Domino's Spent $11 Million on COVID-19 Protocols

A September study from Coca-Cola found restaurant operators had, on average, spent $7,400 to adjust to pandemic realities. This included everything from enhanced training and cleaning protocols to visible updates, like plexiglass and PPE. What does that look like at a restaurant with 17,000 locations?

Domino’s Thursday shared Q3 results that split a very stark line. On one side, the pizza leader posted domestic same-store sales growth of 17.5 percent, year-over-year—its best performance since going public 16 years ago. Yet the cost of operating in COVID times ran Domino’s roughly $11 million with hiring, bonuses, sick-pay policies, and sanitary supplies. General and administrative costs rose 9.5 percent to $91.7 million. And reflecting supply chain instability, commodity costs lifted 3.8 percent.

On that latter dilemma, Domino’s basket actually decreased 1.2 percent in Q2 compared to last year. Cheese was at an all-time low. In Q3, however, cheese surged to all-time highs, Domino’s CFO Stu Levy said.

It’s the kickback of today’s volatility.

CEO Ritch Allison said Domino’s expects elevated costs around safety and cleaning equipment, as well as enhanced sick pay “as long as we’re operating in a pandemic environment.” Additionally, the company plans to offer enhanced compensation for employees throughout the crisis.

But margin pressure aside, there are COVID themes emerging for Domino’s that lay significant runaway.

Company-owned sales increased $18.7 million in Q3. BTIG analyst Peter Saleh estimated a $12 million benefit from COVID demand (more customers tapping delivery, looking to contactless options, weekday boosts, and value, etc.). That was largely offset by the $11 million punch. Saleh wrote Friday in a note the strength of sales trends and market-share gains should collect weight over time. “We view the sales and margin dynamics as paired to each other and the long-term unit target extension as relatively minor in the scope of a global pandemic.”

The “target extension” Saleh referenced is a slowdown in Domino’s march to 25,000 units by 2025. Allison said construction setbacks and international closures—notably in India—could push the timeline back. Year-to-date, Domino’s grew its international footprint by a net of 123 locations compared to 505 in the first three quarters of 2019. The Q3 breakdown was 162 openings versus 123 closures for net lift of 39. Domestically, Domino’s added 44 net units as it opened 47 and shuttered just three.

Allison said the roadblocked path is a timing matter, not a capacity one. “The real issue around the pace … is just the pace of the gross openings, which had slowed during 2020, given some of the construction in permitting challenges that we've seen in markets all over the world,” he said. “But also for those countries that had temporary closures, the effort has really been directed in the short term on getting those stores reopened and ... to their full run rate.”

Internationally, same-store sales increased 6.2 percent to mark the 107th consecutive period of growth. Domino’s has generated positive comps for 38 straight quarters on the domestic side.

What’s driving Domino’s eye-opening top line of late is really three-pronged: Menu innovation, tech tools, and heightened awareness and adoption for off-premises options Domino’s was already mastering (75 percent of the chain’s U.S. sales are digital today). The company’s COVID pivot was more a strengthening than a true shift.

Domino’s high-teens comps accelerated slightly from Q2 on a one- and two-year basis, even with restrictions easing in most markets. Ticket and order growth surged as customers added more to their checkout—a common pandemic theme for quick-serves. The dynamic is check growth through larger orders, not higher prices (as it was pre-COVID for many chains). Both strategies are intended to offset softened guests counts—only today it factors a very different customer into the mix than a year ago.

In Domino’s case, delivery growth has outpaced carryout during coronavirus. And this also lent to larger orders. Delivery, by nature, Allison said, flows through a higher ticket, with an added charge tossed in.

But even the delivery fee Allison sees as a competitive advantage going forward. “When we think about the relatively low and transparent delivery fee that we charge our customers versus what you're seeing with the aggregators, this really is a key part of our value proposition for our customers,” he said. “And all of us have ordered third-party delivery, most of the time, it's really hard to figure out what you're being charged, because you might be getting a free delivery, but then you go and then you see a line that says taxes and fees.”

“… And for those of us that had been in the delivery business forever, we don't know what the service fee is, if it's not paying for having the delivery brought to you,” he added.

Domino’s delivery hikes vary market-to-market based on labor rates, but it doesn’t lump in additional costs regardless. If the upfront pricing is $3.49, it checks out at $3.49.

Still, Allison doesn’t expect competitive intensity to ebb going forward. Third-party platforms continue to market heavy and push aggressive offers that would never balance on the bottom line for restaurants.

“When we take a look at our competitive set in pizza delivery, it's a different game than the game that we were playing five years ago,” he said. “The No. 1 competitor we look at is not any of the pure play pizza players, but it really is competing against delivery from the third-party aggregators.”

Domino's

Wings are flying off the make line at Domino's.

Turning to menu innovation, a methodical category for Domino’s typically, the chain launched chicken wings with improved sauces July 7 and also unveiled two specialty pizzas August 24—the cheeseburger and chicken taco options.

Allison said Domino’s hasn’t promoted wings thus far “because we’re selling all the wings that we can get our hands on today.” The specialty pizzas, he added, are already at the top end in terms of mix for Domino’s specialty pizza range.

Both extensions haven’t added operational complexity. In fact, wings reduced complexity “given how we package it,” Allison said. The specialty pizzas require one incremental ingredient apiece added to the make line.

Wings joined one of Domino’s famed carryout deals at the $7.99 price point for pickup. It’s also available, along with all crust types and a three-toping option, in the $5.99 tier.

“When I think about what's happening with the consumer right now, and looking forward with this recession that we are sitting in today and the fact that there has been no incremental stimulus brought to the consumer, I look forward and believe that our value platforms in sticking to those platforms will only be more important as we look out into the months and quarters ahead,” Allison said.

Overall, Domino’s hit 17.5 percent performance without aggressive promotions. In Q3 2019, it ran two 50 percent off boost week lures. Those will likely return as part of Domino’s customer acquisition strategy, Allison said, but the “underlying demand and our strong everyday value messages”—so critical to a COVID customer—allow the brand to focus on store-level profitability and better service.

Domino’s carside delivery is now available at more than 95 percent of U.S. locations. The launch didn’t add any significant labor cost, Allison noted. GPS technology is live in roughly 90 percent of venues, giving customers an experience they asked for as well as allowing operators to optimize routing and dispatching of deliveries.

With GPS, store managers know where drivers are at any given time. Doing so allows Domino’s to get more efficient in how it plots routing, pre-bag, and brings orders to ready once a driver returns.

In some units, drivers aren’t coming back into restaurants to pickup. Rather, operators run pizzas out to cars and hand them over. It saves a minute, maybe two at the turn, Allison said, a seemingly small tick but one that “results in better service and better labor that you run in the stores.”

Domino’s enhanced make line tools are rolling nationwide, too, and are now present in nearly 80 percent of domestic units.

Allison said Domino’s “slipped a bit” with average delivery times early when volumes jumped at COVID’s onset. The chain’s since returned to “as good or better than” service pre-pandemic, “which is pretty significant when you think about the overall increase in the business that we've seen, and the fact that we deliver our own food,” he said. “So we are making sure that we've got trained and uniform delivery experts bringing that product to the customer.

Systemwide, Domino’s boasts fewer than 300 temporary closures, down from a peak of 2,400 in late March. The company's net income increased about 15 percent to $99.1 million in Q3. Total revenue rose 17.9 percent to $967.7 million

Allison also spoke to the changing landscape and where Domino’s slots in. “I feel for the challenges that a lot of these independent restaurants are going through and their proprietors that have put their livelihoods into those businesses,” he said. “But the reality is, if you were operating an independent pizza restaurant with a significant amount of your business dine-in and if you were relying on beverage mix and alcohol to bring a good bit of margin to your business, if that business has now been shifted to where you have to do most of it [off-premises], and if most of that has to come by paying very high fees to third-party aggregators, it's just a really difficult operating environment.”

In terms of ultimate closures, Allison said, nobody quite knows where it will land.

“But I do believe that the shake-out in the turmoil is going to create opportunity for us to further take share and continue to grow,” he said. “Our teams both—our corporate store team and our franchisees—are out there every day looking for real estate opportunities that are opening up as a result of the pandemic, and also in some cases opportunities where we've shifted in some cities and towns from a more sort of landlord-friendly rental environment for to more of a renter friendly rental environment, an opportunity for us to get potentially some more favorable terms on leases going forward as well for some of the stores that we continue to operate.”