Domino’s U.S. same-store sales rose 3.9% in the U.S. in the first quarter, the company said Wednesday, extending a remarkable eight-year run of uninterrupted growth in the key metric for the tech-savvy pizza chain.
But it was the company’s slowest performance in more than five years and was lower than many analysts expected.
At least part of the reason for the slowdown came from third-party delivery companies that increased their marketing in the period.
But don’t expect the Ann Arbor, Mich.-based chain to jump on that bandwagon, like rival Papa John’s did recently in a national deal with DoorDash.
“I don’t see any need for us to go onto third-party platforms,” CEO Ritch Allison told analysts on its first quarter earnings call Wednesday. “We already have a strong digital channel. We are far and away the digital leader in pizza. We have a loyalty program with 20 million members. It’s not clear why I would want to give up our franchisees’ margin, or data in our business, and give it to someone who would ultimately use it against our business.”
Analysts had expected a slowdown because Domino’s has been aggressively building new units in its key U.S. market as part of a “fortressing” strategy to improve delivery times and carryout business. The company plans to add 2,000 locations in the U.S. over the next seven years.
The company and its franchisees added a net of 27 locations in the first quarter—they opened 31 locations and closed just four. Domino’s now operates more than 5,500 locations in the U.S. and has built 254 restaurants over the past year.
U.S. retail sales, which includes the impact of new stores and same-store sales growth, rose 7.9% in the quarter.
Domino’s has long acknowledged that building more stores in individual markets limits same-store sales growth by diluting the supply of locations, spreading demand over a larger number of locations.
Yet they believe it improves carryout business because consumers will only go so far to get their own pizzas. And they believe it can defend its delivery business in the face of growing competition from third-party providers by speeding deliveries and making it more cost-effective.
“We are the lower-cost delivery channel versus using some other third-party aggregator,” Allison said. “We’re advantaged relative to other players simply because we have significantly more scale.”
He added that another reason the company won’t use third-party services is quality. “At our company we place a high level of importance on quality and safety,” Allison said. “What happens when you have a service failure, or a product quality problem?”
Some international master franchisees do use third-party services. Allison said the experience has been “a mixed bag,” with some markets doing a good job working with aggregators and others that “haven’t done a good job setting up deals and structure.”
Still, executives acknowledged pressure from delivery providers in the quarter, blaming the services’ marketing for limiting Domino’s U.S. same-store sales growth, though they would not quantify the impact.
“We saw a big increase in advertising spend, in a push around free and discounted deliveries,” Allison said. “We’re not surprised to see it was driving some trial in major urban and suburban markets and see a slightly greater impact on our same-store sales growth than perhaps it did in previous years.”
Investors, for their part, shrugged off Domino’s sales results. The company bested profit expectations in the quarter ended March 24—diluted earnings per share rose 10% to $2.20. The company’s stock rose more than 9% in morning trading Wednesday.
While executives were pleased with their U.S. results, they were less than enthusiastic about the performance of international markets despite 1.8% international same-store sales growth in the period—the 101st straight quarter of growth.
“I am not happy with our recent international comp performance and the performance of a few markets in particular,” Allison said. “We continued to see softness in a few large European and Pacific markets.”
He said the company plans to work with master franchisees in those markets on aligning the value with customer demand.
Domino’s, which operates more than 10,000 international locations, also wants to work with those franchisees on implementing consumer insights and data, which drive all of its decisions in the U.S. He calls it “a huge driver of success for the U.S. business.”
Allison added that he remains confident in the company’s international business model. “We have terrific master franchisees,” he said. “The fundamentals in the international segment remain strong.”
Source: Restaurant Business