Has Domino’s Reached its “Tipping” Point?

Last week, Domino’s Pizza announced their latest marketing initiative: 

“Carryout customers who order online can claim a $3 tip to use on their next online carryout order.” 

This is not some gimmick or secret hack. The firm is going national with this campaign, advertising the “$3 tip” using those exact words. 

This is not all that surprising given the labor shortage, but there are a few things that make it much more interesting than it seems. 

Domino’s is one of the only chains that doesn’t deliver through DoorDash, Uber, or Grubhub.

And before you dismiss Domino’s as one of those pre-internet dinosaurs, you should be aware that even throughout the internet era, over the last 20 years, Domino’s remains one of the most profitable firms. 

Just to illustrate this point, if we compare Google’s and Domino’s stock performance since their 2004 IPOs (and up until 2020), Domino’s consistently outperforms Google

How?

On the consumer side: Domino’s has a very strong brand. All orders are received through Domino’s channels (phone, web, or mobile), which are also owned and run by the firm: dominos.com or the Domino’s mobile app. This allows the firm to maintain customer relationships, have a low customer acquisition cost, and an even higher lifetime value. 

It also allows Domino’s to maintain favorable unit economics. The average order size of Domino’s is $21, which means that this is not a high-ticket product, but rather a high volume one. An average store makes 370 orders per day and has to pay its staff and a 5.5% franchisee free to Domino’s. The unit economics seem very encouraging…unless you decide to join a platform and you start paying for each and every delivery. 

For those who are excited about the 10-minute grocery deliveries these days, this next point is a reminder that Domino’s was the precursor to this when back in 1979, it promised customers a free pizza if the delivery took more than 30 minutes. However, in 1986 the firm scaled it down to only $3 off, and in 1993, following a lawsuit by a woman who was hit by a Domino’s delivery driver, it removed the guarantee completely. Nevertheless, speed is still an important variable for Domino’s, and it’s much easier to offer speed when you are fully integrated. 

But deliveries are not Domino’s only focus. While they still account for 65% of all orders, the amount needed to occupy a delivery driver is not really offset by the $2.99 delivery fee per customer, especially now that in many areas the cost of labor is surging. 

With its small store layout, Domino’s never focused on dining in either. Instead, it always offered a carryout option. Interestingly, when looking at all of the quick-serving pizza restaurants (QSR), the number of transactions for carryout vs delivery in North America is more than 2.5x. “Domino’s recognizes that carryout is the main growth opportunity and has been targeting this market over the past few years.”

In fact, over the last 10 years, part of Domino’s growth has occurred due to the “fortressing” strategy it has adopted:

“...the chain is building more locations in specific markets to cut down on delivery times and increase carryout sales.” 

From 2013 to 2020, the firm has opened nearly 1,400 new locations only in the U.S., which amounts to an increase of 27% in the number of its domestic stores; much lower than the 91% increase they had globally, but still significant. In the meantime, other popular chains like Pizza Hut, shrunk by 16%, shutting down 1,300 locations.

On the other hand, and to some extent, Domino’s started building density (i.e., increased the number of stores within limited geographical territories), before the notion of local fulfillment centers was popularized by the likes of Reef, Gorillas, JOKR, and…Amazon. 

So the $3 “tip” is just one more step in encouraging customers to utilize the proximity to a Domino’s store and reduce the costs for both.  

Domino’s vs Aggregators

But while there is a strategy here, it is clear that Domino’s suffers from other issues due to its unwillingness to work with the main delivery platforms. 

First, it is clear, and I will continue shouting this from the rooftops, that the labor shortage is real. Firms are struggling to find workers, particularly for low-skill, low-wage jobs, such as delivery. But the situation is much direr for firms that only need workers for a limited time of the day. For Domino’s, there is a peak over lunchtime and a peak over dinner, and that’s it. 

The main advantage of platforms such as Uber and DoorDash, is that not only do they know where the customers are, but they also know where the customers are, what they want, and how to access them throughout the day. The reason DoorDash wants to collaborate with grocers such as Albertsons, is not only to grow demand, but also to offer continuity to its gig workers. This is also why DoorDash is allowing drivers to pick up products from pharmacies. When a firm offers continuity over time, they don’t need to spend that much to “steal” workers from their competition. 

Ben Thompson coined the term "Aggregation theory" to describe a situation where platforms (or aggregators) become the place customers go to when they are looking for a product or service, forcing suppliers to align themselves with the rules of the aggregator. 

DoorDash and Uber are aggregators for restaurants. Anyone looking for lunch or dinner will first go to these platforms to check their options. For most restaurants (especially those with low visibility), this means that it’s best to appear on that list of options. 

But for delivery people, platforms provide another dimension of aggregation. When it comes to delivery drivers, platforms are not only creating aggregation in terms of customers but also in terms of multiple uses throughout the day. As a delivery driver, you choose DoorDash or Uber since you know that throughout the day, throughout the year (and even throughout the pandemic) you will have work. Furthermore, and as our research shows, drivers exhibit significant inertia in their decision-making, so the longer you offer them jobs, the less you have to spend to retain them. 

Unfortunately, Domino’s cannot offer constant work to its delivery drivers. Aggregators diminish the ability of suppliers (in this case restaurants) to differentiate themselves, which is exactly why a chain with a strong brand would decide to remain independent. But those competing with platforms will suffer the downside of this aggregation. Not on the consumer side, but on the delivery people’s side. 

Technology: The Antidote for Aggregators

But I wouldn’t bet against Domino’s just yet. 

As one of the early movers in creating a good mobile and online ordering experience on the consumer side, the firm is already innovating on the supply side. 

Domino’s has been experimenting with specialized electric bikes that can carry close to 12 pizzas which will potentially solve the parking issues delivery people experience in many cities. 

But even more revolutionary, Domino’s is partnering with the self-driving car firm Nuro to develop and deploy autonomous vehicles to deliver pizzas. The two firms are already testing in Houston. 

If there is a place where self-driving cars make perfect sense it is for such a delivery. Pizza delivery will always be attended (who wants to eat a cold pizza). And Pizza has a very specific shape that makes it amenable for such a system. 

And that’s the advantage of Domino’s: its ability to invest in specialized technology, and then deploy it across its franchises. Firms such as Uber and DoorDash can invest in self-driving technology as well, but given the mix of products they deliver, it’s much harder to find a way to do it efficiently, at least at this stage. 

So take the $3 tip for as long as you can, because you may soon be tipping a robot instead. Whether it’s going to be a Domino’s car or a Doordash one, is still a little too early to say, but the current labor shortage is clearly accelerating this change.