Domino's Pizza Faces Challenges with International Expansion: What's Next?

Current Performance in International Markets

Domino's Pizza has seen positive same-store sales growth and successful expansion in China and Mexico. However, international markets face challenges like compressed growth and foreign currency exchange rate impacts. Despite these hurdles, there is confidence in unit growth potential for 2024 and 2025.

"of 2017, the company has achieved 26 consecutive quarters of positive same-store sales growth. Accelerating expansion of stores with excellent performance of new stores. Due to growing acceptance among domestic consumers, the diversification of pizza consumption scenarios and localized innovation, the pizza market in China continued to grow." --- (DPZ, press release, 2024/04/09)

"Some of our best-performing markets are getting this right. As an example, our master franchisee in Mexico has run very successful boost week campaigns that have driven outstanding order and sales growth." --- (DPZ, earning call, 2024/Q1)

"I was wondering if you can elaborate on what is causing international markets to have a little bit more compressed growth this quarter, which again was in-line with your previous expectations." --- (DPZ, earning call, 2024/Q1)

"We believe this measure is important to understanding Company performance given the significant variability in international franchise royalty revenues that can be driven by changes in foreign currency exchange rates." --- (DPZ, sec filing, 2024/Q1)

"So how do you if you combine it together, the puts and takes into these international markets, how confident are you about the unit growth potential for 2024, 2025 even if not beyond?" --- (DPZ, conference, 2024/05/30)

Impact of Regional Consumer Preferences

Regional consumer preferences significantly impact Domino's international expansion, necessitating adjustments in pricing, promotions, and marketing strategies. Economic conditions and cautious consumer behavior further complicate this, with affordability and value being key consumer demands. Additionally, regional competitors hold substantial market share, underscoring the need for tailored strategies.

"Our ability to build upon our strengths and advantages also depends on the impact of pricing, promotional and marketing plans across the System, and the ability to adjust these plans to respond quickly and effectively to evolving customer behavior and preferences, as well as shifting economic and competitive conditions." --- (MCD, sec filing, 2024/Q1)

"Headwinds discussed last quarter have continued in a number of key markets, we continue to feel the impact of a more cautious consumer, particularly with our more occasional customer and a deteriorating economic outlook has weighed on customer" --- (SBUX, earning call, 2024/Q2)

"So we've had all the share growth, but 40% to 50% of the pizza category is still regionals and kind of up and down the street in places." --- (DPZ, conference, 2024/05/30)

"The broader impact of acts of war and related sanctions, including on macroeconomic conditions, geopolitical tensions, consumer demand and the ability of us and our franchisees to operate in certain geographic areas, may also have an adverse impact on our business and financial results." --- (MCD, sec filing, 2024/Q1)

"So I think we feel really good about the vast majority of our business. We just know the consumer is looking for more on affordability and value, and we're going to lean in and make sure we can meet those needs." --- (MCD, earning call, 2024/Q1)

Competitive Landscape in International Markets

Domino's faces a competitive international market where major players like McDonald's and Starbucks are investing in technology and fundamentals to maintain their edge. With a value-focused environment and strategic investments from competitors like Yum! Brands, Domino's must adapt to sustain its growth and competitive positioning.

"As we've said before, as customers continue to be more intentional with the dollars that they spend in a pressured economic landscape, we expect moderated top line growth this year." --- (MCD, earning call, 2024/Q1)

"Lastly, we must continue investing in the fundamentals and competitive moat of our business, our partners, our stores and our customers as we believe these investments will drive long-term growth and industry leadership beyond these transitory headwinds." --- (SBUX, earning call, 2024/Q2)

"And how do you believe the Domino's brand is positioned to compete? And what arguably is going to be a more value focused competitive environment moving forward? Yes. No, I think it's a great question, Brian. And if we go back to" --- (DPZ, conference, 2024/06/10)

"It is our intent to use these operating cash flows to continue to invest in growing our business and pay a competitive dividend, with any remaining excess then returned to shareholders through share repurchases." --- (YUM, sec filing, 2024/Q1)

"Further, as the Company plans for long term growth and solidifying McDonald’s leadership position, the Company will develop three technology-enabled platforms designed to build our competitive advantages, cement our place in culture and stay one step ahead of the next generation of customers." --- (MCD, sec filing, 2024/Q1)

Supply Chain Issues Impacting International Operations

Domino's Pizza's international operations are facing supply chain challenges due to health epidemics, environmental and social impact matters, and the need to ensure supply chain capacity to meet growing demand. Despite these issues, the company remains confident in its outlook, driven by strong supply chain performance and improved procurement productivity.

"Health epidemics or pandemics have in the past and may in the future impact macroeconomic conditions, consumer behavior, labor availability and supply chain management, as well as local operations in impacted markets, all of which can adversely affect our business, financial results and outlook." --- (MCD, sec filing, 2024/Q1)

"So franchisee profitability continues to grow. And I think that's actually driven by a significant performance on the supply chain side also, which is you are seeing on the supply chain financials that's going into the franchisee profits. So overall, very confident of our outlook for the back half of the year." --- (DPZ, earning call, 2024/Q2)

"A failure, whether real or perceived, to address environmental and social impact matters or to achieve progress on our environmental and social impact initiatives on the anticipated timing or at all, could adversely affect our business, including by heightening other risks disclosed in these Risk Factors, such as those related to consumer behavior, consumer perceptions of our brand, labor availability and costs, supply chain interruptions, commodity costs, and legal and regulatory complexity." --- (MCD, sec filing, 2024/Q1)

"Second, we are now expecting supply chain margins to expand compared to the prior year, due to some favorability in the food basket and slightly higher procurement productivity. We are forecasting to come in below the midpoint of our food basket range of 1% to 3% for the year." --- (DPZ, earning call, 2024/Q2)

"and as well as supply chain capacity to actually make sure that we have enough resources to basically fulfill the demand that we're expecting to see incrementally, demand coming from both same store sales transactions as well as incremental units that we are expecting to continue to grow." --- (DPZ, conference, 2024/06/10)

Regulatory Challenges in International Markets

Domino's Pizza is facing significant regulatory challenges in international markets, impacting its ability to meet store expansion goals. These challenges, including issues with store openings and closures, have led to a temporary suspension of its global net store guidance. Regulatory environments also affect operational costs and optimal ownership structures, further complicating international expansion efforts.

"In the release, Domino's disclosed that the company 'expects it will fall 175 to 275 stores below its 2024 goal of 925+ net stores in international primarily as a result of challenges in both openings and closures being faced by Domino's Pizza Enterprises ('DPE'), one of its master franchisees.' As a result, Domino's disclosed that '[t]he Company is temporarily suspending its guidance metric of 1,100+ global net stores until the full effect of DPE's store opens and closures on international net store growth are known.' On this news, Domino's stock price fell $64.23 per share, or 13.57%, to close at $409.04 per share on July 18, 2024." --- (DPZ, press release, 2024/07/25)

"Our success depends in part on our ability to manage the impact of regulations and other initiatives that can affect our business plans and operations, which have increased and may continue to increase our costs of doing business and exposure to litigation, governmental investigations or other proceedings." --- (MCD, sec filing, 2024/Q1)

"The optimal ownership structure for an individual restaurant, trading area or market (country) is based on a variety of factors, including the availability of individuals with entrepreneurial experience and financial resources, as well as the local legal and regulatory environment in critical areas such as property ownership and franchising." --- (MCD, sec filing, 2024/Q1)

Strategic Responses to International Expansion Challenges

Domino's Pizza addresses international expansion challenges by launching initiatives with strategic intent and maintaining them long-term. Additionally, they focus on understanding and aligning with the concerns and priorities of their global franchisees to ensure cohesive strategic responses.

"And so when we launch things, we launch them with strategic intent and they stay on." --- (DPZ, conference, 2024/05/30)

"What are the areas that your franchisees around the world are most excited about, most worried about any common strategic priorities that have come up there would be great. Thank you." --- (DPZ, earning call, 2024/Q2)