THE HEDGEYE EDGE
For the better part of the last decade Domino's Pizza (DPZ) has operated in a world of its own, dominating the pizza and broader food delivery environment. DPZ was the first-mover when it came to technology-assisted pizza delivery services and because of this, independent pizza shops, Pizza Hut, and other restaurants have not been able to adequately service the delivery market. However, as we stated in our recent Black Book presentation, we have begun to see evidence of the competition for share of delivery spending hit the Domino’s UK business, which we believe was the primary reason for their shortfall in 2Q17.
Although the UK is home to a far more developed delivery market, compared to that of the US, we believe that the domestic delivery market is ramping up quickly. With the help of UberEats, DoorDash, Postmates, and Panera, restaurants of all different cuisines are getting into delivery, and this will place increasing competitive pressure on the DPZ business.
INTERMEDIATE TERM (TREND)
With the domestic delivery business still in relative infancy, DPZ will continue to be the focal point for many seeking delivery, especially pizza. Looking at alternative data, DPZ worldwide Google trends, Dominos.com Alexa page views and Twitter mentions continue to experience YoY growth, and this has buttressed the stock.
However, as Pizza Hut improves its offering/value proposition and the delivery space continues to mature, more options will be available for consumers to order via delivery and this will negatively impact the DPZ business, much like we have seen in the UK, Australia, and Japan.
LONG TERM (TAIL)
Increasing competition will be the bane of DPZ’s existence in the long term as the US delivery space continues to mature. We are beginning to see the early stages of a changing of the guard in the delivery space as the home delivery occasion is no longer just a pizza occasion. Other players in the QSR space are taking delivery seriously, as perennial powerhouse MCD most recently launched delivery at more than 4,000 units in the US and Australia, and still has much more capacity to add delivery going forward.