Domino’s effort to fortress its U.S. market is running into a common problem: Construction delays.
Specifically, the company said that delays in permitting and construction have slowed unit growth, a problem that is expected to persist for at least a year.
“We’ve already flagged that in the U.S., between the permitting and construction delays that we’re dealing with, we’re going to see a slowdown,” Sandeep Reddy, Domino’s CFO, told investors this week. “That slowdown has come.”
“Until we see the permitting and construction delays completely abate, it is going to be a headwind,” he added.
Indeed, Domino’s U.S. unit growth has averaged about 60 locations per quarter between the fourth quarter of 2020 and the first quarter of this year.
Yet the company added just 22 locations in the second quarter and 24 in the third.
On a percentage basis, that means Domino’s unit count growth has declined to 2.7% over the past 12 months from 3.7% the same period a year ago.
Domino’s, however, believes that its unit growth will soon return because franchisees can generate a return by constructing new locations. “Demand is very strong from our franchisees,” Reddy said. “That’s why we’re really very convinced that we’re on our way to that 8,000-plus mark.”
Delays in permitting and construction in recent months have hit more than a few restaurant chains and have apparently continued, even as some supply chain problems appear to have been eased. Companies like Noodles and Shake Shack have had issues with new restaurant builds in recent months, among others.
For Domino’s, that 8,000-location mark is a key goal. Just before the pandemic, the Ann Arbor, Mich.-based pizza chain made a key strategic goal of building more locations in existing markets, called “fortressing.” With 6,400 locations, that means it needs another 1,600 restaurants to get to that mark.
By adding more locations per market, the company argued, it would generate more carryout sales while improving delivery times and overall service. The company believed the move was key to making it more competitive in the face of rising competition from delivery players.
In other words, it was willing to forego some same-store sales growth in the short term in exchange for overall retail sales growth.
It’s uncertain whether the company is succeeding in this. Retail sales growth has slowed in recent quarters as same-store sales struggled coming out of the pandemic, which the company initially blamed on the driver shortage but now appears to be impacted more by inflation and curbs on spending by its core consumers.
But it certainly isn’t hurting growth in carryout sales. Carryout same-store sales rose 20% in the third quarter while delivery same-store sales fell 7.5%. Domino’s expects to become more competitive with more traditional fast-food chains in the coming months.
Domino’s has also used refranchising recently to spur more growth. The company refranchised its Michigan market, for instance. And it recently sold 114 locations in Salt Lake City and Phoenix to 11 franchisees. “The refranchising strategy for us is really more of a growth strategy,” CEO Russ Weiner told investors.
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