Update 2025.1 - Domino's Pizza (DPZ)
Still Best in Class ROI for Franchisees
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What happened since the initial write-up?
We first wrote about Domino’s in November 2020, which means that many parts of the U.S. and rest of the world were still in lock-down mode at the time. This is relevant because the QSR pizza industry was experiencing a surge in delivery orders relative to carryout. Prior to Covid in 2019, the ratio of U.S. QSR pizza delivery to carryout was 39% to 61%. In 2020, that ratio changed to 41%/59% and in 2021 53%/47%. Then as the world returned to normal, QSR carryout regained some of its lost share. By 2024, the ratio of delivery to carryout reverted back to 45%/55%, indicating that delivery was able to hold onto some of the initial share gains. This data is from NPD up to November of each year from the company’s annual reports.
A big reason for this shift in customer preference in 2020 was the result of Covid lockdowns + social distancing mandates. Domino’s even offered contactless delivery options where pizzas were placed on pedestals in front of your door. Carryout was somewhat challenged during this period, but the decline wasn’t even close to the gains that the company experienced in delivery.
Adding to this relative share gain in delivery was the continued rise of the food delivery aggregators like Uber Eats, DoorDash, Postmates, Grubhub and others. If you remember in 2019, Domino’s faced increased competition from the aggregators that were running heavy promotions and discounts to new customers. As the company insisted on managing its own delivery order management and service, Domino’s share of delivery went down from 35% in 2019 to 31% in 2021.
Even with this headwind, Domino’s reported +11.5% same store sales growth in 2020. Those trends continued into 2021 but a shift started in 3Q, where delivery started to show negative comps and carryout was seeing a return to growth. Customers were returning to their pre-covid lifestyle during this time. The data from NPD suggests that the U.S. Domino’s stores still had very impressive delivery growth in 2021, but you have to remember that the data only goes through November.
In 2022, it was a “return to normal” year for Domino’s, continuing to gain share in carryout through its fortressing strategy. Carryout has been solid since 2022, with same store sales in this category increasing +15% in 2022, +5.7% in 2023 and +6.5% in 2024. Delivery on the other hand experienced same store sales growth of -9%, -1% and +1.4%, during the same time period.
When comparing Domino’s to Papa John’s, the company underperformed on a same store sales basis during the delivery boom period. Some of that was because Papa John’s was coming off company specific issues that had resulted in negative same stores sales in prior years but also because they had signed agreements with DoorDash, Uber Eats (and Postmates) to handle their food delivery in early 2019. This resulted in many incremental U.S. QSR pizza orders going to Papa John’s, especially during the lockdown periods.
Domino’s original stance on food delivery aggregators was basically skepticism about the sustainability of the business model. Here is Stu Levy, then CFO of Domino’s, at the ICR Conference in 2021.
“To be honest, we have a lot of questions about the aggregator model. So, I think the thing that puzzles us a little bit is we've been delivering for 60 years and in 60 years, we have never made money on delivery only. We make money on the food that we sell. So, it makes us question how you can have a model that is providing delivery and drive a sustainable business model from that, because we certainly have not been able to on delivery alone… You've got a finite value chain and in that value chain, these aggregators are essentially inserting themselves. And they have to get paid from one of two ways. It either has to come from the restaurant… or it has to come from the customer. And we believe that at a certain point, the customers are going to start pushing back a little bit on some things that maybe they were willing to take during COVID, that maybe they're not willing to take moving forward.”
However, the company’s official stance changed in July of 2023 when Domino’s signed an exclusive agreement with Uber to handle their third-party delivery aggregation (later extended to May of 2025). A pilot program was launched in the fall of 2023 and the rollout went nationwide later that year. Under the agreement, Uber handles the delivery orders that come in through their platform while Domino’s franchisees handle the delivery of the food. Any promotions through Uber would have to be approved by Domino’s. Also included in the new partnership agreement was the addition of 13 international markets that weren’t already using Uber as an aggregator partner to total 28 markets including the U.S.
The company explained its change of heart on using the aggregators as an additional channel for delivery. This is CEO Russell Weiner on the Q2 2023 earnings call:
“Really for us, it came down to three elements: scale, scope and incrementality. The scale of the aggregator QSR pizza delivery business is big now. It's a $5 billion category. We're the number one pizza delivery company in the country and we don't sell a single order on it. And so if there's a $5 billion opportunity, that kind of scale, you can expect us to compete for our fair share. The second is scope, the scope of the deal and the terms of the deal are really favorable for us and our international and domestic franchisees. And I said earlier, how now 70% of the stores will have access to potentially orders from Uber. And the last piece is just the incrementality. It's clear from the work we've done internationally and the studies we've done here in the states that we know how to manage this as a separate channel and drive incremental volume.”
The idea from the company side was to rollout the Uber partnership slowly to figure out what was actually incremental to its existing delivery business. In the 4th quarter of 2023, Domino’s first broke out the contribution from Uber to be 0.4% of orders and the stated goal was to have 3% or more contribution from Uber by the end of 2024. The next few quarters saw a ramp from 1.4% in 1Q 24, 1.9% in 2Q 24, 2.7% in 3Q 24 and 2.7% in 4Q 24. The company missed its year-end target but explained that they were still experimenting with optimizing marketing around the platform.
Domino’s determined that 65% of orders were incremental on the Uber Eats platform. The QSR Pizza market serviced through the food delivery aggregators are $5B in the U.S. and the company’s goal is to get to $1B with partnerships across most aggregators. Just last week, Domino’s announced a partnership with DoorDash, beginning in the U.S. in May and Canada later in 2025. The operating terms are similar to that of the agreement with Uber. Domino’s will still handing the delivery, while customers can order through DoorDash.
Even during this period of shifting demand from delivery vs. carryout and the new partnership with Uber, the franchisee’s performed well. U.S. franchise store EBITDA reached a high of $177k in 2020, followed by $174k in 2021, $139k in 2022, $162k in 2023 and $162k again in 2024. There were some issues related to under-staffing and inflation (along with the -0.8% same store sales) that impacted the 2022 EBITDA number.
Initially in 2022, the company stated that there was a 13% comp difference between fully staffed and understaffed locations. And by 2Q of that year, the top stores were outperforming the underperforming stores by 7% of growth. That issue was mainly resolved by the end of the year with only a 2% gap in delivery. Cost inflation also hurt the franchisees in 2022, with the food basket pricing increasing 10%-12% in 2022 vs. 2-4% in prior years. Domino’s alleviated this somewhat with pricing actions related to certain products and combos deals.
The other big change that happened over the past 4 years is the update to the company’s loyalty program. The “Piece of the Pie” program was originally launched in 2015. The program allowed members to earn points towards redemptions on orders over $10 (6 times to get a free pizza). Carryout customers that gravitated towards the lower priced $5.99 and $6.99 deals were oftentimes precluded from earning points towards redemptions. With the new Domino’s rewards program launching in September of 2023, members now earn points on orders above $5, which covers most orders. Redemption tiers were also expanded to multiple levels and more items to include beverages, bread bites, sandwiches and pastas. As of 2024, there were 36M members and a data point was given in early 2023 that there were an additional 45M inactive members.