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Domino’s same-store sales may not reveal its true performance

The pizza chain, which has enjoyed an unprecedented run of same-store sales growth, says it is focused on growing its overall sales, says RB’s The Bottom Line.
Photo courtesy of Domino's

The Bottom Line

At Domino’s, same-store sales growth seems almost a birthright. The chain has enjoyed about a decade’s worth of uninterrupted growth in the key metric in the U.S. It’s even more ridiculous internationally, where the company hasn’t reported a negative number since Bill Clinton’s first term as president.

All of which might make it a bit odd to hear the company’s chief financial officer de-emphasize the number’s importance.

“Everybody gets so focused on comp store growth,” Stuart Levy said at the ICR Conference this week—using the informal terminology for same-store sales. “I’m not trying to minimize comp store growth, but it’s not just the growth in an individual box. It’s about being able to put more boxes out there. It’s about being able to grow your brand by adding units.”

Yet it’s also an indication of Domino’s current strategy, which focuses on adding locations to grow overall sales, rather than building sales within the same box. The strategy, called “fortressing,” is designed to improve delivery times and generate more walk-in sales in part by peppering the world with more Domino’s.

In so doing, Domino’s is banking on generating enough sales from the additional units and improved service to make the investment worth it, even at the expense of some sales at locations close to the newer units.

After all, if a market operated 10 stores and Domino’s adds three locations, those new units will reduce sales at the previous 10 locations. But the company believes it will make for a stronger overall brand.

To the company, therefore, success should be measured more on retail sales, which tracks total sales for the system, rather than same-store sales, which measures sales growth (or declines) at existing locations.

That said, pre-pandemic Domino’s retail sales growth had been slowing. In 2019, same-store sales rose 3.2% in the U.S. for the full year, but retail sales were up 6.9%, a difference of 3.7%. That was slower than in 2018, when same-store sales rose 6.6% and retail sales were up 11.2%.

“I’m not trying to minimize the importance of comps,” Levy said. “In fact, I’d be crazy to try and minimize the importance of comps when you’ve seen the comps we’ve had. We just think about comps plus. It’s plus overall growth in the system that matters.”

Same-store sales are both really important and highly overrated at the same time. By measuring sales at existing locations, a company can demonstrate the popularity of its brand with customers. And all brands need at least some same-store sales growth to keep pace with inflation. A company’s unit economics are important—just ask Subway.

But it’s also easily manipulated. A brand can close a few underperforming locations, for instance, which improves the overall average because those bad stores are no longer in the calculation. A company can also raise prices, which can generate same-store sales growth without the benefit of additional customers.

In addition, same-store sales doesn’t reflect a brand’s overall expansion. So companies that are adding units aggressively, like Domino’s, will have weaker sales but better overall performance.

Still, Domino’s fortressing strategy remains a risk. By building more locations, it does potentially hurt that all-important same-store sales number, which could hurt the brand’s unit economics. Then again, when you’ve had a decade’s worth of improving unit economics, you can afford to take a few risks.

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