“What we’re going to see here in the near term is that there’s so much investor subsidy into that (delivery) business model right now,” says Domino’s CEO Ritch Allison. “We’re not really sure where it’s going to shake out long term. There’s substantial discounting and over-investment in advertising right now to drive consumer demand. We don’t know how that’s going to shake out once consumers actually have to pay the full cost of that delivery because those fees are quite substantial relative to the cost of the underlying food.”
There’s So Much Investor Subsidy In The Delivery Business Model
What we’re going to see here in the near term is that there’s so much investor subsidy into that (delivery) business model right now. We’re not really sure where it’s going to shake out long term. There’s substantial discounting and over-investment in advertising right now to drive consumer demand. We don’t know how that’s going to shake out once consumers actually have to pay the full cost of that delivery because those fees are quite substantial relative to the cost of the underlying food.
We also have not yet seen what’s going to happen with the supply of restaurants on these platforms as well. Over time it’ll be proven out whether or not that business is truly incremental and whether or not that business is actually accretive from a margin standpoint to the operators that are offering that service through the third-party aggregators. So long-term still a lot of questions but short term certainly some pressure.
We’re not going to do foolish things in the short term in reaction. We’re still very focused on our franchisees’ profitability. That’s first and foremost in our minds and we’re still very focused on generating great returns and free cash flow for our investors. We’re generating cash flow now at a pace of about a million dollars a day in the Domino’s business. So some near-term activity here that’s creating some turbulence in the marketplace but we’re going to remain focused on our long-term strategy, great profitability for our franchisees and strong operating cash flow and returns for our investors.
We Still Gained a Significant Amount of Market Share In Q2
When you take a look at our business we still gained a significant amount of market share in the pizza category during the second quarter. Our retail sales were up 6.8 percent which is significantly higher than the growth in the category and frankly much higher than the growth in the restaurant industry in general. So while same-store sales at three percent were at the lower end of our long-term outlook, the overall retail sales growth driven by the combination of that same-store sales and really strong unit growth was still quite positive.
It is a tougher operating environment than it has been in years past. We do have new competition in the marketplace that we’re fighting against every day. There are also labor pressures in the marketplace, certainly, the tight employment environment and some of the rising minimum wages across the country are putting some pressure on. But we are really in a position of strength as we enter into this more turbulent period.
Bringing Data-Driven Decision Making To International Markets
In 2018 our average store in the US had operating cash flow as measured by EBITA of $141,000. Our franchisees are very healthy. Cash on cash returns in the business are really strong. That’s why when you take a look at what’s going on with units, we opened 45 units in the second quarter in the US and only closed three, it’s still a very healthy business model. We’re positioned quite well as we look forward relative to the rest of the restaurant industry to continue to be successful.
We are we’re working hand-in-hand with our master franchisees around the world. As you look from market to market the issues in markets can be different depending upon those specific circumstances. What we’re trying to do is work with the markets to bring some of the same terrific data-driven decision-making that we’ve used to grow the business in the US over a number of years now and help our international markets in that regard.
Broadly, when you take a look at the international business, retail sales were up 9.8 percent in the second quarter. We are gaining share at a significant pace in the international markets as well as having great growth in the international markets this past quarter with a 158 net store openings. It remains a very healthy business despite the comps over the last few quarters being on the lower end.