the advertising landscape around food delivery,” Allison said. “We expect that behavior to continue for some period of time.”

It was Domino’s starkest acknowledgment of the competitive threat third-party providers pose to its sales growth. The company’s tone on that threat has shifted markedly this year.

That said, the company has been preparing for a more competitive future with its fortressing strategy, designed to shrink delivery times, improve on-time performance and increase takeout orders.

That fortressing itself is impacting same-store sales: The company added 42 locations in the U.S. in the second quarter, and 200 worldwide. The company now operates about 6,000 units in the U.S. and more than 16,000 globally.

The additional supply is taking some traffic away from existing locations.

Still, executives say it’s “the right long-term answer for the brand.”

“Our data-driven approach to territory assessment has created a meaningful, educated conversation around how we can best continue to win the long game by establishing closer proximity to households, driving carryout, shrinking delivery areas, improving service and lowering cost-per-delivery for franchisees,” Allison said.

The commentary from Domino’s executives, which helped send the company’s shares down more than 8% on Tuesday, has emboldened bearish investors who believe its growth days are numbered because of the delivery threat.

Domino’s itself, however, says much of that competition at the moment is not profitable. “There still remains a heavy degree of discounting in the marketplace by the third-party aggregators and also a heavy degree of advertising spend,” Allison said. “While the economics of the business are still open to question for the long-term, the near-term activity indicates that investors are willing to lose a lot of money to drive trial and market share in those businesses.”

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