Domino’s welcomed a boon in the early times of COVID thanks to customers sprinting toward brands with high off-premises equity. The past couple of years haven’t been as kind, with the company hit with staffing challenges, drops in delivery sales, tightening consumer wallets, and transfers to dine-in occasions.
The international business has been troublesome, although due to effects beyond Domino’s control. The chain shuttered 225 restaurants outside of the U.S. in Q3, related, in part, to its complete exit from Russia. On August 21, the master franchisee in the country—overseeing 143 restaurants—announced its intention to file bankruptcy. The closures also come from Domino’s Pizza Enterprises, which announced in the summer it would face closures due to a “short-term business adjustment on their side,” CEO Russell Weiner said. The group is the master franchisee of Australia, New Zealand, Belgium, France, The Netherlands, Japan, Germany, Luxembourg, Taiwan, Malaysia, Singapore, and Cambodia.
However, these instances are considered one-time events. If shutdowns from Russia and Domino’s Pizza Enterprises were removed, fewer than 15 international restaurants closed in Q3. Plus, Domino’s Pizza Enterprises is still optimistic about its long-term outlook of reaching 7,100 outlets by 2033. Domino’s finished the quarter with 13,435 international restaurants. Same-store sales for business outside the U.S. increased 3.3 percent year-over-year.
As for the U.S., sluggishness continued in Q3, with same-store sales declining 0.6 percent, after lifting just 0.1 percent in the second quarter. The decrease was driven by order count declines, partially offset by a higher average ticket thanks to an average price jump of 3.2 percent. But Weiner remains confident in Domino’s status as the No. 1 pizza carryout and delivery player in the U.S.
Franchisees certainly aren’t wavering. Weiner noted “there’s a lot of excitement” about developing restaurants and the domestic system hasn’t shut down more than 20 stores in a year since 2017. In Q3, the brand opened 28 U.S. locations and closed one, pushing the footprint to 6,762 outlets as of September 10. Seventy-two units are under construction, and most of them should open in the fourth quarter.
Most importantly, the bottom lines of the operators are moving up. Domino’s is on pace to deliver an average of at least $155,000 in annual EBITDA per store, up from its previous forecast of $150,000. This is significantly higher than the $139,000 figure from 2022. Also of note, the brand’s operating income margin grew by 190 basis points in Q3 year-over-year and is expected to reach 2021 levels for the year.
“Think about the foundation now of this business, right? In a quarter that was essentially flat in the U.S. business, margins improved and the franchisee profit has improved,” Weiner told investors during Domino’s Q3 earnings call. “And so you take that and you bring in the orders that we expect both in Q4, but especially in 2024, that just leverages really, really nice. And so the foundation of Domino’s is ready to be leveraged.”
The brand is pulling several levers to boost sales in Q4, starting with a revamped loyalty program that caters more toward carryout customers. Domino’s lowered the spending threshold to earn points from $10 to $5, which is better for guests who enjoy purchasing the weekly $7.99 carryout deal. Also, customers are eligible to redeem quicker, with tiers of 20, 40, and 60. Domino’s has already seen meaningful redemption at the 20 and 40-point levels, which include Stuffed Cheesy Bread and Bread Twists (40 points) and single-serve beverages, Parmesan Bread Bites, and Dipping Cups (20 points).
The greater recognition of carryout customers makes sense, given the channel’s expansive growth over the years. The business’s same-store sales lifted 1.9 percent in Q3 after rolling over a 19.6 percent increase in the year-ago period.
“This carryout business that we’re leaning into, store growth is so important,” Weiner explained. “The franchisees realize that. … So when we take an existing service area, and we split it, about 80 percent of those carryout customers are incremental. And so when you look at the headwinds that have subsided and you look into the present and the future as the franchisees, there are a lot of reasons to build a Domino’s store.”
Meanwhile, delivery same-store sales dipped 2.3 percent in the quarter, rolling over a drop of 7.5 percent in Q3 2022. But a turnaround is expected with this challenged segment. Domino’s ended Q3 back at pre-pandemic delivery times because of best practices highlighted during the company’s Summer of Service program. Also, the chain is ramping up its partnership with Uber Eats, which is supposed to drive incremental delivery volume from new customers, increase the brand’s pizza delivery market share, and create stronger economics for the company and franchisees. The impact will begin in a measurable way in the first quarter.
Domino’s has piloted Uber Eats in Las Vegas, and it will soon move the third-party delivery access to Houston, Miami, Detroit, and Seattle—both corporate and franchise stores. A national launch is expected before the end of 2023.
“We already deliver more pizzas than anyone in the country, and so as we take on these incremental orders, we just need to make sure that technology works,” Weiner said. “That’s what we’re doing now and then certainly making sure the staffing is right, and we’re working with Uber and our franchisees to do that.”
There’s also an “Emergency Pizza” deal. Customers who order Domino’s will have 30 days to claim a free pizza to use “in any emergency they see fit,” Weiner said. Only online orders and loyalty members are eligible. The CEO described it as an “old school buy one get one free” promotion, just packaged differently.
“The mechanics are still the same, but the message is going to resonate because of the economic that you’re talking about,” Weiner said. “So best-in-class value is important, but making sure we break through with not just a value message, a strong brand message is critical, and I think we’re doing that.”
Domino’s is continuing to innovate around operations as well. On October 3, it announced a venture with Microsoft to collaborate on generative AI solutions to “create the next generation of pizza ordering and operations technology,” Weiner said. The two sides are focused on enhancing the ordering process through personalization and simplification and streamlining processes and quality control with predictive tools.
Based on the first three quarters of 2023, Domino’s projects its global net store growth for 2023 to trend at or slightly below the low end of its 5-7 percent two- to three-year outlook—the big driver of that being the international closures.
“Overall I think our U.S. business in terms of visibility and trajectory, looks very solid and I think the entire change in unit growth on a global level is based on international business and the closures there,” CFO Sandeep Reddy said.