Domino’s Trusts Its Delivery Dominance

Quick, direct pizza delivery has been central to the DNA of Domino’s since founder Tom Monaghan began making a 30-minute guarantee in 1984. And the company’s current CEO, Ritch Allison, has been doubling down on the importance of this aspect of Domino’s performance for every day of his 18-month tenure atop the Ann Arbor, Michigan-based chain.

Allison is steadfastly sticking with the strategy that has been essential to the ascension of Domino’s to the top of the pizza industry over the last decade and that he believes will keep it there: Only the company and its franchisees will deliver Domino’s pizzas even though most other fast-food brands are working with third-party delivery startups that are helping them chew into Domino’s market share.

“Fundamentally, I don’t want to put another entity between Domino’s pizza and our customers,” Allison told Chief Executive. “As this third-party-delivery craze unfolded, we started from a position of strength that virtually no one else had in the marketplace. We already have a very well-established and profitable delivery business today.”

Plus, Allison said, “We’re protecting our customer relationships and data.” And, third, “We don’t want to impair the economics of franchisees by infusing a third party, who typically charges from 10 to 30 percent off the top. In the restaurant industry, most players don’t have the margins to yield that take rate to third parties.”

Allison is staking out this position in the face of adversity that Domino’s hasn’t encountered since previous CEO Patrick Doyle led the chain out of the Great Recession and built a digital-tech-enabled ordering and delivery operation that by 2018 had catapulted Domino’s over Pizza Hut into the No. 1 position in the global pizza business.

After posting same-store sales growth for several years in the upper-single and lower-double-digit percentages, Domino’s same-store increase slowed to 2.4 percent in the third quarter. And Allison has signaled expectations for continued slower growth, in the 2-5% range, for the next two to three years, compared with its consistent guidance of 3-6% growth over the previous several years.

The main culprit seems to be third-party food-delivery providers such as DoorDash, Grubhub and Uber Eats that have helped fast-food competitors—including other big pizza brands—expand their market shares. In the short run, Domino’s has responded tactically, in part by beginning to market “delivery insurance,” guaranteeing that orders will be accurate and on time, and also offering a 20-percent-off deal after 9 p.m., hoping to get a bigger piece of the late-night market that is a strong day part for the delivery providers.

Allison also is planning in 2020 the launch of a significant new menu item for Domino’s, the sort of occurrence that he said is “overdue.” The company hasn’t introduced a major new product in a couple of years now, he said.

But the way Allison sees it, Domino’s is playing a game of attrition from a position of strength. The company has built a digital-tech development juggernaut on the outskirts of Ann Arbor that now amounts to about 600 people, comprising more than half of the total headquarters workforce. It was their work that helped Domino’s develop and introduce a spate of industry innovations in online ordering and delivery over the last several years and that continues to push the envelope through experiments with autonomous delivery vehicles and even drones.

“We’re already tech-enabled to the point where two-thirds of our business is digital today,” Allison said. “And with a loyalty program with 23 million active members, and a database of more than 85 million customers who’ve ordered at least once from us in the last year, we already have some assets in place that have positioned us such that we weren’t forced to jump on board with third-party aggregators.” The company also is clustering more physical stores in target markets and goosing its carry-out business.

Meanwhile, Allison believes that “there’s a significant shakeout to come” among third-party delivery services,” citing the financial challenges of several of them and the fact that overall revenues for the restaurant business “aren’t growing any faster than before the third parties came in.” Meanwhile, he said, Domino’s remains “in a position of great strength, with profitable franchisees and a great business model. We’ll stay focused on our core business model and outlast the shakeout that’s inevitably to come with third parties.”