WEBVTT - Domino’s losing dough after gangbusters growth

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<v Speaker 1>From The Australian. Here's what's on the front. I'm christinaming it.

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<v Speaker 1>It's Friday, July thirty one, twenty twenty six. Pizza chain

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<v Speaker 1>Dominoes will close as many as sixty stores, half of

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<v Speaker 1>them in Australia and New Zealand, after posting its biggest

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<v Speaker 1>loss in decades. Investors are focusing on the positives, prompting

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<v Speaker 1>a share price jump, but Dominoes is far from out

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<v Speaker 1>of the woods. As skyrocketing inflation and some risky business

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<v Speaker 1>decisions bite, so can the servers of super cheap pizza

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<v Speaker 1>bounce back. Senior business reporter Eli Greenblatt is here in

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<v Speaker 1>just a moment. Eli Greenblatt is a senior business reporter

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<v Speaker 1>with The Australian and Eli I've got to start with

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<v Speaker 1>the hard hitting questions, what's your go to pizza order?

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<v Speaker 2>Like margarita and vegetarian. I've got kids as well, so

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<v Speaker 2>they've got pretty simple tastes. And either if you can

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<v Speaker 2>really judge the quality of a pizza chain or a

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<v Speaker 2>store by how they do the very simple things, which

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<v Speaker 2>is really a margarita or a vegetarian?

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<v Speaker 1>I agree. I think it's hard to stuff up a

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<v Speaker 1>margarita but I'm also partial to a barbecue chicken as well.

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<v Speaker 1>But I agree that the quality is where it's at.

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<v Speaker 1>Do you order from a Dominoza or a crust when

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<v Speaker 1>you get your pizzas, or do you prefer to go

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<v Speaker 1>out to eat?

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<v Speaker 2>You know, sometimes I go just locally and so an

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<v Speaker 2>independent pizza chain and kind of support them in the neighborhood.

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<v Speaker 2>Normally I just call up and pick it up. A

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<v Speaker 2>bit of fashion. I don't use Uber Eats or door Dash,

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<v Speaker 2>which probably makes me a minority these days. So many people,

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<v Speaker 2>especially young people, are on door Dash or they're on

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<v Speaker 2>Uber Eats and the lord of their pizza that way,

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<v Speaker 2>and they'll really go for a low cost operator or

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<v Speaker 2>someone who's quick, someone who's around the corner. But you know,

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<v Speaker 2>it's pretty tough out there because there's so much an

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<v Speaker 2>offer out there. It's becoming incredibly hard in that fast

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<v Speaker 2>food category.

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<v Speaker 1>Domino's is one of those that has certainly fit the

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<v Speaker 1>bill for fast food over the last few decades. Really

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<v Speaker 1>in Australia, they're back in the news. What's going on?

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<v Speaker 2>Yeah, Look they're having some troubles and they've been in

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<v Speaker 2>trouble for quite a few years actually, during COVID really

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<v Speaker 2>was their best of times, where the shares run as

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<v Speaker 2>high as about one hundred and sixty dollars. You know,

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<v Speaker 2>they were worth tens of billions of dollars. But since

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<v Speaker 2>then they've really collapsed. The shares are down about eighty

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<v Speaker 2>or eighty five percent, and last night that had an

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<v Speaker 2>update where they said that have good will impairments or

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<v Speaker 2>write offs of about three hundred million dollars, so that

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<v Speaker 2>will send them into a loss for the full year.

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<v Speaker 2>It'll be only their second loss in about twenty one

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<v Speaker 2>years of being on the ax. It'll be quite a

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<v Speaker 2>deep loss sales and negative across all their regions, so

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<v Speaker 2>it's Australia, New Zealand, Asia, Western Europe. They're really struggling,

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<v Speaker 2>and they've really had some big mishaps along the way

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<v Speaker 2>since the end of COVID, which has been around the

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<v Speaker 2>cost of their pizza, the way their pizzas livered, opening

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<v Speaker 2>too many stores and too many locations, expanding too quickly,

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<v Speaker 2>they had extra delivery fees they slapped on which they

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<v Speaker 2>had to then walk back from because customers were upset.

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<v Speaker 2>Competition from a lot of other retailers, and it's really

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<v Speaker 2>been quite difficult for them.

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<v Speaker 1>On the flip side, Domino's share price is up slightly,

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<v Speaker 1>certainly not to where it was as you said during COVID,

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<v Speaker 1>but it has jumped a little bit. Why would the

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<v Speaker 1>value of shares be going up when the company is

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<v Speaker 1>losing money.

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<v Speaker 2>Yeah, that's right. There's two interesting things going on at

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<v Speaker 2>the same time, two factors influencing the share price when

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<v Speaker 2>the shares came onto the market that were traded after

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<v Speaker 2>Wednesday night's update. So first of all, yes, a throndrebillion

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<v Speaker 2>dollar write off is pretty bad. That is non cash. However,

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<v Speaker 2>it's an accounting treatment and it doesn't affect the underlying

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<v Speaker 2>profitability of business. And in fact, even though there was

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<v Speaker 2>that big write off, even though sales were negative, the

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<v Speaker 2>underlying profit was actually okay. It came in with analyst expectations.

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<v Speaker 2>It was actually a bit better than what some analysts expected.

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<v Speaker 2>So in some ways it's a relief rally. But then

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<v Speaker 2>the second thing is it really caught out the shorts,

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<v Speaker 2>people that were short in the stock. And just to

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<v Speaker 2>take maybe a few steps back, most people would be

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<v Speaker 2>aware of, you know, the traditional way of making money

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<v Speaker 2>in the share market where you buy low and sell high.

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<v Speaker 2>So you'd buy shares in a company you think it

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<v Speaker 2>will go higher, you sell for a higher price, you

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<v Speaker 2>make a profit. But you can also make money on

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<v Speaker 2>a falling share price. That's called shortening a stock. Now

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<v Speaker 2>what's happened with Dominoes is Dominoes actually was the most

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<v Speaker 2>shorted company on the AX. So when the share price

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<v Speaker 2>started to rise Thursday morning, the shorts were caught out.

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<v Speaker 2>They had to scramble back in to buy those positions back,

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<v Speaker 2>to buy those shares so they could not lose as

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<v Speaker 2>much money and give the shares back to the people

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<v Speaker 2>they borrowed from. So they had to cover their position.

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<v Speaker 2>They will pay dividend this year, but really it's a

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<v Speaker 2>shrinking business. The share price is certainly collapsing, and they're

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<v Speaker 2>struggling for a number of reasons, but one of them

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<v Speaker 2>is they've decided to pull away from promotions and discounts.

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<v Speaker 2>Normally would the Dominoes, there'd be lots of heavy advertising

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<v Speaker 2>of one of promotions discounts, heavily discounted home delivery offers,

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<v Speaker 2>which brought in the customers but wasn't very good for profit.

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<v Speaker 2>So new management, new leadership at Domino's, they've decided to

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<v Speaker 2>pull away from that and have kind of like an

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<v Speaker 2>everyday low pricing, which is what you would see at,

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<v Speaker 2>for example, a Dan Murphy's or a Bunnis. When you

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<v Speaker 2>do that, the customers obviously will go elsewhere. So they've

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<v Speaker 2>had falling sales. That's hurt their profits. They're shutting down stores.

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<v Speaker 2>They're doing the best they can, but in the short

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<v Speaker 2>term there will be some pain.

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<v Speaker 1>Yeah. Friends and family of mine who have been subscribed

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<v Speaker 1>to Domino's Marketing have said in the past that the

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<v Speaker 1>text messages and emails that they've received, either with promotions

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<v Speaker 1>or deals, have been almost inescapable at times. Some have

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<v Speaker 1>even said that their relationship with Domino's Marketing has been

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<v Speaker 1>one of the most enduring of their lives, and that's

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<v Speaker 1>not happening anymore. Was that a misfire for them?

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<v Speaker 2>Do you think? I think it was. I suppose it

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<v Speaker 2>works for a while until it stops working. And I

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<v Speaker 2>think perhaps during COVID people were desperate. They were keen

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<v Speaker 2>on pizzas, very keen on home delivery, and that kind

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<v Speaker 2>of worked. But really the market is changing and they

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<v Speaker 2>were left behind. Also, they weren't really on those delivery

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<v Speaker 2>apps like door Dash and Uber Eats. Now, there were

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<v Speaker 2>some seemingly kind of logical reasons for that. They didn't

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<v Speaker 2>want to give away their margins to Uber Eats. They

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<v Speaker 2>also didn't want to trust their pizza to a third

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<v Speaker 2>party deliverer. That's understandable. They had their own army of

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<v Speaker 2>delivery people who did the delivery for them, so that

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<v Speaker 2>was all kept in house. But really the market's shifted

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<v Speaker 2>since then, especially for younger people. They're always on their

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<v Speaker 2>mobile phones and they've got those apps. They've got Uber Eats,

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<v Speaker 2>they've got door Dash, and if you're not on those apps,

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<v Speaker 2>you're then just not seen at all, You're just invisible.

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<v Speaker 2>You've got to be there. So a year or two ago,

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<v Speaker 2>the American parent, the NASDAQ listed Domino's Inc. Decided to

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<v Speaker 2>go on those apps. And look, there's going to be

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<v Speaker 2>some turbulence there, there's going to be some lost margins,

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<v Speaker 2>but it looks like it was the right decision because

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<v Speaker 2>they had to be in front of the customer, and

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<v Speaker 2>for now, the customer is on those apps, and you've

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<v Speaker 2>got to be there.

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<v Speaker 1>We have talked to you about Dominoes on the front

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<v Speaker 1>before ELI. That was back in twenty twenty three. As

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<v Speaker 1>you mentioned, when Dominoes lost millions of dollars because it

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<v Speaker 1>had put a nominal service fee on top of its

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<v Speaker 1>online orders. Australians at the time were starting to feel

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<v Speaker 1>the pinch of the cost of living crisis and weren't

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<v Speaker 1>prepared to cop that extra two dollars or so on

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<v Speaker 1>their bill. At the time, they did apologize for that

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<v Speaker 1>and said that it would never happen again, But they've

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<v Speaker 1>made a slew of other quite big changes since then

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<v Speaker 1>with all of that in mind, and should they have

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<v Speaker 1>maybe seen this particular downturn coming, probably.

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<v Speaker 2>Would have been helpful. I think if they looked deeper

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<v Speaker 2>into the market and kind of understood the consumer and

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<v Speaker 2>how they're shopping fast food and what they expect. I think,

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<v Speaker 2>you know, funny enough, with that delivery fee they put

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<v Speaker 2>on and they had to take off, that was to

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<v Speaker 2>deal with inflation. That was itself to cover their extra costs.

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<v Speaker 2>They had a huge increase in their bills for everything really,

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<v Speaker 2>from oil, from the packaging and the pizza, from labor,

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<v Speaker 2>from electricity, even cheese prices went up, and you know,

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<v Speaker 2>funny enough, at the time, Domino's was one of the

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<v Speaker 2>biggest buyer of Mozzulo cheese. In Australia they were number one.

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<v Speaker 2>They used so much cheese those prices went up and

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<v Speaker 2>they thought that's the only way to get the money back.

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<v Speaker 2>But yes, customers weren't happy with that.

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<v Speaker 1>Here's what Format Domino's Australia CEO Don Mage said about

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<v Speaker 1>the ill fated service fee in twenty twenty four.

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<v Speaker 2>The whole industry has a delivery service fee, so we

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<v Speaker 2>fell on the trap that we should do it as well.

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<v Speaker 1>But it's been a competitive advantage that we didn't have

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<v Speaker 1>a delivery service being our customers made it very clear

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<v Speaker 1>to us.

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<v Speaker 2>Also, I think the problem for Dominoes they grew way

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<v Speaker 2>too fast. Their attention was spread across too many regions,

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<v Speaker 2>so they really though originally were Australia and New Zealand, Okay,

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<v Speaker 2>that makes sense. They were Western Europe. That's maybe something

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<v Speaker 2>you can handle. So they were France, Belgium, Germany, but

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<v Speaker 2>then they went into Japan and then Taiwan and then

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<v Speaker 2>Malaysia and Cambodia. It was too many regions across too

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<v Speaker 2>many time zones, too much going on. You know, the

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<v Speaker 2>Japanese pizza market is incredibly different to the Australian pizza market,

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<v Speaker 2>or the American pizza market and the German market is

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<v Speaker 2>different again. So really it was way too much to

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<v Speaker 2>do all from a Brisbane headquarters and it was just

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<v Speaker 2>they just lost focus.

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<v Speaker 1>Coming up the changing tastes driving Domino's downturn. I'm hungry.

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<v Speaker 2>What's so special as Dominoes?

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<v Speaker 1>That was my turn to cook dinner and I thought,

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<v Speaker 1>you know what, I'm just going to get the family Dominoes.

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<v Speaker 1>If someone can tell me why Dominoes is so cheap

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<v Speaker 1>in Australia, this is.

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<v Speaker 2>Probably the best Dominoes I've had in years.

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<v Speaker 1>Dominoes is quite unique in the Australian fast food market

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<v Speaker 1>in that it hasn't really attracted the ire of say

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<v Speaker 1>Starbucks during its time here. In fact, I would say

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<v Speaker 1>that Australians are almost proud of the wholesale rejection of

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<v Speaker 1>Starbucks in Australia. Do you think Australians and in some

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<v Speaker 1>of those other markets maybe as well, are just falling

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<v Speaker 1>out of love with cheap pizza or is there something

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<v Speaker 1>deeper going on here, what's actually driving all of this?

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<v Speaker 2>It could be I mean, people seem to have a

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<v Speaker 2>love it or hate a relationship with Dominoes or a

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<v Speaker 2>belief in Dominoes or thinking about their pizza, but they

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<v Speaker 2>do remain incredibly popular thousands of stores in Australia and

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<v Speaker 2>New Zealand, so that must be for a reason. People

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<v Speaker 2>do want it and there is a need therefore cheat pizza.

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<v Speaker 2>There's nothing wrong with that, I think, especially you know,

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<v Speaker 2>for a family with their own cost living pressures, if

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<v Speaker 2>they want to treat a cheat pizza does the trick

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<v Speaker 2>and there's certainly know nothing wrong with that, I think

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<v Speaker 2>for them. The competition just became huge, whether it's from

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<v Speaker 2>KFC and then Goodman and Gomez and that whole kind

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<v Speaker 2>of Mexican fast food scene that has come in, whether

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<v Speaker 2>it's also the supermarkets bullies call that Aldi made a

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<v Speaker 2>big push into frozen pizzas and really improving the quality

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<v Speaker 2>of those pizzas and the prices. Now again, people may

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<v Speaker 2>have a view on supermarket pizzas if they're good or

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<v Speaker 2>bad or not, but they're very priced competitive with takeaway

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<v Speaker 2>pizza from a store. The quality is improving all the

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<v Speaker 2>time and the price is coming down all the time,

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<v Speaker 2>so that's tough as well. And then you've got this

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<v Speaker 2>whole other movement perhaps of people moving away from carbs

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<v Speaker 2>or you know, it's a whole issue to itself about

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<v Speaker 2>the flax or the boom in GLP one drugs like

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<v Speaker 2>ozen pic where people are eating less and certainly eating

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<v Speaker 2>less bready products like pizza.

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<v Speaker 1>Yeah, that is an interesting I guess aspect of this conversation,

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<v Speaker 1>isn't it that what we eat and what we are

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<v Speaker 1>seen to be eating has been affected by that broad

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<v Speaker 1>a cultural shift. I guess. I don't know about you,

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<v Speaker 1>but it's really just made me want a slice of pizza,

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<v Speaker 1>to be honest. Thanks Eli. Eli Greenblatt is a senior

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<v Speaker 1>business reporter with The Australian. You can read all his

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<v Speaker 1>reporting and analysis right now at the Australian dot com

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<v Speaker 1>dot au