In the not so distant past, food delivery was nearly synonymous with pizza, or maybe your local Chinese restaurant. Not so anymore. A number of secular changes like prevalent access to the internet, busy work schedules, and increased spending on dining out are making food delivery a high-growth sub-industry for restaurants. According to Adroit Market Research, the global online food delivery business is expected to grow 16% a year through 2023.
Domino's Pizza (NYSE: DPZ) has long been a dominant player in the space. At the end of 2018, the world's largest pizza chain owned 31% of the total pizza delivery market. More importantly, the company has been leveraging its leadership to capture strong growth -- bucking restaurant industry trends with 6.6% U.S. same-store sales growth, a combination of foot traffic and customer ticket size. That has compared with nearly non-existent same-store-sales growth for the average U.S. restaurant the last few years.
Thus, expectations have been running high for Domino's, and the second quarter of 2019 was no exception. Investors were disappointed with the numbers from the tech-enabled pizza chain, but results were nothing to balk at.
King dollar, and fresh competition, take a big slice
Total revenue rose 4.1% during the second quarter, driven by a net 200 new stores, pushing the global count to 16,114. U.S. same-store sales grew 3%, and international same-store sales grew 2.4%. Global retail sales at Domino's locations were up 5.1%, but excluding the effects of a strong U.S. dollar, retail sales were up 8.4%.
In spite of currency fluctuations that took a heavy toll, Domino's still delivered solid bottom-line results. Quarterly adjusted earnings were up 19% to $2.19. All told, it added to what's shaping up to be another good year for the pizzeria behemoth.
Six Months Ended
Six Months Ended
Adjusted earnings per share
Data source: Domino's Pizza. YOY = year over year.
As good as it was, though, same-store sales decelerated again. In the same period a year ago, U.S. comps were up 6.9% year over year, and international was up 4%. Thus, it wasn't just King Dollar that took a cut. Management stated, as it has been for a while now, that food delivery start-ups took their fair share as well.
Image source: Getty Images.
The battle of food delivery heats up
It isn't just rival pizza joints trying to capture some of Domino's success and the rising importance of delivery. It's also non-pizza chains clambering to get into the food delivery game. Technologists including Uber (NYSE: UBER) Eats, GrubHub (NYSE: GRUB), and DoorDash are making it easier for other restaurants large and small get in on the action, too.
The same trend is happening overseas as well. Delivery start-ups have been a hot investment theme -- like Tencent Holdings' (NASDAQOTH: TCEHY) cash infusion into India's Swiggy and Booking Holdings (NASDAQ: BKNG) partnership with China's Ctrip into delivery service Meituan, to name just two. International growth is a key area of focus for Domino's, so the rising tide of competition is sure to temper expansion.
Blaming external factors would be disingenuous, though, as Domino's is inflicting pain on itself too. The answer to surging interest in delivery has been "fortressing," the company's strategy to continuously open new stores in existing markets to get increasingly closer to customers. This isn't just another quirky marketing scheme. The idea is that the closer the store is to the consumer, delivery will be faster, in-store pickup will be more convenient, and service will be better due to shorter lines -- keeping the pizza restaurant top-of-mind and staving off competition. Though it hasn't happened yet, the plan has cannibalization potential -- when new stores start stealing sales from existing ones. Nevertheless, Domino's thinks it has enough data on its markets that this won't happen, although it is one of the reasons for the slowdown in comps growth.
A Nuro self-driving delivery vehicle. Image source: Nuro.
However, technology has been given credit for helping Domino's grow in spite of its aggressive store expansion plan. The company has a myriad of options for customers to order with, and has added tools to make tracking order progress convenient. Domino's has even built out an app to order from a supporting wearable device -- because what better way could there be to wreck your daily steps goal than by ordering a pizza via your fitness tracker or smartwatch? During the second quarter earnings call, management said it is launching a pilot program in Houston this fall with self-driving vehicle delivery service Nuro. Added to the technology mix have been myriad marketing campaigns and deals to entice customers into using the new tools.
It may be a stretch to call Domino's a technology company, but data science is helping drive positive results for the megachain -- even in the midst of a hyper-competitive restaurant industry where too many store openings and pressured profit margins have become the norm. Investors may have been unhappy with the growth slowdown during the second quarter, but it's all by design at Domino's.
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Nicholas Rossolillo and his clients own shares of Booking Holdings and Tencent Holdings. The Motley Fool owns shares of and recommends Booking Holdings and Tencent Holdings. The Motley Fool recommends Grubhub and Uber Technologies. The Motley Fool has a disclosure policy.