At the end of February 2023, Domino’s Pizza released its 2022 financial report. Among them, Delta opened 174 new stores in China throughout the year, with a total of 589, and its expansion rate ranks first among the five major pizza brands.
However, although the number of stores in China has expanded rapidly, it has lost money year after year. From 2019 to 2021, the net loss of Delta China reached 182 million yuan, 274 million yuan and 471 million yuan respectively, and the net loss in the first half of 2022 also reached 95.475 million yuan.
The IPO plan of Delta’s operator in Mainland China, Hong Kong and Macao was also not smooth. The company had already passed the hearing of the Hong Kong Stock Exchange. It was originally planned to be listed on December 23, 2022, but finally decided to postpone the offering “in view of the current market conditions”. The poor performance is obviously an important reason for postponing its listing plan.
With its main take-out route, the number of stores around the world is close to 20000, and its net income in fiscal year 2022 is more than 4.5 billion dollars. In terms of revenue and number of stores, Delta is the first in the world. However, in China, its performance has been far behind that of Pizzahut. In the face of the Chinese pizza market, why is the “trump card” operation mode of Domino’s difficult to work?
1、 In China, Damelor can’t beat Pizzahut
According to the data in 2021, Pizzahut occupies the first place in China’s pizza market with 37.4% of the market share, and Damelor ranks the third with only 4.4%. As of January 1, 2023, the number of Damilar stores in China is less than one fourth of Pizzahut.
Pizzahut has a first mover advantage in China. It opened its first store in 1990, seven years earlier than Damilar. Long before other international pizza brands joined the competition, Pizzahut captured the hearts of many Chinese people with its positioning as “Happy Restaurant”.
In addition, due to the scattered management rights, the development speed of Delta China in the early stage has been relatively slow. In 2017, Dashi became the exclusive franchisee of Delta in Mainland China, Hong Kong and Macao. Since then, the explicit expansion strategy has led to the rapid growth of Domino’s stores in China.
When it comes to pizza, most consumers first think of Pizzahut. Although there are many negative comments on Pizzahut’s taste and price on various social platforms, its discussion degree is still high.
In terms of regional coverage, it is also difficult for Tamil to compete with Pizzahut. It was not until 2016 that Delta opened its first store outside Beijing and Shanghai in Hangzhou. In many second and third tier cities, consumers can only see Pizzahut and non chain pizza brands. Xinyi, a loyal fan of Delta, told us that she had never heard of the brand in her hometown. It was not until I came to Beijing to go to university that I found that Dammelle was “delicious and cheap”.
However, consumers’ enthusiasm for Delta is very high. Many users of Douban and Zhihu have called for Delta 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 Delta to open stores in their cities
Source: Douban
In the prospectus, Delta divided the market into “Beijing and Shanghai” and “new growth market”. From 2019 to 2021, the latter’s income share showed a trend of increasing year by year. As of June 30, 2022, the number of stores in Beijing and Shanghai was 283, while the number of new growth markets was 225. According to the prospectus update, Delta China plans to open 188 new stores in 2023, mainly in first-tier cities and new first-tier cities.
2、 Why is the winning trick of Domino’s ineffective in China
As the largest pizza brand in the world, why is the development of Domino’s in the Chinese market unsatisfactory? Is the “takeout route” not feasible in China?
Domino’s Pizza Company was founded in 1960 with its headquarters in Michigan, USA. The success of the company was not smooth. The rapid expansion of the company caused the founder Tom Monaghan to break the capital chain and carry huge debts. Later, Monagan found that most of the turnover came from takeout business, which determined takeout as the core business of the company.
With the delivery speed of “30 minutes must arrive”, by 1990, Domino’s had more than 90% of the pizza takeout market in the United States. In the process, Domino’s also went to Japan, Britain, France and other markets, and gradually developed into the world’s largest pizza brand.
China is one of the top ten international markets for Domino’s, ranking seventh. From 2019 to 2021, Delta China’s revenue from outbound orders accounted for no less than 70%. In the first half of 2022, the revenue of its own online channels in China exceeded 51%. The number of monthly living people also reached 900000.
Through the supply chain and central kitchen, Delta distributes its ingredients to stores around the world, and generates revenue by charging franchisees royalties and certain technical fees. The stores of Delta China are all direct-sale stores. The central kitchen will distribute the prepared dough to each store, and the store will knead it manually after receiving the order, which can also ensure the consistency of its taste and quality.
With its innovative taste and quality control guarantees, it has attracted many consumers in the Chinese market. Ling Zi came to Beijing to study in graduate school last year and became a repeat customer after eating a meal of Domino’s, even for a month, almost every week. “The main thing is that it’s really delicious, especially the various customized curls that are very distinctive.” According to Frost Sullivan’s survey, consumers in Beijing and Shanghai rated Domino’s pizza as the best taste.
The high-quality and cheap products and the extremely fast delivery speed have become the main advantages of Delta. From ordering to baking and delivery, users can get the progress of this order through the small program owned by Delta. Playing small games can attract many new users by means of free meals, 30% discount on weekends and other preferential means, and can stay in their private domain applications for a long time to maintain a stable user stickiness.
The promise of “30 minutes to reach” has also been implemented by Delta. Lingzi ordered the order on the small program for two weeks in a row, but only a few minutes later than the scheduled delivery time, and the small program automatically sent a 9-inch pizza voucher. This also made Lingzi feel more favorable to the brand of Delta.
So, why does Delta China lose money every year?
First of all, although it is mainly for delivery and does not require too many shop assistants, this does not mean that the labor cost of Delta is very low. A store typically has 20-30 employees, including managers, employees, and riders. In order to ensure the delivery speed, the staff union in the store temporarily acts as a rider during peak hours, and the company also conducts rider training for employees. However, in this business model, there is a concomitant increase in personnel costs. From 2019 to 2021, employee compensation expenses exceeded 40% of Delta China’s annual expenses.
In other countries, the self-built distribution team of Domino’s is a sharp tool to ensure the delivery speed and surpass the competitors. However, in the Chinese market where the take-out business is very developed, other pizza brands can take advantage of third-party platforms such as Meituan, Hunger, Flash and so on. The advantages of the self-built distribution team of Delta are no longer, and the cost is higher.
At the same time, Delta China needs to pay a one-time franchise fee to the headquarters, and each store needs to pay a franchise fee. In addition, there are royalties, namely sales share, as well as software license fees and annual upgrade fees. From the data of the prospectus, the franchise fee accounts for nearly half of the store operation and maintenance expenses.
Screenshot of Delta China Prospectus
Image source: official website of Delta
With regard to the problem of continuous losses, the official interpretation of Delta China is as follows: the company’s store expansion and entry into new markets, the income of each store, the cost and expenditure at the store level, and the investment in the talent reserve for the store development, regional store management and information technology functions, as well as the company-level cost and expenditure related to brand building activities are increasing.
While Damelor has been expanding its stores, Pizzahut, Zumbo Pizza and other brands have also made efforts in the takeaway track. In fiscal year 2021, Pizzahut’s takeaway revenue accounts for 36% of the overall sales. The delivery advantage of Domino’s, which focuses on the delivery route, is being impacted.
According to Frost Sullivan’s prediction, China’s pizza market will reach 62.3 billion yuan in 2025. The vicissitudes of the world on a “cake” breed a huge market. There is still a long way to go between the world’s No. 1 Damelor and the No. 1 place in the Chinese market, and Pizzahut, which is far ahead at present, is not at ease. As consumers, what we care about is always a mellow and delicious pizza.
