Analysts believe the dumped delivery fee might not lead to a lift in sales volumes for Domino’s

Domino’s has dumped its pizza delivery fee in Australia but analysts fear the move might not lead to a lift in sales volumes as pizza faces competition from cheaper meal options.

Analysts fear the dumped delivery fee for Domino’s Pizza in Australia might not see a lift in sales volumes. Picture David Clark

Domino’s Pizza’s backflip to remove its delivery service fee in Australia - a surcharge hated by diners and which triggered a sharp pull back in sales - has been welcomed by analysts, but the threat to its pizza volumes from frozen supermarket pizzas and other cheaper eating options remains amid the cost of living crisis.

Putting further pressure on Domino’s business could be the recent decision by the Fair Work Commission to lift the wages of millions of Australians by 5.75 per cent that could force the pizza giant to share more profit margin with its franchisees and cushion the elevated wages cost.

While pizza has always been considered a cheap meal, rising interest rates, rents, utility bills and other expenses have squeezed household budgets to place pressure even on the humble pizza delivery.

On Tuesday Domino’s, the nation’s largest pizza chain which has more than 3700 stores across Australasia, Asia and Europe, announced it was removing its 7 per cent delivery service fee, which it said was introduced in July 2022 to cover the rapidly increasing costs of operating its delivery business.

The fee added around $2 to an average $30 pizza delivery purchase.

Domino’s Australia and New Zealand chief executive Josh Kilimnik said the pizza maker was pleased to give customers a win in the current inflationary environment.

“We introduced this fee because we felt it was the best option at the time to protect the livelihoods of our franchisees, who are small business owners in their local communities.

“However, we know that our customers are feeling the pinch too – with interest rates, rents and household bills going up and up,” Mr Kilimnik said. “We have made the decision to remove this fee because we want more customers to be able to enjoy the convenience of delivery, and we hope this change goes a long way to making that possible.”

Dominos Pizza CEO Don Meij has conceded the delivery fee was a misstep. Picture: NCA NewsWire/Tertius Pickard

Citi analyst Sam Teeger said in a note to clients that the removal of the Australia delivery service fee could suggest the company is still trying to find a solution to improve delivery volumes, which have been underperforming due to cost-of-living pressures.

“We suspect the delivery service fee might have exacerbated the weakness in delivery volumes, noting we previously flagged that the service fee (%) and the cap ($) had increased on different occasions.”

Mr Teeger said it was possible that Domino‘s might have raised menu prices to offset the removal of the delivery charge.

“From a customer perspective we think this is sensible given the customer is no longer being charged an extra fee for a delivery service they have been accustomed to getting for free”

The real test was now if Domino’s could win back customers, especially as other quick meal ideas, such as supermarket pizzas, are much cheaper.

“That said, it is unknown whether this initiative will sustainably improve delivery volumes, noting the consumer is facing increasing headwinds and frozen pizzas in grocery stores are materially cheaper than quick service restaurant delivered pizza.”

The introduction of the delivery surcharge was derided by customers at the time and led to a slump in volumes over 2022.

In February Domino’s Pizza shares crashed 25 per cent in one day after released its interim results and admitted it had mishandled a round of price hikes designed to counter the intense pressure from inflation within its business, but which turned off customers and sent sales volumes plummeting.

The sharemarket rout at one point wiped off more than $1.5bn from the company’s market capitalisation as it admitted a surcharge on pizza deliveries was badly received by diners who pulled back on their pizza orders and patronage of Domino’s stores, and which reverberated across its pizza operations in Australia, New Zealand, Asia and Europe.

Mr Teeger said in his note he had a neutral rating on Domino’s.

“In order for us to turn more positive we need to see improvements in franchisee profitability which would help accelerate store rollout where 2024 consensus forecasts appear demanding based on the current run-rate and as a result we see risk that Domino’s may have to share more of its margin with franchisees, especially in light of the recent Australian minimum wage increase by 5.75 per cent from 1 July.”