Higher pizza prices turn Domino’s customers off

Higher pizza prices turn Domino’s customers off

Via Domino's Australia on Facebook.

Domino’s Pizza Enterprises’ (ASX: DMP) attempts to balance inflationary concerns by upping the prices of its pizzas has turned some customers off in the first half of the financial year, leading to a material dip in earnings and profit for the Australian operator.

According to Domino’s, which operates the brand in the Asia Pacific region and some European countries, the company’s response to combating inflation "had not been optimal".

This involved lifting prices and applying some surcharges - a strategy that protected franchisee profitability but led to a decrease in spending overall, according to CEO and managing director Don Meij.

“In the initial stages of inflation, our expectation was that we could offset increased input costs by providing customers ‘more for more’ rather than passing price through - an approach deep in our DNA,” Meij says.

“Given the challenging conditions and the effect on our franchisees we felt it was necessary to lift prices, including applying some surcharges.

“This was successful in protecting franchisee profitability, however given the speed of the change it was difficult to forecast the effect on customer repurchasing rates, especially where customers order less frequently such as Japan or Germany.”

As such, ordering frequency fell, resulting in December trading being "significantly below" the Brisbane-headquartered Domino’s expectations.

“Our data shows very clearly that our store operations are at a high standard, with customer satisfaction and delivery times remaining strong,” Meij says.

“Equally our digital offering, including our new app, is performing very well. Where we need to do more work is pricing and getting the value equation right.”

Overall, online sales dropped by 4.5 per cent in the half to $1.53 billion, while earnings fell 21.3 per cent to $113.9 million.

Underlying net profit after tax also took a tumble, down 21.5 per cent to $71.7 million and revenue dipped by 4.3 per cent to $1.15 billion.

Overall food sales were 4 per cent lower, but the company added 367 new stores to its global network in the period, of which 278 were acquired.

The company says sales were positive in December, though "not as strong as anticipated and the effect of higher prices, reducing customer repurchasing, continued into January".

“Fortunately, the customer demand globally for freshly prepared, affordable out-of-home meals, remains strong,” Meij says.

“This gives us confidence that the power to overcome these short-term challenges is within our control and we will continue to work to get the balance right.”

Domino's says these flat conditions have continued into the second half, with sales growth "less than anticipated" as management attempts to strike a balance between franchisee profitability and customer satisfaction.

As such, the company expects same-store sales growth to be below the medium-term outlook of between 3 and 6 per cent growth.

However, management says it is confident in its ability to return to positive same-store sales growth once it is able to balance the value equation for customers.

“What gives us confidence is the world-class team Domino’s and our franchisees employee - in our stores and in our corporate roles,” Meij says.

“We are confident in the power of our people to navigate these extraordinary times, and are proud of their efforts to respond and lift our performance.

“This is an ongoing process, and we appreciate the support from both our new and loyal customers.”

Shareholders will receive an interim dividend of 67.4 cents per share, paid on 16 March 2023.

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