Domino's Pizza abandons plans for new fast-food concept

Domino’s Pizza Enterprises has abandoned plans to launch a new food concept and will focus instead on boosting sales of non-pizza products and faster deliveries to grab a bigger share of the lunch market.
At its annual investor day on Friday, Australia’s largest pizza chain told analysts it would no longer investigate opening a new fast-food format because there was plenty of scope to boost sales from its existing franchise by widening its menu and cutting down delivery times.

Analysts believe Domino’s has been looking at new formats such as sandwiches, hamburgers and even Mexican food to increase its share of the market.

Domino’s is estimated to account for about 45 per cent of the pizza market and 40 per cent of the online food market but only 3 per cent of the total quick service restaurant or fast-food market, which is dominated by McDonald’s.

Domino’s has recently added products such as oven-baked sandwiches, chicken wings and thick shakes to its Australian menu and analysts expect more non-pizza offerings to cater to lunch-time crowds seeking a wider range of options.

However, one of the  barriers to Domino’s increasing its share of the lunch-time market is its store network, with the bulk of its stores located in residential areas rather than within walking distance of CBD office blocks and major work locations.
“The store network they have is very well set up for short delivery times to the home but they probably have to convince people to order delivery for lunch,” said Citigroup’s head of research Craig Woolford.

Payback period

Domino’s may be able to open new stores closer to areas where people work.

“But the challenge to having them closer to (lunch-time crowds) means they’re not necessarily close to where people are at dinner time – it’s a structural challenge,” said Mr Woolford.
Domino’s indicated it would continue to open new stores in Australia by splitting existing franchisees’ territories to speed up delivery times, boost same-store sales, improve net promoter scores and reduce labour costs.

Domino’s plans to open 380 stores in Australia and New Zealand over the next seven years and store splits are expected to account for 70 to 80 per cent of new stores, up from 60 per cent over the last three years.

However, store splits could make it harder for Domino’s to achieve international payback targets for franchisees because it takes more than three years for sales and earnings to recover when stores are split.

Brand owner Domino’s Pizza Inc wants to encourage more franchisees to open more stores by reducing the payback period on initial capital to 2.5 years.
According to Citigroup, the average payback period for Domino’s Pizza franchisees is three to five years, with Australia estimated to be about 3.7 years compared with 4.8 years in Japan and 4.25 in Europe.

No trading update

Citigroup estimates a franchisee’s earnings per store (EBITDA) would need to rise by 46 per cent to $200,000 and weekly sales would need to rise 15 per cent to 25 per cent to achieve 2.5 year payback.

Citigroup believes this is a stretch, while Morgan Stanley analysts say franchisee returns will improve as store operators benefit from digital initiatives such as automated rosters, predictive ordering (ie based on past demand franchisees start preparing pineapple pizzas at 6pm), electronic bikes, ordering apps, GPS pizza tracking and digitising stock takes.
“No time frame was placed on Domino’s Pizza Inc’s aspiration but we think as store economics improve, so too will demand for stores,” said Morgan Stanley analyst Tom Kierath.

Domino’s provided no trading update at the investor presentation but is expected to do so at its annual meeting on November 7.

Analysts have recently trimmed same-store sales forecasts for Domino’s European stores following reports from Domino’s Pizza Inc and Domino’s Pizza Group in Britain that the extremely hot summer had dented demand.

“There’s no doubt Europe has been softer – when it gets too warm that does have a negative impact on pizza sales,” said Mr Woolford.