Operating Efficiency of Domino’s Pizza Tantamount to Google
Domino’s Pizza (NYSE: DPZ) went public in 2004, and it has delivered a superior return to its shareholders, better even than Google (NASDAQ: GOOGL). “It’s pretty amazing,” said Joe Weisenthal. “The basic idea is that both Domino’s Pizza and Google went public around the same time. I think it was 2004. And if you look at the chart, they basically had a pretty similar trajectory. If you invested money in the early 2000s in Google, then you’ve made your, you know, you’re this tech genius and you’ve made millions of dollars. No one ever thinks, well actually, if you put money into a simple pizza company, you would have made the same amount.”
Indeed, Google opened for trading at $100 per share on August 19, 2004. Today, those shares are worth $4,260, including splits and dividends. Google shareholders have enjoyed a total return of 41 times their initial investment.
Domino’s Initial Public Offering occurred on July 13, 2004. Shares debuted for trading at $14 per share. Today, those shares are worth $790, including dividends. Domino’s Pizza has therefore returned to shareholders 55 times their initial investment.
Jonathan Maze, Editor-in-Chief of Restaurant Business Magazine, recently explained how Domino’s Pizza was able to deliver this incredible performance. “They have the best setup. They control their delivery drivers. They let you know, so you know when it’s coming. From a value standpoint, you can feed your family for like 20 bucks. And it’s all real easy to do.”
Second, what differentiates Domino’s business model from other food chains that might do delivery? Maze explains, “I think that there are some other issues with, you know, Chinese restaurants that have prevented that sector from being as big as pizza chains. And I think a lot of it has to do with the process of cooking Chinese food and that sort of thing. Everybody eats pizza, it’s a fundamental value. So, you know, you get a pizza from Domino’s and you know, it might cost you, depending on whether you use a coupon, it’s going to cost you $8, $10, $12 or whatever. And you’re going to feed a couple of people at the very least. And you know, it’s really hard to beat that value.”
Maze explains the third reason for the outperformance of pizza delivery: low food costs. “That value is a big deal. And it’s also, from a food cost standpoint, it’s also fairly inexpensive. And that enables these companies to do these pricing deals, which help them to do these values.”
Maze explains the fourth catalyst for Domino’s growth: its fast-or-free marketing pitch. “So Pizza Hut for instance, was a dine-in restaurant in the 1960s. Domino’s emerged with this idea via that you could deliver these pizzas directly to people’s homes. So Domino’s really grew a lot in the 1970s and then in the 1980s, and then they had this deal where they would deliver the pizza within 30 minutes or it was free. And that enabled that company to just, you know, grew that into franchising, which enables companies to grow very quick. That really enabled it to grow very fast.”
Fifth, Maze says that Domino’s technology, especially web and mobile ordering, helped to maximize customer checkouts. “They’ve been pioneers in adding technology to their restaurant. So they were very early adopters of ordering on the web. And then of course, mobile ordering too, you know, to eliminate the pain-point of having to call your pizza delivery restaurant and wait on hold for like 10 minutes or whatever.”
Seventh, Domino’s controls its own Point Of Sale (POS) system. “Domino’s required their franchisees to adopt the company’s own point of sale system,” explains Maze. “There was, in fact, a very large lawsuit from some franchisees against Domino’s over this POS system. Domino’s ultimately won… that’s given the company the ability to control the entire ordering process, without having to actually go to another company. So if they want to add functionality to their mobile or online ordering, they simply do it, and do it very easily.”
Eighth, Maze explains that Domino’s excelled at marketing. “They marketed the idea that their ordering process was easy. One of the biggest things they probably did was convince customers that they are more tech savvy than anybody else they were doing. Double-digit comps year upon year. It was kind of amazing to see.”
Finally, Maze explains that Domino’s centralized delivery system outperforms third-party delivery apps like UberEats or GrubHub. “Domino’s controls the process with a hub and spoke model. You have your delivery drivers at the restaurant. The people order from the restaurant. And then delivery drivers go out to the homes to deliver the food. In a third party system, it’s just a lot more jumbled. People are ordering either from the restaurant or from the third party delivery app. And then those orders go to independent contractors that may be close to the restaurant, or they may be a couple of miles away… It’s just a much more jumbled mess and it’s much more difficult to do that efficiently. And that’s probably as big a reason why third party delivery doesn’t make the money of Domino’s.”