From a revenue standpoint, Domino's is the No. 1 pizza chain in America, but the brand isn't satisfied with that position.
There's actually ample whitespace for the company to chase. Domino's occupied 22 percent of the total quick-service pizza market in the fiscal year that ended November, while other major pizza chains captured 30 percent and regional chains and independents accounted for 48 percent, according to data from The NPD Group. In the U.S. pizza delivery market, Domino's maintained 36 percent, with other major chains grabbing 27 percent and regional/independents totaling 37 percent. For carryout, Domino's had 15 percent. Other major brands had 32 percent, and regional/independents 52 percent.
Suffice to say, Domino's has not hit its ceiling, despite pushing $7.1 billion in domestic systemwide sales last year, and the company knows it. CFO Stu Levy said the restaurant isn't comfortable with just being No. 1—it wants to be a "dominant No. 1."
"If you look at market share leaders across a lot of industries, 22 percent, you've got a lot of companies that are much higher than that when they are the leading player," Levy said during the brand's ICR Conference presentation. "So when we look at that, we say there's growth out there."
As of Q3, Domino's had 6,239 stores in the U.S., but the company believes there's room for 8,000. Internationally, there's roughly 8,550 stores, but the brand thinks it can add nearly 5,200 incremental units.
Here's how Domino's views the growth potential of the international developed and emerging markets:
- Actual: 1,143
- Potential: 1,675
- Actual: 709
- Potential: 1,200
- Actual: 742
- Potential: 1,000
- Actual: 545
- Potential: 700
- South Korea
- Actual: 476
- Potential: 500
- Actual: 434
- Potential: 1,000
- Actual: 345
- Potential: 1,000
- Actual: 332
- Potential: 350
- Actual: 308
- Potential: 400
- Actual: 1,264
- Potential: 1,800
- Actual: 784
- Potential: 1,025
- Actual: 545
- Potential: 900
- Actual: 363
- Potential: 1,000
- Saudi Arabia
- Actual: 273
- Potential: 450
- Actual: 305
- Potential: 750
"If you look longer term, we fully expect a market like China, at some point, it's going to be our second-largest market behind the U.S.," Levy says. "There is so much growth potential out there, and the formula for success across all of them quite honestly is pretty similar. And that gives us a ton of confidence in terms of our ability to continue to grow, to continue to gain share, and to continue to leverage the successes we've had in these markets for years to come."
Domino's has reported 38 consecutive quarters of positive same-store sales in the U.S. and 107 straight internationally. From 2010 to 2019, domestic comps lifted by an average of 6.9 percent and international comps by an average of 5.5 percent.
Levy attributed that to franchisees, a group he said is 60 years in the making—that's what makes it such a competitive advantage. Every franchisee previously worked for Domino's, and more than 95 percent started in an hourly role. The average operator oversees seven stores and generates $1 million in EBITDA.
He said there's a level of affiliation, passion, dedication, and commitment to the brand that can't be replicated by a third-party investor. The main reason it works is because the company is continually focused on franchisee profitability, Levy added.
Despite growing costs of PPE and sanitation requirements, individual U.S. franchise stores achieved an average EBITDA of $158,000, compared to $143,000 last year.
"Obviously, these are incredibly attractive economics," Levy said. "Store profitability matters. It certainly matters to our franchisees. It matters to us because it matters to our franchisees. And when they're making money like this, they're looking to grow."
With those type of store-level economics, Levy said there also needs to be a proven strategy that says, "OK, if I want to take this and do this somewhere else, how do I do it?"
That's where Domino's fortressing strategy comes into play, something the brand was successful at over the past few years. Levy said fortressing is truly about getting closer to customers, so the brand can provide great products, great value, and great service.
The strategy enables delivery drivers to make more deliveries, which results in more tips. It also fuels Domino's ability to do carryout.
"So while we watch a lot of businesses out there trying to figure out how to expand their delivery area to capture more customers, we're doing the opposite," Levy said. "We're saying we want to provide the best value proposition for our customers, and the way to do that is to actually get closer. And we have a proven model that suggests when you do this the right way, you will continue to grow, and you will continue to grow profitably."
Domino's has its formula, and Levy expects it to carry the brand through 2021, even when facing a growing number of dine-in availability and laps of the 2020 COVID performance.
For one, this means not playing the LTO game. Levy said menu items must have staying power, pass rigorous consumer testing, and generate profitability. It has to be something that warrants being on the menu permanently.
It also means staying away from third-party delivery. The CFO noted Domino's was delivering for six decades and has never made a profit on delivery only. That makes the company question how one can derive a sustainable model from that mode of business. He said the profit has to come from somewhere, and it's either going to be restaurants or customers. Levy said smaller independents are already facing rising wage, labor, and food costs, so the restaurant side doesn't provide a large profit pool. So that means profit has to flow from the customer. Levy believes at a certain point, guests will push back.
"The value proposition of paying say $15 to get $9 worth of food delivered to you doesn't make a lot of sense," Levy said. "And the feeling that you get when you see free delivery with a $12 service charge, it doesn't start to feel free. So somewhere along the line, that profit for the aggregator has to come from somewhere, and we have a lot of questions about wha the long-term sustainability is of trying to take it from the customer or trying to take it from a restaurant operator who maybe doesn't have the margin to pay that somebody else would."
Domino's hasn't provided guidance on comps for 2021, but Levy reiterated that if the brand continues to focus on great product, value, and service, everything will take care of itself.
"It drove positive comps before we had COVID," Levy said. "You can certainly get some tailwind early on during the pandemic just by being, but I think ultimately over time, and the pandemic has been running for quite a while, if you weren't doing it with good products and good value, it wasn't going to last forever."