Slide in Domino’s Pizza sales part of a wider consumer malaise

The slide in Domino’s Pizza sales is part of a wider malaise influencing consumers who are pulling back on retail spending, analysts say.

Domino's Pizza chief executive Don Meij. Picture: Steve Pohlner

The 10 per cent rout in Domino’s Pizza’s shares on Tuesday following its shock profit downgrade is being viewed as part of a wider malaise across the $400bn retail sector, where consumers increasingly hunt for value or refuse to spend at all – and that is tipped to worsen as the year progresses.

Domino’s shares were weaker again on Wednesday, down 1 per cent, after the company had unveiled dramatic strategies to resuscitate its earnings trajectory in the face of weaker consumer demand, including shutting down its only recently acquired Denmark stores as well as up to 70 underperforming pizza outlets.

As part of its trading update and new strategic direction, Domino’s chief executive Don Meij reflected on the anaemic consumer settings to concede there had been a slower than anticipated rebuilding of weekly order counts for the pizza maker, largely from delivery orders.

Last week Domino’s backflipped to remove its delivery service fee in Australia – a surcharge hated by diners and which triggered a sharp pullback in sales – and which also dashed the pizza chain’s position as a “value” meal option in the minds of consumers.

The fee, only about $2 on an average $30 pizza delivery purchase, was enough to send consumers elsewhere and underlined the cratering of consumer confidence and pullback in discretionary spending.

Consumers have become more cost conscious since the most recent few RBA interest rate increases, resulting in a string of sales and earnings warnings from discretionary retailers such as Baby Bunting, jeweller Michael Hill, Maggie Beer foods, candle seller Dusk, fashion outlet Universal Store and now Domino’s.

“Consumers are sensitive to price, because what you are seeing in retail trading is that April was softer, but wasn’t terrible as retailers were out there promoting product and consumers were responding. But what we have found since May is that promotions are starting to fall on deaf ears,” said Jarden analyst Ben Gilbert.

“Shoppers are shopping across more stores, more actively seeking out deeper discounts. May has been extremely challenged from that standpoint and June looks like to have been pretty similar.

“It has gotten very challenging over the last four to six weeks (for retailers) and we have had some downgrades, but this could just be the start as we haven’t seen the cost pressures come through yet.”

This week’s consumer confidence survey from Westpac underlined the growing unease among shoppers and the pullback in spending, with the bank’s consumer index stuck near recession lows for the past year.

The Westpac survey said consumer risk aversion had hit record highs in June as safe havens and paying down debt were heavily favoured

Mr Gilbert said it would be a challenge for Domino’s to recapture consumers who reeled at the delivery charge amid the current consumer gloom.

“Domino’s put prices up too much,” he said. “This hurt demand and it will take time to restore value perception.”

UBS analyst Shaun Cousins said Domino’s had lost the trust of its customers when it added the extra delivery fee.

“Price trust appears to have been lost with some customers,” Mr Cousins said.

Citi analyst Sam Teeger said the pizza maker was yet to demonstrate it had found a sustainable way to improve its customer value proposition with volumes still declining.

“We consider plans to share a third of the cost out with franchisees to be a step in the right direction to improve suboptimal franchisee profitability,” Mr Teeger said.

“However, we see risk that the balance sheet may temporarily constrain Domino’s ability to ­provide additional support to franchisees.”