“I was a pizza delivery boy at the Pizza Oven in Canton. I wanted to get fired so bad, I actually wrecked the delivery car, but they wouldn’t fire me because I was the only person they had working there.” – Marilyn Manson
“The secret of success in life is to eat what you like and let the food fight it out inside.” – Mark Twain
“Let’s face it: so much of what we consume is not driven by knowledge but by basic craving and impulse. The process of what we eat starts in our heads. And no one is more in our heads than a food industry that spends billions of dollars in marketing its message in every means possible.” – Chuck Norris, who, if you did not know already, can make onions cry
In this week’s piece the focus is on food & beverage retail and the challenge for incumbents with the rapidly changing dynamics within the industry. We start, however, with a quick update on uranium, which we touched upon at the start of the year and again recently.
The spot price of uranium increased to US dollars 26.60 per pound on Wednesday, exceeding the highs recorded in December last year following the back-to-back production suspension announcements by Cameco and Kazatomprom.
Uranium Participation Corporation, a pure play commodity exposure on uranium, also recorded new US dollar highs on Wednesday – mirroring the increase in the spot price of the commodity.
Share Price of Uranium Participation Corporation
Source: Bloomberg
With Cameco soliciting bids for 500,000 pounds of uranium for delivery between the end of this year and through 21 March 2019, and looking to purchase as much as a 15 million pounds from the spot market through the end of 2019, uranium prices may well have a lot further to run from here. How $URPTF performs from here on out is, in our opinion, worth monitoring.
Food & Beverage Retail
Domino’s Pizza: The “e-commerce company that happens to sell pizza”
Domino’s Pizza’s market capitalisation at the end of 2006 was US dollars 1.75 billion and the company had total debt of US dollars 742 million in debt. By the end of 2007 the company’s market capitalisation had dropped by 55 per cent to US dollars 785 million while debt had ballooned to US dollars 1.72 billion – increasing by more than 130 per cent year-over-year. The following year things got even worse as market capitalisation dropped to US dollars 261 million – close to a seventh of what it was merely two years prior.
Today, the company’s market capitalisation stands at around US dollar 12.6 billion – a 48 fold increase since the end of 2008.
The turnaround in Domino’s Pizza’s stock price has quite simply been remarkable, to say the least.
The below chart shows the stock price performance of Google and Domino’s Pizza, respectively, starting from the time of Google’s public listing (Domino’s was listed a little over a month before Google).
Despite the sharp fall in Domino’s Pizza’s stock price between 2006 and 2008, its price performance compared to that of Google’s stock, starting from their respective public listings till date, is not too dissimilar
Price Performance: $GOOGL vs. $DPZ
Source: Bloomberg
In 2008, with sales flagging and the company under pressure, Domino’s revamped its menu and its ingredients. In 2010, it became one of the first quick service restaurant chains to launch online ordering and did so by building an in-house technology team to lead the effort.
While these initiatives had a positive impact on the company’s bottom and share price, if we look at the chart comparing the price performance of Domino’s and the S&P500 Restaurants Sub-Industry Index, what is apparent is that something more drastic happened starting in 2012. That change according to company’s management was the realisation that Domino’s was no longer a pizza company but rather an “e-commerce company that happens to sell pizza”.
Price Performance: $DPZ vs. S&P500 Restaurants Sub-Index
Source: Bloomberg
In 2012, Dennis Maloney, Chief Digital Officer, and Kelly Garcia, SVP of e-Commerce Development and Emerging Technologies, presented the idea to Domino’s Pizza’s board of directors and CEO that in order to endure and flourish in the cut-throat business of quick-service pizza, the company had to go further in its adoption of technology. The company had to undergo a digital transformation, they said. What the two executives pitched was nothing short of stripping down the company to its bare bones and rebuilding it with a new tech-first culture and an entirely different operational model.
Domino’s invested heavily in its online ordering system. The aim was to improve the overall consumer experience. It introduced the Domino’s Tracker – a bar that shows you the progress of your order, in real time. The tracker was an instant hit. It also enabled the creation of profiles as part of the ordering system. This was done so that returning customers could login and re-order items they had ordered in the past with only a few clicks.
In developing its online ordering system, the company recognised the growing importance of mobile and took a mobile-first approach by launching easy-to-use iOS and Android applications. These applications, too, were an instant success and their adoption accelerated the transformation of the company’s operating model.
Domino’s did not stop at mobile. It followed up the success of its mobile applications with the launch of Domino’s AnyWay, an innovative ordering platform that enables customers to place order through any one of their preferred devices, from anywhere. Customers can order using text messages, Apple TV, Amazon Echo, Google Home, Samsung Smart TVs, smart watches and via Tweets, Facebook messenger and Slack. In 2014, the company even launched its proprietary voice-ordering tool, nicknamed “Dom”, for its mobile applications.
On the two-way customer dialogue and engagement side, the company launched the ‘Think Oven’ campaign. Think Oven is a Facebook page, just not a typical one. It consists of two parts: ‘Projects’ and the ‘Idea Box’. In Projects the company asks for ideas on specific items such as the colours to use for their uniforms and chooses its favourite suggestions and rewards those who submitted them. Idea Box is an open suggestion box for any and all things to do with Domino’s. Suggestions submitted in the Idea Box have from time-to-time become the inspiration behind the launch of new projects.
To track the performance of and glean insights from all the digital initiatives, the company built an analytics team. This team introduced A/B testing – the process of comparing two versions of a web page to see which one performs better – and used it to help the company better understand what did and did not work in driving sales. This in turn fostered a cultural of innovation; the company started experimenting with different ideas and by introducing new products and adopting those that were successful in increasing sales and / or profitability.
With all the digital initiatives underway, the company did not stay quiet about them. Instead, it used them as part of its marketing campaigns and pushed forward the idea that Domino’s is an innovative, tech-driven food company. It launched Domino’s Live – a tool allowing customers to watch their order being prepared live. It also placed the its live Twitter feed on the front page of its website – the feed captures every conversation about Domino’s on Twitter, irrespective of whether it is positive or negative.
The result of all these efforts is that digital sales now make up the majority of the company’s sales with mobile representing half of all digital sales, technology is now the company largest department in terms of employee headcount, more than a half million orders have been placed using Dom since its launch, and Pizza Hut from being the forerunner, is now a very distant second quick service pizza chain in the US. And of course, the incredible price performance of its stock.
Not the Only One
Domino’s is not the only quick service chain to undergo a drastic transformation. McDonald’s is another. The world’s largest food chain has revamped its iconic quarter pounder in the US, which is now made using never-frozen beef patties in each and every one of its restaurants in the US. (Fast Company has a fantastic piece on McDonald’s’ transformation that is well worth the read.)
Dunkin’ Donuts too has taken steps toward a drastic digital transformation of its business and is starting to reap the rewards.
UberEats and the Challenge for Incumbents
What the Domino’s, McDonald’s and Dunkin’ Donuts transformation experiences show is the drastic amounts of effort and patience that is needed by incumbent food & beverage retail businesses to overhaul their businesses in order to thrive in today’s hyper-connected world.
And it is not getting any easier.
With the growth of food delivery platforms, such as UberEats, Deliveroo and GrubHub, in recent years, the competitive landscape is gradually tilting in favour of niche and small scale food businesses and giving rise to new food businesses that are completely eschewing a physical presence and simply delivering through these platforms.
Prior to the launch of these platforms, restaurants had to invest in hiring a driver and a vehicle if they wanted to cater to delivery demand. This model of having a proprietary delivery service was neither the most efficient use of capital nor of time. For instance, when a food business is running its own delivery service, it has to wait for its drivers to return to do the next round of deliveries, which is a significant opportunity cost for all but the very biggest food chains. Drivers on food delivery platforms, on the other hand, do not have to return and restaurants have access to the drivers that are both free and nearest to them.
The entry of Uber into the food delivery business, in particular, has been a game changer in our minds. And Uber CEO, Dara Khosrowshahi, confirmed just as much at the Code Conference in March when he stated that UberEats already has a US dollars 6 billion bookings rate.
The reason UberEats is such a game changer is that Uber already has a very large number of drivers signed up for its ride-sharing business and it gives these drivers the option to drive for just Uber, just for UberEats or both, i.e. Uber already has a very large captive source of drivers that it can convert to driving for UberEats at little to no cost.
The upshot of the proliferation of food delivery platforms for customers is that they now have the choice of placing orders among dozens (if not hundreds) of restaurants and as well as the convenience of ordering from multiple restaurants to accommodate varying dietary preferences. This is turn is allowing niche and small food businesses to compete for delivery demand with the very largest food businesses.
Investment Perspective
The investment implications of the changing competitive dynamics are really quite simple: there are very few listed food & beverage retail businesses that are resilient to the changing industry dynamics and therefore worth investing.
For now the only quick service restaurant stock we like is Dunkin’ Donuts $DNKN and we are also looking at Yum! Brands $YUM as a potential long.
Disclaimer: No pizzas were consumed in preparation of this week’s piece
This post should not be considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.