Lockdowns are good for the pizza delivery business, but great management is even better.
Investors shouldn’t be surprised. Domino’s has been disrupting fast food forever.
Most of retail is messed up. Although customers hate it, self-checkout is everywhere. Delivery companies like Uber Eats ( (UBER) - Get Report) and GrubHub ( (GRUB) - Get Report) are convenient, but super expensive for consumers, and terrible for margins at restaurants. Everything is upside down.
Domino’s built the world’s largest pizza brand by delivering surprisingly decent pizza at a fair price, fast. Then the Ann Arbor, Mich.-based company went a step further. Managers cut out all of the cruft in between pizzas and the customer.
They removed all of the friction with software. Ordering, payment and even pizza tracking moved onto a personalized smartphone app. Want a hot pizza in a hurry for the game this afternoon? Boom, a couple of taps and swipes and Susan was making your favorite pie, and George was delivering it 15 minutes later.
Innovation, and quickly learning from failure is part of Domino’s DNA.
The company has been through countless iterations in its relatively short lifespan. Founded in 1960 as DomiNick’s by two Irish American brothers, the idea was always to build a chain of stores with similar branding and products.
Five years in, Tom Monaghan had bought out his brother, purchased an additional two locations and changed the name to Domino’s. By 1978, franchising and aggressive expansion pushed the number of storefronts to 200.
The cornerstone of Domino’s pledge to customers was fast service and reasonable prices. Meeting those commitments has not always been easy. But the company has already proven capable of finding new solutions and adapting.
In the early 2000s, new self-rising crust recipes and clever marketing from giant food processors Kraft Foods and Unilever made frozen, make-at-home pizzas more enticing. These deflated the entire delivery sector.
The way back into customers good graces began with technology. Domino’s released a pizza tracker in 2008. It was silly idea but following the progress of orders on computer screens, and later smartphones, gamified the process. It won new fans.
A year later the company spent millions re-imagining all its pizza recipes. When Patrick Doyle, a Domino’s veteran, became CEO in 2010, he doubled down on technology. His teams implemented a digital strategy that led to orders on smartphones and a zero-click purchase experience through smart TVs. Overall sales zoomed from $1.6 billion in 2011, to $3.4 billion in 2017.
Digital orders were more profitable. There were also preferred by customers. With the entire virtual menu laid out in front of them, customers are more likely to add to their orders, including a side of high-margin cheesy breads and soda to make a meal of it.
The business became the perfect digital transformation story.
Through the first quarter of 2019, 65% of all Domino’s sales came from digital channels. This includes through new platforms like Alphabet’s ( (GOOGL) - Get Report) Google Home, Facebook’s (FB) Messenger, Apple’s ( (AAPL) - Get Report) Watch and Twitter (TWTR). Credentialed customers can even order Domino’s by texting a pizza emoji from their smartphone.
The quick service restaurant has plenty of competition. McDonalds ( (MCD) - Get Report), for example, joined forces with Door Dash earlier this year. But burgers and fries don’t travel well. Hashtag, unhappy meal.
Domino’s is winning because the company got to digital first, and best. Now the company is pressing its advantages on pricing and quick delivery as it expands its footprint with more stores.
The strategy is working.
Profits during the second quarter surged to $118.7 million, up from $92.4 million a year ago. The top line was stronger, too. Revenues jumped to $920.0 million, from $811.6 million last year. Analysts who cover the company, according to data from FactSet, were expecting only $915.0 million in sales.
More impressive, same store sales in the United States surged 16.1% year-over-year. International same store sales growth was 1.3% during the same time frame.
The stock has been a big winner, gaining 41% in 2020. Shares are extended. Perhaps they will consolidate in the short term, but this is a stock long-term growth investors should munch on when it pulls back.