Why Domino’s reversed course on third-party delivery last week after so many staunch years against it, boils down to scope. Or as CEO Russell Weiner explained it, “now that aggregators are at scale, the next logical marketplace for us to enter is order aggregation.” 

Russell went on to say Domino’s U.S. research and findings from 13 international markets (where it already engages with aggregators) showed “that taking orders using the Uber Eats marketplace provides access for Domino’s and its franchisees to a new segment of customers and what we believe will be a meaningful amount of incremental delivery orders once it’s widely available.”

Phrased differently, Domino’s third-party play isn’t as much a fulfillment objective (to help with labor) as it represents an inevitable point in digital maturation. Joining the aggregator marketplace allows Domino’s to court guests who live within that marketplace—not brand loyal—and otherwise would not have come direct to Domino’s white-label. The arena grew too vast to ignore and big enough to offer a value proposition in the form of incremental gains. According to the Wall Street Journal, 14 percent of pizza sales flowed through delivery apps in the past year, leaving Domino’s to envision a fresh path to $1 billion in sales.

The chain plans to start with four pilot markets before going national by the end of 2023. A key detail—pointing back to the reach over fulfillment aim—is orders will be delivered by uniformed Domino’s drivers. The chain still plans to bring pizza to customers (perhaps using its growing electric car fleet). To closely guard that experience, Uber Eats is the only U.S. platform Domino’s will use until at least 2024. And customers can still tap Domino’s Tracker—the trailblazing feature that launched in 2008—through the Uber Eats app so they’re not forfeiting a main tech option by coming in through a different channel. Uber One and Postmates Unlimited members receive deliveries free of charge as well. 

Perhaps even more vital to exclusive arrangement, Uber, per the WSJ, agreed to hand over customer data to Domino’s.

Pushing incremental delivery volume into the business, however, is something Domino’s can clearly benefit from. In Q1, its delivery same-store sales declined 2.1 percent, rolling over a 10.7 percent drop in 2022. Management cited dine-in growth and more discretionary spend as the main culprits. Additionally, as has been the case across the segment for some time, Domino’s continued to struggle to hire delivery drivers, which it’s tried to addressed by offering more flexibility to workers, like shorter shifts, fewer hours, and the ability to sign up for shifts with short lead times.

If you stretch back a year earlier, it was an issue that led to store hours being reduced, phones going unanswered, and online orders getting restricted. In all, the number of combined lost operating hours equated to the entire U.S. system being closed for six days. Domino’s same-store sales declined 3.5 percent in the period. Notably, delivery comps declined 10.7 percent.

It was that same quarter Weiner, who was COO and U.S. president at the time, said “nothing is off the table” in regard to future third-party partnerships. Two years prior, former CEO Ritch Allison told investors he’d have a “tough time sleeping at night” if the pizza chain ever used an aggregator driver to fulfill an order. It even created a “surprise frees” menu promotion as an alternative to the surprise fees often associated with third-party delivery.

So this current deal shouldn’t, in practice, keep Allison, now a board member, wide-eyed into the early hours. Domino’s drivers will still be at the door when somebody opens it (or there to place pizza for contactless).

Domino’s also already boasts a $1 billion international business with third-party. Outside the U.S., markets that currently don’t partner with Uber Eats will start transitioning this year. Master franchisees who are presently with Uber Eats outside of the new global contract will be able to move to the fresh agreement before the year ends. 

The big picture: Domino’s believes the deal could allow Uber Eats to provide incremental orders to 70 percent of its stores globally.

In May, Uber Eats controlled 23 percent of sales in the U.S. when it came to the delivery field, according to Bloomberg Second Measure. Postmates had 2 percent. DoorDash topped at 65 percent.

Third-party aggregators have dug into the share of delivery-centric brands, like pizza, for years despite their own setbacks with profitability. Subscription services such as DoorDash’s “Dashpass” or Uber One and Postmates Unlimited keep third-party drivers busy in a gig, rideshare labor pool. At the same time, these one-price, no-fee services have generated loyalty among aggregators’ customer bases and prevented them from racing to restaurants. 

Larger chains operating a self-delivery model often need to either supplement with third-party aggregators, implement a subscription service, change their model to offer more flexible work schedules, and/or raise fuel reimbursements, just to compete more effectively for drivers.

BTIG analyst Peter Saleh said Domino’s weakness in shares this year (prior to last week) can be attributed to flattish sales trends, declining franchisee cash flow, and slowing of unit development. But now? “We believe that dynamic is set to reverse as same-store sales accelerate in the coming quarters as the announced partnership with Uber Eats rolls out.”

Domino's delivery sales.

Saleh predicts the sales benefit will register in the mid-single digits based on similar launches in the industry. Papa Johns connected with DoorDash in mid-2018 and, about two years later, executives said third-party aggregators accounted for about 7 percent of sales, with roughly 65 percent of those sales considered incremental. In all, it implied 450 basis points of incremental comps. Franchisees, in talks with Saleh, added sales mix has continued to grow, especially when drivers are in short supply. “We see no reason why Domino’s can’t experience a similar mix with UberEats as the partnership rolls out nationally,” he said.

As Papa Johns CEO Rob Lynch shared in the past, getting a multi-year jump on the rest of the field enabled the brand to meet guests where they are and open an incremental channel. “Our most valuable customers come through our loyalty channels,” Lynch said in January, “and two-thirds of the customers who come through the aggregators are incremental and are helping to drive that loyalty number. We see them come from aggregator initial usership to more of our organic channels.” 

Saleh admitted there are still some unknowns with Domino’s deal, including the impact on carryout sales (carryout same-store sales rose 13.4 percent in Q1, on top of 11.3 percent growth in 2022, and now accounts for half of Domino’s business), pricing disparity on the platform (will Domino’s direct channels be cheaper?), if boost weeks will be included, and UberOne benefits. 

Delivery represents 50 percent of orders at Domino’s and 60 percent of sales, “so while we are eager to understand the benefits of UberEats on delivery, we are also interested to hear if a carryout option will also be available on UberEats, and at what price,” Saleh noted.

Mainly, Domino’s $7.99 Large One-Topping carryout offer has been “widely successful,” he added, with double-digit same-store sales for the past two years and three-year stack comps north of 30 percent for the past calendar. Management was reluctant to raise the price on the carryout offering, opting instead to increase price on the Mix and Match deal—it went up $1 last spring. The chain recently added Loaded Tots.

Overall in Q1, Domino’s U.S. same-store sales grew 3.6 percent, lapping a decrease of 3.6 percent in the prior-year period. The lift was fueled by a rise in average ticket, thanks to 6.2 percent pricing. It was partially offset by lower order volume (a gap the UberEats deal could potentially cover).

Other recent innovations for Domino’s include in-car ordering through Apple CarPlay, which arrived in Q1 and enables guests to either tap to order, where they can submit a saved order, or call to order, which allows them to place an order via a customer service representative. “Pinpoint Delivery” was announced in June as well. Now, customers have the option to receive a delivery order in places like parks, beaches, etc., by dropping a pin on a map through Domino’s app.

In addition to understanding if UberEats will offer Domino’s carryout special, Saleh feels it’s important to know how UberOne subscribers will be handled. Generally, they don’t pay delivery fees, “which complicates the scenario given that Domino’s is delivering all the pizzas ordered through this partnership,” he said.

“Therefore, there must be some additional revenue sharing that compensates Domino’s delivery drivers when UberOne customers purchase Domino’s,” Saleh continued.

It will also be intriguing to follow how Domino’s plans to handle the aggregator’s famed boost weeks, which offer 50 percent off the entire menu for an entire week, every quarter.

The wider picture

At the end of 2022, Saleh picked Domino’s as a brand to watch for the coming year. Not that the country’s most successful pizza chain was about to sneak up on anybody, but rather that its near-term fortunes contained upside. This hasn’t changed. Saleh still expects franchisee profitability to “improve significantly” in 2023 and again in 2024 due to the improving sales environment, commodity deflation, and better driver availability.

Historically, every 40-cent change in the price of cheese equates to 100 basis points of restaurant-level margin. In Q2, block cheese prices fell 71 cents on average from the prior year, aiding margins by an estimated 175 basis points.

If cheese prices remain at current levels, Saleh said, franchisee margins at Domino’s could lift by 150 basis points for the full year and store-level EBITDA could approach $160,000—well above last year’s $139,000.

Domino's EBITDA.

Naturally, unit-level profitability improving would likely spur development, as it traditionally has for Domino’s. One point to circle: even with delivery sales taking a dive of late and mid-teens inflation last year, Domino’s still only closed 15 U.S. stores on a base of nearly 6,700. The 0.2 percent closure rate is the lowest in the industry (among brands Saleh tracks). In this year’s QSR 50—coming out in early August—Domino’s posted net growth of 126 locations, average-unit volumes of $1.309 million and domestic systemwide sales of $8.752 billion. It closed the year with 6,686 U.S. stores (6,400 franchises). It was a significantly lower net number than the prior year, when Domino’s expanded by 205 domestic units, but, to Saleh’s point, the closure rate remained essentially non-material. 

Domino's same-store sales.

“We believe management’s more aggressive pricing posture over the past three quarters and anticipated future pricing should not only drive margin expansion, but should allow [Domino’s] to better compete for driver availability,” Saleh said.

In Q1, Domino’s crossed 20,000 units globally, finishing at 20,008. That included 6,708 in the U.S. and 13,300 internationally. Domestically, the brand opened a net of 22 restaurants in the quarter. Outside the U.S., a net of 106 locations debuted. Store openings are still being pressured by delays in supply chain and permitting, but Domino’s expects the headwinds to soften in the latter half of 2023. Approximate buildout costs increased 20 percent last year, but franchisees still have three-year paybacks. 

Average store profitability in 2022 was $139,000. Profit was higher in Q4 2022 compared to Q4 2019 as franchisees felt the impact of Mix and Match’s price increase. Margins are projected to get better in 2023, aided by the margin flow-through of Loaded Tots, the company said.

Fast Food, Menu Innovations, Pizza, Restaurant Operations, Story, Technology, Domino's