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Domino's Pizza Stock Faces a Major Problem (And, It's Not The Noid)

A factor the pizza chain can't control may impact the return Domino's shares deliver to investors in 2022.
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Domino's (DPZ) - Get Domino's Pizza, Inc. Report owns 22% of the quick-serve (QSR) market share for pizza in the United States and  20% globally. The company has nearly $18 billion in global sales from its 18,380 stores, of which 98% operate under a franchise model.

Those numbers seem huge, but Domino's CEO Richard Allison, speaking at a virtual conference, pointed out that the QSR pizza market stands at $81 billion globally, split nearly equally between the U.S. ($40 billion) and the rest of the world ($41 billion). He also noted that fragmentation in the market opens up opportunities for his company to add share.

"As we think about the share opportunity out into the future, if you look at the U.S., for example, the top four players only make up about a 52% share," he said. "It's more fragmented than some of the other QSR categories out there."

In the long-term, that's a huge opportunity for Domino's but the company does face some significant shorter-term headwinds, according to its CEO.

The Noid Lead

The Noid character has appeared in Domino's ads since the 1980s.

Domino's Faces Some Expensive Problems

Allison explained that his chain's huge scale has helped it during the Covid-19 pandemic. "As we look forward to growing the business well into the future, the muscle that comes from that substantial marketing fund is also an important part of our scale advantage."

Domino's, however, can't leverage its size to get itself out of every problem. Allison expects that the chain's bottom line will be hurt by rising prices for the ingredients it needs to make the items on its menu.

"We expect unprecedented increases in our food basket cost versus 2021 of 8-10%, which is three to four times what we would normally see in a year," he said. "I think many of you are aware of the significant inflation across the U.S. economy and how that is hitting many of the inputs that we have for our business from meats to cheese to some of the grains that go into the production of our products."

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The CEO said he also expects to see wage inflation in 2022, which he sees impacting the entire industry including Domino's.

What Is Domino's Doing to Combat Rising Expenses? 

"In light of some of these costs we are going to make some changes to our national offers in 2022," Allison said.

The first of those, he added, will hit menus "in a couple of weeks" and it relates to the Domino's $7.99 carryout offer. Instead of changing the price, Domino's plans to give customers less food.

"We're not going to change the headline number because the equity in that number is so important," he said. "But we are going to move that offer to online only and we're going to change the count on our chicken -- our wings and boneless -- from 10 pieces to eight pieces to recognize some of the costs we are incurring."

Allison said that including less chicken lowers the cost while moving to online-only has benefits as well.  

"One is a higher ticket. Two is a lower cost to serve because we're not having to answer the phones, and third is that we get access to critical data."   

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