Increased labor costs and decreased sales revenue negatively impacting Domino's profit margins
Domino's Pizza Slows Store Openings Amid Tough Market Conditions
Domino's Pizza, the popular global pizza chain, has seen a decrease in store openings due to a cautious approach from its franchisees in a challenging market environment. This environment is characterised by weaker consumer confidence, increased labor and employment costs, and economic uncertainties such as those related to government budget measures.
The primary factors affecting the profitability of franchisees include rising labor costs, weaker consumer demand, cost pressures in input prices, market uncertainty, and a focus on store profitability. The increase in employment expenses, driven by government budget changes, has made expansion less attractive for franchisees. Declining consumer confidence and a decrease in takeaway orders have reduced sales growth, directly affecting store revenue and profits. Higher food basket costs and insurance expenses have squeezed margins, impacting earnings despite overall sales volume growth. Franchisees prefer a cautious approach to investment and new store openings until there is greater economic stability. In some regions like Japan, Domino's has closed loss-making stores to focus on areas with greater potential, improving unit economics for franchisees and overall profitability.
Despite these challenges, Domino's continues to see international and U.S. same-store sales growth and expects store openings to pick up again when market conditions stabilise. The company is actively investing in strategic growth areas, with initiatives such as loyalty programmes and supply chain automation on track to deliver further efficiencies.
In the past year, franchise partners faced a 10% minimum wage increase, and underlying earnings before interest, tax, depreciation, and amortization (EBITDA) at Domino's fell by 7.4% to £63.9m. System sales and order count growth decelerated in the second quarter, reflecting consumer weakness. As a result, franchise partner profitability at Domino's declined. The operational progress of the loyalty programme trial and supply chain automation initiatives were mentioned.
The market backdrop has become "more difficult" for Domino's and its franchisees. Franchisees are taking a more cautious approach to store openings due to increased employment costs and uncertainty ahead of the Autumn Statement. Underlying profit before tax at Domino's fell 14.8% to £43.7m. The company expects underlying EBITDA for the full year to be between £130m and £140m, a 7.5% downgrade on previous estimates.
Overall sales at Domino's grew 1.3% to £777.8m in the 26 weeks to June 29. Revenue at Domino's grew 1.4% to £331.5m in the same period. Domino's has opened 11 stores in the year to date. New store openings for the full year are expected to be in the mid twenties.
In summary, the tougher market conditions marked by rising costs, weaker demand, and economic uncertainty have led franchisees to slow their expansion plans and focus on improving the profitability of existing stores before pursuing aggressive growth.
- In light of the current market conditions, Domino's franchisees are focusing on finance and investing wisely, preferring a cautious approach to expanding their business through new store openings.
- Despite the challenging market environment impacting their profitability, Domino's is still making strategic investments in areas like loyalty programs and supply chain automation to ensure long-term growth and stability.
