Domino’s Pizza Inc. (DPZ, Financial) saw its stock price surge 11% higher on July 12 after announcing a global delivery partnership with Uber's (UBER, Financial) Uber Eats. This marks the first time the pizza company is looking for delivery options outside of its own ecosystem, which could be the start of a new growth phase in my opinion as Domino’s will be able to leverage this strategic business partnership.
The new deal with Uber
According to the new deal signed with Uber, U.S. consumers will be able to order from Domino’s through Uber Eats and Postmates apps starting this fall. In the initial phase, Domino’s Pizza’s products will only be available in four pilot markets, but by the end of the year, availability will be expanded nationwide. According to the deal terms, Uber will be the exclusive third-party delivery platform for Domino’s at least until 2024. According to Domino’s Pizza CEO Russell Weiner, this partnership will allow the company to tap into new market segments. Commenting on this new development, he said:
"Domino's has a history of successfully entering new marketplaces. Our research in the U.S. and learnings from 13 of our international markets has shown us that taking orders using the Uber Eats Marketplace provides access for Domino's and its franchisees to a new segment of customers and what we believe will be a meaningful amount of incremental delivery orders once it's widely available."
Domino’s and Uber operate in 27 common international markets, and this agreement tries to leverage the co-existence of the two companies in key global markets to bring new customers to both businesses.
The growth strategy
Domino’s has consistently been ranked as the leading pizza company in the U.S. for many years according to data from Bloomberg Second Measure; at the beginning of 2022, Domino’s accounted for over 42% of the pizza market share in the U.S., followed by Pizza Hut with a market share of 23%, Papa John’s International (PZZA, Financial) with a market share of 22% and Little Caesars with a market share of 13%. Domino’s market dominance is the result of its high-quality delivery network, product innovation, the success of its digital investments and the loyalty program that rewards return customers.
As Domino’s gears up to allow customers to place orders on Uber Eats and Postmates, the company will have to ensure the same level of quality it has maintained for years. Failure to do so could potentially create an opening for its competitors to grab market share. Details shared by Domino’s on July 12 suggest the company is taking several measures to retain its branding while benefiting from Uber’s reach. For instance, the delivery of orders placed on Uber Eats and Postmates will still be completed by delivery drivers in Domino’s uniforms. The Domino’s app, on the other hand, will continue to offer deals and will be the home of the loyalty program. Because the company’s high-quality delivery service played a key role in lifting the company to the top of the pizza market in the U.S., investors will have to closely monitor the early results from its partnership with Uber to determine whether this deal will add value to long-term shareholders.
A key pillar of Domino’s growth strategy is technological innovation. Over the last couple of decades, Domino’s has emerged as the most innovative pizzamaker not just in the U.S. but globally. For instance, Domino’s was the first quick service restaurant – not just the first pizza company – to allow customers to place orders using voice commands with Alexa. Today, customers can place orders not just through its e-commerce portal but also by sending a text message, a Facebook message or even through Slack and Apple (AAPL, Financial) Watch. The company has invested millions of dollars to enable these innovative order placement methods, and it would be reasonable to conclude that these investments have paid off handsomely given that Domino’s has secured the leading position in the pizza market.
To further establish its technological dominance, Domino’s plans to invest $90 to $100 million in fiscal 2023, which includes funding for a re-designing of its e-commerce platform to offer an even better experience to customers. The company’s digital investments are focused on achieving three key objectives – improving customer experience, enhancing marketing efficiency, and consolidating its market share further.
In addition to continued digital investments, Domino’s is introducing several changes to its loyalty program as well. A major change is coming to the Piece of the Pie loyalty program which was launched in 2015 with delivery customers in mind. According to company filings, 43% of first-quarter sales came from the carryout segment, which highlights how this segment has grown in importance. With this understanding, the company is refreshing thePiece of the Pie program to offer more benefits to carryout customers with the view that more rewards will incentivize them to order more in the future.
With a more refined digital experience, better loyalty benefits and access to Uber’s large customer base, Domino’s seems well-positioned to retain its leadership position in the pizza market, which paves the way for steady earnings growth.
Domino’s seems fairly valued
I see Domino’s as a wonderful, well-managed business. The company has traded at premium valuation multiples historically because of its market leadership, which is understandable. Today, Domino’s is valued at a price-earnings ratio of 30 compared to its five-year average of 32.52. There is nothing much between the historical average and the current valuation, which suggests Domino’s is fairly valued today. As Warren Buffett (Trades, Portfolio) once said, a wonderful company at a fair price is often better than a fair company at a wonderful price. Domino’s pays a quarterly dividend of $1.21 per share, which translates to an annual yield of 1.25%. This is not an eye-popping return, but still, I believe the total value proposition is solid, all things considered.
Takeaway
Domino’s is entering a new era of growth by inking a partnership with Uber to access the millions of users who use Uber Eats and Postmates to order food. Domino’s is taking the necessary precautions to make the most of this partnership without harming its brand image, which is commendable. Aided by continued digital investments and the success of its loyalty program, I believe Domino’s is likely to record steady growth in the next few years.
