At the end of February 2023, Domino’s Pizza released its 2022 financial report. It shows that Domino’s has opened 174 new stores in China throughout the year, bringing the total to 589, ranking first among the top five pizza brands in terms of expansion speed.
However, despite the rapid expansion of Domino’s stores in China, it has been losing money year after year. From 2019 to 2021, Domino’s China’s net losses will reach 182 million yuan, 274 million yuan, and 471 million yuan respectively, and the net loss in the first half of 2022 will also reach 95.475 million yuan.
The IPO plan of Dashi, the operator of Domino’s in mainland China, Hong Kong and Macau, China, is also not going well. The company had already passed the hearing of the Hong Kong Stock Exchange and was originally planned to be listed on December 23, 2022, but in the end it was decided to postpone the sale due to “in view of the current market conditions”. Poor performance is obviously an important reason for its postponement of listing plans.
Domino’s focuses on food delivery, with nearly 20,000 stores worldwide, and a net income of more than US$4.5 billion in fiscal year 2022. No matter in terms of revenue or number of stores, Domino’s ranks first in the world. However, in China, Domino’s performance has been far behind Pizza Hut. Facing the Chinese pizza market, why is Domino’s’ “trump card” operating model so difficult to work?
1. In China, Domino’s can’t beat Pizza Hut
According to the data for 2021, Pizza Hut occupies the first place in China’s pizza market with a market share of 37.4%, and Domino’s ranks third with only 4.4%. As of January 1, 2023, the number of Domino’s stores in China is less than a quarter of that of Pizza Hut.
Pizza Hut has a first-mover advantage in China. It opened its first store in 1990, seven years earlier than Domino’s. Long before other international pizza brands joined the competition, Pizza Hut captured the hearts of many Chinese people with its positioning as a “happy restaurant”.
In addition, due to the relatively dispersed management rights, the development speed of Domino’s China in the early stage has been relatively slow. In 2017, Dashi became the exclusive franchisee of Domino’s in Mainland China, Hong Kong and Macau. Since then, the clear expansion strategy has led to the rapid growth of Domino’s Chinese stores.
When it comes to pizza now, the first thing most consumers think of is Pizza Hut. Although there are many negative comments on Pizza Hut’s taste and price on various social platforms, the degree of discussion remains high.
In terms of regional coverage, it is still difficult for Domino’s to match Pizza Hut. It was not until 2016 that Domino’s opened its first store outside Beijing and Shanghai in Hangzhou. In many second- and third-tier cities, consumers basically only see Pizza Hut and non-chain pizza brands. Xinyi, a loyal fan of Domino’s, told us that she had never heard of the brand Domino’s in her hometown. It wasn’t until I came to Beijing to go to university that I realized that Domino’s was “delicious and cheap”.
However, consumers’ enthusiasm for Domino’s is very high. Many users on Douban and Zhihu have called for Domino’s to open stores in their cities.
Many users on Douban called for Domino’s to open stores in their cities
Many users on Douban called for Domino’s to open stores in their cities
Image source: Douban
In the prospectus, Domino’s divided the market into “Beijing and Shanghai” and “new growth markets”. From 2019 to 2021, the proportion of the latter’s income will show a trend of increasing year by year. As of June 30, 2022, there are 283 stores in Beijing and Shanghai, and 225 stores in new growth markets. According to the prospectus update, Domino’s China plans to open 188 new stores in 2023, mainly in first-tier cities and new first-tier cities.
2. Why Domino’s winning strategy doesn’t work in China
As the world’s largest pizza brand, why is the development of Domino’s not satisfactory in the Chinese market? Is the “takeaway route” not working in China?
Domino’s Pizza Company was founded in 1960 and is headquartered in Michigan, USA. The fortune of Domino’s was not smooth sailing. The excessive speed of expansion made the founder Tom Monaghan (Tom Monaghan) break the capital chain and bear huge debts. Later, Monaghan discovered that most of the turnover came from the food delivery business, so he determined food delivery as the company’s core business.
With the delivery speed of “30 minutes must arrive”, by 1990, Domino’s had mastered more than 90% of the pizza delivery market in the United States. In the process, Domino’s has also entered markets such as Japan, the United Kingdom, and France, and gradually developed into the world’s largest pizza brand.
China is one of Domino’s top ten international markets, ranking seventh. From 2019 to 2021, Domino’s China’s revenue from delivery orders will account for no less than 70%. In the first half of 2022, Domino’s China’s revenue from its own online channels will exceed 51%. The number of monthly active users also reached 900,000.
Domino’s distributes ingredients to stores around the world through its supply chain and central kitchen, and generates revenue by charging franchisees royalties and certain technology fees. Domino’s stores in China are all direct-operated stores. The central kitchen distributes the prepared dough to each store. After the store receives the order, it is hand-kneaded and patted into a cake base, which can also ensure the consistency of its taste and quality.
Domino’s continuous innovation in taste and quality assurance has made it attract many consumers in the Chinese market. Reiko came to Beijing to study for graduate school last year. After eating Domino’s once, she became a repeat customer of it. For a month, she basically ordered “Damin’s” every week. “It’s mainly because it’s really delicious, especially the various customized rolls are very distinctive.” According to the survey by Frost & Sullivan, consumers in Beijing and Shanghai rated Domino’s pizza as the best in taste.
Domino’s, the world’s No. 1 company, why can’t it compete with Pizza Hut in China?
Domino’s official website screenshot Domino’s official website screenshot
Image source: Domino’s official website
High-quality and low-cost products and extremely fast delivery speed have become the main advantages of Domino’s. From placing an order to baking and delivery, users can obtain the progress of the order in Domino’s own mini program. You can get free meals by playing mini-games, 30% off on Tuesdays and Wednesdays and other discounts have attracted many new users, and they can remain in their private domain mini-programs for a long time, maintaining a stable user stickiness.
The promise of “30 minutes must arrive” has also been fulfilled by Domino’s. Reiko placed an order on the mini program for two consecutive weeks, but a few minutes after the scheduled delivery time, the mini program automatically sent a coupon for a 9-inch pizza. This also doubled Reiko’s affection for Domino’s brand.
So, why does Domino’s China lose money year after year?
First of all, although Domino’s focuses on delivery and does not require too many store attendants, this does not mean that Domino’s labor costs are low. A store is usually equipped with 20-30 employees, including managers, employees and riders. In order to ensure the speed of delivery, the employees in the store will temporarily act as riders during peak hours, and the company will also provide rider training for employees. However, under this business model, it is followed by rising staff costs. From 2019 to 2021, employee salary expenses will exceed 40% of Domino’s China’s annual expenses.
In other countries, Domino’s self-built delivery team is a sharp weapon to ensure the speed of food delivery and outperform competitors. However, in the Chinese market where the food delivery business is very developed, other pizza brands can leverage on third parties such as Meituan, Ele.me, and Flash Delivery. platform. Domino’s self-built distribution team has lost its advantage and costs more.
At the same time, Domino’s China needs to pay a one-time franchise fee to the headquarters, and each store needs to pay a franchise fee. On top of that, there are royalties, which is a share of sales, as well as software license fees and annual upgrade fees. Judging from the data in the prospectus, the franchise fee accounts for nearly half of the store operation and maintenance expenses.
Screenshot of Domino’s China prospectus Screenshot of Domino’s China prospectus
Image source: Domino’s official website
Regarding the issue of continuous losses, Domino’s China officially explained: the company’s store expansion and entry into new markets, each store’s revenue, store-level costs and expenses, and investment in talent reserves for store development, regional store management, and information technology functions , and increasing corporate-level costs and expenses related to brand-building activities.
While Domino’s continues to expand its stores, Pizza Hut, Zumbo Pizza and other brands have also made efforts on the takeaway track. In fiscal year 2021, Pizza Hut’s takeaway revenue accounted for 36% of the overall sales. Domino’s, which focuses on delivery routes, is being impacted on its delivery advantages.
According to Frost & Sullivan’s prediction, the scale of China’s pizza market will reach RMB 62.3 billion in 2025. The vicissitudes of life on a piece of “cake” have given birth to a huge market. Domino’s, the world’s number one, is still far from being the number one in the Chinese market, and Pizza Hut, which is currently far ahead, is not at ease. As consumers, all we care about is a delicious pizza.