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Should pizza chains work with third-party delivery?

RB’s The Bottom Line examines the vastly different strategies deployed by Domino’s Pizza and Papa John’s.
Photograph courtesy of Uber Eats

The Bottom Line

For a long time, pizza chains had a virtual monopoly on the business of delivering food to homes, with exceptions for Chinese restaurants and Jimmy John’s.

And then third-party delivery services came along and changed all of that.

Perhaps not surprisingly, the reaction of the largest of these pizza chains to the incursion of new competitors into their turf has been varied.

Domino’s Pizza has resisted third-party delivery. Papa John’s, as we wrote this week, has embraced it.

Which is the right move? It’s certainly worth examining.

For the most part, the companies’ different strategies reflect their current business standing. Domino’s has enjoyed a decadelong run of sales growth and is in a strong enough position to hold back companies such as DoorDash, Uber Eats, Grubhub and Postmates.

Papa John’s sales have been brutal for the past two years, likely exacerbating an already difficult driver shortage and prompting it to make deals with third-party players.  

One of the biggest arguments against third-party delivery is the customer relationship. By resisting third-party delivery, Domino’s is ensuring that it controls everything associated with the process. It can make deliveries more efficient and can run ads such as its current campaign guaranteeing quality delivery.

To be sure, Papa John’s is less concerned about controlling the process than it is about not getting deliveries to the homes at all. Some of the company’s decision is related to its driver shortage, and the ability for third parties to expand its restaurants’ reach.

“They already have the delivery networks in place,” Papa John’s CEO Rob Lynch said this week. “They are already serving customers that we are not reaching today.”

But what about data? The next big frontier in the restaurant space is in the use of data gathered from customers, particularly through digital channels. Papa John’s argues that the issue of data sharing is overblown, noting that the vast majority of its customers already use one of the delivery providers.

“We don’t believe the idea of their stealing our data and using it against us is going to transpire,” Lynch said.

But data is important. Pizza chains and third-party providers are theoretical competitors. And maybe less theoretical as more of them invest in ghost kitchens.

Domino’s believes that sharing data with third-party aggregators is risky.

“I just can’t understand why you’d want to give that to a competitor,” Domino’s CEO Ritch Allison said last month, referring to the company’s 23 million loyalty members and 85 million active users.

At the same time, more customers are using third-party delivery apps than ever, and at least a certain percentage prefer to keep just a couple of delivery apps on their phone. Those might not include a pizza chain.

Papa John’s gets access to those customers. Some of those customers might also be outside of the company’s normal delivery radius. “We think they can help us,” Lynch said.

By avoiding third-party delivery, Domino’s is forgoing that customer set. That said, it has nearly twice as many domestic locations, and delivery radius is less of an issue.

Still, the chain’s same-store sales growth has slowed down this year as delivery providers have increased their presence.

Papa John’s, meanwhile, saw its same-store sales improve last quarter, and trends suggest that it soon could outperform its rival for the first time in several years.

That said, third party is “still a relatively small part of our business, and I would not attribute our disproportionate sales growth this quarter to those partnerships,” Lynch said.

There’s also profitability. Pizza chains can deliver more efficiently and profitably because they employ drivers and use a hub-and-spoke system to make deliveries. Domino’s has long argued this, saying that using third-party providers would hurt its operators’ cashflow.

Papa John’s doesn’t say that its profits are the same. But, Lynch said, “we’re very happy with the profitability associated with the aggregators' orders.”

Maybe the biggest potential concern, however, lies with the delivery providers themselves.

Late last month, Grubhub told shareholders that its new-order customer growth has slowed, that new customers tend to be less loyal and that the delivery business is maturing.

Uber Eats’ adjusted earnings before interest, taxes, depreciation and amortization was a loss of $316 million last quarter. Third-party delivery company Waitr Holdings reported another loss Thursday, and its stock plunged 35% after the company decided not to sell itself and took a massive write-down on impaired assets.

These issues have seemingly buttressed Domino’s long-held contention that delivery economics don’t work. Investors have pushed the company’s stock 8% higher since the Grubhub letter was made public.

That said, the third-party delivery business will likely change and not go away altogether. Too many customers like having options. The business seems likely to morph into a mobile ordering marketplace where delivery is an option.

For a company like Papa John’s, which needs a little help on the sales side and on the driver side, a partnership with these providers isn’t necessarily a bad idea, either.

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