Domino’s to ditch underperforming stores as sales sag

Domino’s chief executive Don Meij says ditching underperforming stores and dropping delivery fees should help turn the pizza chain around as it works to get sales back on track after an earnings slump and struggles to manage rising costs.

In a trading update on Tuesday, the company said some store sales had improved in the second half but remained below the medium-term outlook of 3 per cent to 6 per cent, and it would reduce the number of stores.

Domino’s Pizza Enterprises CEO Don Meij is exiting the loss-making Danish market.

“Domino’s will reduce the size of its current corporate store network of about 913 stores by 15 to 20 per cent, through closing underperforming stores and accelerating the refranchising of corporate stores in ‘turnaround’,” the company said.

Between 65 and 70 underperforming corporate-owned stores will close, along with the company’s 27 Danish stores, acquired in 2019 for €2.5 million ($4 million), which Meij said had generated too many losses.

“We bought a damaged business in the Denmark market and thought we would be able to grow it a lot faster than we’ve been able to,” Meij said. “For the size of the losses, we just said it’s not worth it.”

A Domino’s spokeswoman said stores in Australia, Japan, France and Germany will be affected by the move, with around a third (up to 20 stores) expected to be in Australia.

“We will work closely with the team members affected and expect to offer roles for them in neighbouring stores. We also expect to be able to offer delivery customers a service from neighbouring stores where delivery distances allow,” the spokeswoman said.

Shares in Domino’s dropped more than 10 per cent in early trade to a four-year low before ending down 5.9 per cent at $43.6 a share at close.

Europe has been a particularly challenging market for Domino’s, Meij said, because of the neighbouring Ukraine war and its impact on energy and soft commodity costs.

However, Meij said the business saw improvements after reversing some of its pricing decisions.

“In March, we tested removing the delivery service fee that we introduced in July last year, then removed it across all stores nationally last week, and are now seeing a healthier recovery in our delivery orders,” he said. “We also overpriced our bundles, so we’ve been reversing that.”

In February, the company revealed its sales had slipped by 4 per cent for the six months to December and said its plans to fight inflation “had not been optimal” in the first half, with increased product prices and delivery and surcharge fees impacting how often customers ordered.

Despite labour costs increasing, and the possibility of recession, Meij said the company’s margins were improving and its outlook was more positive, with a softening in commodity and ingredient prices.

“This isn’t the first recession that we could face,” Meij said. “For us, it’s about making sure that we’re placing Domino’s as the best value option against any alternatives and that’s what we’re doing with our menu designs and price points. Our margins are improving because we’re selling more pizzas and because food costs, which really skyrocketed last year, are coming back down, with cheese, wheat and some of our proteins moving into a better space.”

Opal Capital Management chief investment officer Omkar Joshi said the company’s update was relatively weak and showed it still had work to do.

“It was a disappointing update, and they’re clearly still seeing revenue pressures coming through,” Joshi said. “They’re working on the cost side of things, which is fairly necessarily.”

Joshi said Domino’s had faced a weaker revenue environment but that pricing missteps had also hurt the business over the past year.

“Domino’s has been less resilient than many would have expected,” Joshi said. “They’re in a tough position and are entering a more challenging environment than last year.”

While softer input cost inflation is likely to benefit the business, Joshi said, labour costs would be a headwind, especially after the government’s minimum wage increase.

“Wages are a fairly important cost for them like all consumer-facing businesses, and wage increases definitely will put pressure on them. It means they’ll have to cut costs somewhere else in the business, but that’s more easily said than done.”

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