On the Margin
Dominos Pizza logo

Could delivery pit McDonald’s against Domino’s?

Blog: As burger giant goes big into delivery, pizza chain says the occasions are different

This post is part of the On the Margin blog.

It’s rare that a company reports same-store sales of 9.5 percent and investors start selling, but that’s what happened to Domino’s Pizza Inc. on Tuesday.

The selloff, as we reported yesterday, was rooted in the chain’s surprisingly weak international business, especially in the United Kingdom, where same-store sales increased “just” 2.4 percent. 

The reaction suggests investors believe that competition for delivery could be hurting Domino’s sales there. And perhaps that’s a risk for the chain’s sales in the U.S.

That’s a key point because delivery is suddenly top-of-mind with many executives domestically, and perhaps nowhere is it more top-of-mind than at McDonald’s Corp. — which is rapidly expanding the service here, and which dubbed Wednesday “McDelivery Day.”

Theoretically, the quick addition at delivery at a 14,000-unit chain poses a risk to Domino’s, which has built its 5,000-unit domestic business largely on its ability to deliver pizzas to customers. 

McDonald’s believes it has a strong opportunity to generate sales with delivery. The orders are as much as two times higher than a typical McDonald’s order. And the company’s size and scale enables it to get food to customers in 30 minutes or less. And 60 percent of the orders come in the evening and late night.

The restaurants that do a lot of delivery include college campuses, downtown areas with no access to cars, and lower socioeconomic areas where consumers might not want to venture out in the evening. 

These are different customers from McDonald’s typical visitors. 

“They’re coming in at underutilized dayparts,” Lucy Brady, senior vice president of corporate strategy and business development. “We believe now it’s highly incremental. We’re tapping into a different use case.”

To be sure, delivery remains a very small part of the overall restaurant business, and it’s clear from Domino’s results so far that the delivery business is coming from other sources.

Domino’s 9.5-percent same-store sales in the second quarter came as just about every major restaurant chain outside of upscale concepts has worked on delivery in some form.

CEO Patrick Doyle said the company has seen no evidence that the other delivery providers are affecting its business. 

He said the chain’s sales aren’t being hurt in areas where delivery is more popular.

“We know where delivery services are well developed, and where they are not,” Doyle said. “We can break those markets apart and see where there is differentiation in the results, and we’re just not seeing it. Any way we cut the numbers, it does not show up in our results as pressuring our comps.”

Doyle said that customers first decide to get pizza delivered, and then choose from where to get the pizza. He said Domino’s strong efforts to bolster its technology in recent years have made the company an easy decision, which has helped its sales. Domino’s same-store sales have increased 32 percent on a three-year basis and have increased 25 straight quarters in the U.S. 

“We’re watching it very carefully,” he said. “We understand the marketplace very well. We’re looking at all the players, where they do well, and where they do not. We’ll take good ideas anywhere we can find them. But so far we’ve seen zero effect on our sales.”

And he also had some words of caution for delivery providers.

“Delivery is a lot harder than they thought it was going to be,” Doyle said. “Some are already gone. Others are understanding the economics. For it to work, it’s got to work for the driver, the restaurant, the company providing the service, and it’s got to work for the customer. There’s got to be value creation for all four parties to have a sensible delivery business. There’s still a lot of learning going on.

“We’ve had 57 years of learning how to make delivery efficient. Our advantages there seem to be holding up well.” 

Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.

Contact Jonathan Maze at [email protected]

Follow him on Twitter at @jonathanmaze

Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish