Domino’s shifts its tone on third-party delivery

After saying for some time that it saw little impact from the services, the chain now says the service is hurting sales, says RB’s The Bottom Line. What changed?
Photograph courtesy of Domino's Pizza

The Bottom Line

Last week, Domino’s Pizza reported 3% same-store sales growth in the second quarter and laid the blame largely at the feet of third-party delivery.

That represents a dramatic shift in tone for the Ann Arbor, Mich.-based pizza chain, which not long ago was insisting that the service wasn’t having much impact at all.

To look at this shift, we analyzed Domino’s earnings calls transcripts using financial services site Sentieo.

We searched for the term “third party,” referring to companies such as DoorDash, Grubhub, Postmates, and Uber Eats.

One thing is clear: Executives are talking about them a lot more now. On the 14 Domino’s presentations from late 2017 until its first quarter earnings call in April, executives or analysts mentioned the term “third party” an average of four times per presentation.

Last week, they mentioned it 23 times.

Similarly, executives have dramatically increased their use of the term “aggregators” during earnings calls this year when compared with past years—a clear sign that the company has shifted its tone and analysts are asking a lot of questions. Which is precisely what happened.

Domino's Slowing U.S. Same-Store Sales

Graphic courtesy of Technomic

Let’s go back to February 2018, when Domino’s then-CEO Patrick Doyle reiterated a line the company had used often in previous months.

“Overall, I would give you the same answer you’ve heard from me many times, which is we just have not seen a really significant effect from this. And if we can identify it, it is still relatively small.”

That was roughly the company’s view for much of the past two years, even as services grew rapidly and more restaurant chains added them—and analysts kept asking. And it continued as Doyle handed over the CEO baton to Ritch Allison in 2018.

Allison in December of last year hinted that there may be some impact in big metro areas such sa San Francisco or New York City. But, he said, “Generally, when our customers order from us, they decided to have pizza that night.”

Amid this, however, Chipotle Mexican Grill was generating sales growth with the promotion of a free delivery offer. In subsequent months, major delivery services such as DoorDash would start advertising. Brands such as Taco Bell and Wingstop turned on delivery marketing. Chains such as Wendy’s used offers to get customers to start ordering delivery. Chick-fil-A delivers.

Numerous other chains, from Dog Haus to Jersey Mike’s, pushed delivery more aggressively.

In April, Domino’s view of third-party delivery changed quite a bit.

“We experienced pressure on the U.S. comp from our successful fortressing strategy as well as from aggressive marketing of third-party aggregators,” CFO Jeffrey Lawrence said on the first quarter earnings call. Same-store sales during that period rose 3.9%.

And then, in the second quarter, those sales worsened, to 3%. What’s more, the company said it all came from price, rather than traffic. For a chain that has enjoyed almost uninterrupted customer growth for the past decade, it was a very different result. And investors punished the company’s stock.

“We did, during Q2, continue to see a significant amount of pressure on the part of third-party aggregators,” Allison said. “There is a substantial amount of discounting out there as they drive to gain market share.”

To be fair, Domino’s has not shifted its tone this year on its concerns regarding delivery providers’ economic model—profitability for many companies remains elusive, especially as they push hard for market share.

And the company started its response to third-party delivery long before this shift in tone came along. Its fortressing strategy, building more units in existing markets, was designed in part to bolster its delivery capabilities. It is also intensifying its response to aggregators’ growth.

A shift in tone was inevitable. As more large chains added delivery and began marketing the service, its growth would ultimately eat into the business long enjoyed by traditional delivery providers.

This is going to be a big test for Domino’s in the coming quarters. Restaurant chains aren’t exactly slowing down when it comes to delivery: Giant McDonald’s, with its low-cost burgers and ultra-prevalent locations, just turned on its marketing a few weeks ago.

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