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Morningstar | Third-Party Delivery Aggregators Are Near-Term Headwind for Domino’s but Long-Term Thesis Intact

Domino’s Pizza is well-positioned in the highly competitive global restaurant industry. To withstand intense competition, the firm is poised to leverage the wide moat it derives from its strong brand, technological intangible assets, and a cohesive franchisee system, plus its cost advantages rooted in superior technology and delivery route density compared with peers'. Under CEO Richard Allison’s leadership, Domino's Pizza's focus on combining unit growth and same-store sales layers to drive systemwide sales, improve unit economics, and bolster returns on capital should further enable it to adapt to evolving consumer preferences. Domino's is committed to its value proposition with low-cost pizza, operational efficiency, and increasing store density globally, and we believe its 2025 targets of 25,000 stores worldwide (versus 16,000 in 2018) and $25 billion global retail sales ($13.5 billion) are achievable.Domino's generates profit from company-owned stores, franchisee royalties, and supply chain operations that provide food, equipment, and supplies to franchisees. Franchisees own 98% of all Domino's Pizza locations, providing an annuity-like royalty stream with few capital requirements. Domino’s Pizza stores focus almost entirely on delivery and carryout (“delco”) and are optimized to maximize throughput. This strategy combined with an attractive menu value offering has led to best in class cash-on-cash returns of 40%-plus which incentivizes franchisees to follow Domino’s corporate goal of unit expansion. Despite our optimism about Domino’s asset-light business model and long-term growth potential, we believe the global pizza category will become more competitive as existing players attempt to replicate Domino’s strategy and as newer fast-casual players continue to expand. Additionally, delivery (70% of systemwide sales) competition continues to intensify as more cuisines become available through aggregator services, which leads to increasing competition for customers and draws from the delivery labor supply. We contend Domino's is not idle in the face of tough competition and is improving its consumer value proposition through technology and menu options.