Investing in Domino's Pizza – It's All About the Dough (Part 12 of 15)
Attracting the new generation
Restaurants are continually innovating to keep up with ever-changing trends and customer preferences. Some restaurants chains, such as McDonald’s (MCD), Wendy’s (WEN), and Burger King (QSR), are updating stores to appeal to the Mi llennials. Others, such as Chipotle Mexican Grill (CMG) and Panera Bread (PNRA), promote food quality to attract customers.
For its part, Domino’s is introducing a new Pizza Theater concept, and is requiring all of its locations to adopt the initiative.
The Pizza Theater
The Pizza Theater is a reimagined design for Domino’s (DPZ) restaurants. It allows customers to watch as their orders are prepared, as you can see in the image above. The company plans to have all its stores remodelled according to this design by the end of fiscal 2017.
McDonald’s had redesigned ~70% of its domestic store interiors and 60% of exteriors by the end of 2014. But while remodelling is all the rage with restaurants, the effectiveness of this strategy is still questionable. In the US market, McDonald’s same-store sales growth fell to 4% in February.
What does this mean for Domino’s?
Investing in renovation and regular repairs are part and parcel of every retail business. But in its company filings, Domino’s specifically states that it’s investing $50 to $60 million in capex for technology and the redesign program.
Yet given that about 45% of orders in the US and 35% of orders in the international markets are placed via digital platforms, is this redesign investment worthwhile? If the customer doesn’t see the pizza-making process 35% to 45% of the time, where’s the benefit?
Also, unlike a fast-casual restaurant such as Chipotle Mexican Grill (CMG), where you have to be present while your order is prepared, Domino’s is more of a casual sit-in restaurant. So you don’t really need to be at the counter watching your food being prepared. Basically, the effectiveness of the Pizza Theater strategy is a bit of a question mark.
To mitigate these kinds of company-specific risks when you’re investing, you may want to look at a broader portfolio such as the Consumer Discretionary Select Sector SPDR Fund (XLY) or the iShares U.S. Consumer Services ETF (IYC). XLY and IYC respectively invest 10% and 12% of their portfolios in restaurant stocks.
Browse this series on Market Realist: