Domino's defends its store 'fortressing' amid cannibalisation fears

Domino's Australia has defended its strategy of opening new stores in already successful high-sales areas despite concerns it could cannibalise the sales of existing franchises.

At an investor day briefing on Thursday, Domino's executives "debunked the myths" of the company's 'fortressing' strategy, which will see it open another 1200 stores in the next 5 to 8 years in an effort to boost the company's overall sales.

Fortressing involves gerrymandering the delivery boundaries of Domino's stores to allow space for another store in the area. The company pitches the strategy as a way to boost sales, improve brand recognition and reduce both delivery time and labour costs.

For Domino's globally, fortressing is nothing new. The US business, which is run separately to Domino's in Australia, has been aggressively rolling out stores for the last 12 months, opening nearly 250 stores between July and September.

This has seen the US business' same-store sales growth suffer, slowing considerably as newly opened stores snatch sales from existing stores in the same area.

Speaking to The Age and The Sydney Morning Herald, Domino's Australia chief executive Don Meij defended the company's store rollout plans, saying cannibalisation was not a concern.

Domino's Pizza chief executive Don Meij.Credit: Louise Kennerley

"It's a thematic on the Domino's business globally that people think maybe there could be cannibalisation here," he said. "So we've gone at lengths to illustrate how that's not the case."

In documents provided to investors on Thursday, Domino's broke down the effect of its fortressing strategy, touting the reduction in delivery run times and an increase in customer satisfaction.

But the company also claimed sales for existing stores in fortressed areas do initially suffer following the opening of new stores, recovering to prior levels after three years.

Mr Meij says in "almost all" cases stores return to their original volumes, and stressed the franchisees must agree to relinquish their delivery territory to a new store. Domino's also waives the advertising royalties, around 7 per cent of gross sales, for the affected stores.

"This has been happening for decades because, by and large, people want to do it, it makes sense, and the ROI is there," he said.

He also dismissed concerns the Australian market was at a point of saturation, saying Domino's was only the fifth-biggest fast food store in Australia and the company was "still quite small".

Pizza checker assesses franchisees

Earlier this year, Domino's rolled out its 'Pizza Checker': an AI-enabled pizza scanner which photographs pizzas to assess them for quality. Along with being somewhat of a novelty for customers, the company says it's made a "meaningful increase" in customer satisfaction.

It will now be used as a way to score franchisees on their performance, with the company implementing a bonus-linked scorecard system and internal rankings of stores with the best-looking pizzas.

Domino's will also incorporate the Pizza Checker into its operations evaluation reports (OER) for franchises, which will see the company work with stores who "fall below" the benchmark set by their peers.

Mr Meij refused to indicate what the consequences for stores who fail to improve their Pizza Checker scores even after the company works with them.

"There hasn't been any need for that, so I can't go there," he said.

Domino's Australia shares closed down 1 per cent at $47.53.