Is there any end in sight to the dominance Domino’s has displayed in the pizza category throughout the past few years? Based on the company’s ambitious plans outlined during last week’s Investor Day, the answer seems a bit clearer now: No.
The company’s current trajectory can be traced back to 2010, when Domino’s revamped its pizza recipe and launched a bold “Oh Yes We Did” campaign that called itself out for having a lackluster product. Since, systemwide sales have jumped from $3.1 billion to $5.9 billion in 2017.
The company’s strategy has piqued investor interest, too. Domino’s shares were worth a little over $11 in the beginning of 2010. Today, they’re worth about $260.
It’s an understatement to say that Domino’s has been on a roll of late. While much of the industry has been flat to slightly positive, the pizza giant has posted revenue growth above 20% for the past three quarters, and has experienced 30 consecutive quarters of same-store sales growth. Thirty.
Because of this consistent progress, Domino’s surpassed Pizza Hut in 2017 to become the country’s largest pizza chain by sales, even though it has about 2,000 less domestic units.
Any questions that lingered about the company’s momentum after CEO Patrick Doyle’s retirement six months ago should be settled by now. Successor Ritch Allison hasn’t missed a beat and his investor day presentation illustrates that the company has no plans to rest on its laurels. Domino’s is projecting $25 billion in annual sales globally by 2025 – double its 2017 sales of $12.25 billion – as well as 2,000 new U.S. stores within that time frame.
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In a crowded restaurant space plagued by oversaturation, this is an ambitious goal. To grow its footprint, Domino’s plans to lean heavily into its fortressing strategy, which began in 2012. The idea is simply to add more stores to existing markets in an effort to cut down on delivery times and be closer to carryout customers.
This approach presents a risk of cannibalization (see Subway). But Domino’s has advantages in that these fortressed stores are being opened by existing operators in the market. It also helps that a majority of the company’s business comes through delivery/carryout channels, so more stores should – in theory at least – lead to higher volumes, higher sales and, ultimately, higher profitability. Fortressing could also prevent competition from gaining traction in the market.
During investor day, COO Russell Weiner painted a picture of what this has looked like so far. In Las Vegas, for example, an operator who went from three to four stores in the same area experienced a $42,000 increase in average annual sales per store, much of that coming from incremental carryout business. Because of this success, Domino’s plans to increase its store count in Las Vegas by 25% in the next three years through realignment.
“Why fortress? Because proximity matters. It allows for better service. You’re closer to your customer,” Weiner said during the presentation. “If we don’t grow our stores or split our territory for better service, someone else is going to. If money is there to be made, someone will come.”
Another major advantage Domino’s has – both in fortressed and traditional markets – is strong unit economics. Weiner claims that the U.S. system has a cash-on-cash payback of less than three years for franchisees.
“When we have that payback, we’re going to grow. The opportunity to invest and get that money back within three years is really attractive and we’re seeing a significant number of franchisees willing to put capital in the brand,” he said.
Allison said franchisee profitability is at the center of every decision made – from pricing and promotions to technology investments.
“I wouldn’t put a nickel of my own money into a franchise business if I didn’t know what the unit level economics are,” he said.
Domino’s also has a significant leg up on its competition because it’s one of the few brands actually growing traffic. Conversely, much of the industry’s growth within the past two years has been driven by ticket. Weiner said that is simply not sustainable.
“You’ve got to grow through traffic and orders. If you’re getting more people in your store, it’s telling you you’re doing things right. You’re not trying to trick them into spending another penny, you’re satisfying them and they’re coming back for more,” he said.
Domino’s grew traffic by 7.4% in 2017 to 2018. Comparatively, the overall pizza category grew traffic by 1.7% in that same time frame, while the QSR segment grew by just 0.8%.
The company considers pricing, value and loyalty strategies by whether or not they will drive traffic, and that approach is clearly paying off. Domino’s is able to do this because it leverages its technology infrastructure to make data-driven decisions, Allison said.
“I don’t have to make gut calls because we’re listening to the customer and collecting that data to make the decisions,” he said. “That translates into our relationship with our franchisees. We don’t tell them, ‘we think you should do this.’ We bring the data and the franchisees trust us.”
Former CEO Doyle started talking about Domino’s position as a technology company that sells pizza about five years ago. The company has pushed the accelerator on this idea since and, as a result, 65% of all orders now come through digital channels.
Domino’s got to that number because it offers 18 different ways to order. For consumers demanding convenience and speed, this is quite a differentiator. Domino’s is essentially conditioning consumers to order a pizza with very little friction, regardless of they are – even if that happens to be a beach. The company is furthering appealing to convenience seekers by offering a strong value proposition.
All of this leads to what executives are calling a “virtuous cycle.” Volume growth leads to higher sales and profitability which leads to the ability to offer value at scale. As an example, the company launched its $5.99 deal all the way back in 2009. That price point has remained the same since, but store EBITDA has more than doubled.
“That’s because of scale. Value at scale lets us give our customers price points they’re going to want,” Weiner said.
Scale doesn’t just allow Domino’s to control the value narrative, it also allows the company to leverage purchasing power, technology investments, supply chain economics and advertising costs. And this is how the rich get richer, so to speak.
“We all have the same headwinds,” Weiner said. “But with the scale that we have and the value we can offer, the headwinds in the industry are tailwinds for Domino’s.”