Pizza maker feels the heat

Domino's remains a strong business, but high costs and delivery problems have hit profitability

- JAMES CARLISLE

In an inflationary environment, the most important attribute a company can possess is pricing power – the ability to pass cost increases onto customers without a resulting drop in demand. This, in turn, depends on the value offered by the company’s products.

We’ve always reckoned that Domino’s scores well in this area, at least in a relative sense. Its fortressing strategy, whereby it has built a dense network of small stores, ensures that delivery is quick (and therefore cheap) and that the pizzas arrive in the best possible condition.

This gives Domino’s an edge over other food delivery organisations, from restaurants to aggregators such as Uber. We still believe that’s the case. But the more we think about the company’s interim result, the more we worry about its ability to pass on cost increases.

As chief executive Don Meij noted in a conference call, the fast food sector overall has been performing well (particularly burgers, he said), but delivery has been struggling, and Domino’s – he was “embarrassed” to say – had underperformed within delivery.

It looks like consumers have been suffering some sort of sticker shock on the costs of delivery and Domino’s, in particular, has got its pricing strategy wrong. That’s fine. It happens.