After nearly thirty years in the Chinese market, Domino's has entered a golden period of rapid expansion.
In the first quarter, Domino's China opened 97 new stores, achieving 61% of its annual target for new, under-construction, and signed stores.
As of the end of the first quarter, Domino's China had reached 1,031 stores.
As the exclusive franchisee of Domino's in the Chinese market, DPC DASH (1405.HK) (hereinafter referred to as &#34;Domino's China&#34;) has initiated an accelerated expansion model since completing its Hong Kong stock listing in 2023.
By 2024, the total number of Domino's China stores is expected to reach 1,008, with a net increase of 240 stores, of which 220 are from new markets outside Beijing and Shanghai.
Although it has not abandoned its insistence on a fully self-operated delivery model, Domino's China has not opened delivery services for some new market stores, citing the &#34;hot demand for new market stores.&#34;
After indirectly relaxing its self-imposed requirement of &#34;30 minutes delivery,&#34; Domino's China is expected to emerge from a four-year loss of 1 billion yuan.
In 2024, Domino's China is projected to achieve a revenue growth of 41.4% year-on-year to 4.314 billion yuan, with a net profit of 55 million yuan, turning a profit.
Based on 2024 sales, Domino's has surpassed Pizza Hut to become the second-largest pizza brand in mainland China, only behind Pizza Hut, and China is also the fastest-growing market for Domino's store expansion.
Will Domino's China find a new world after moving out of Beijing and Shanghai?
<h2>The Label or Burden of Self-Delivery</h2>
Unlike Pizza Hut, which is positioned as a family gathering place, Domino's excels in delivery, promising &#34;30 minutes delivery.&#34;
Most Domino's China stores are less than 150 square meters, leaving only half the space for dine-in, with past revenue contributions from delivery accounting for 70%.
While KFC and McDonald's have also established independent delivery systems separate from third-party platforms, they have adopted a cooperative outsourcing model, whereas Domino's China employs a large number of dedicated delivery riders.
This was originally a &#34;commitment&#34; to align with the parent company's self-operated delivery.
However, in China's developed third-party delivery market, this insistence has not only failed to demonstrate advantages but has also significantly increased labor costs.
At its peak, the proportion of riders was nearly half of the total number of employees, with employee salary accounting for over 40%, far exceeding Pizza Hut's less than 30% during the same period.
During peak times, store employees even had to take on the role of riders, leading to the closure of the order system during extreme weather conditions.
The promise of &#34;30 minutes delivery&#34; further limits the delivery radius of stores to 1.5 kilometers. To cover more customers with limited manpower, Domino's must continue to open stores.
But while many stores have opened, profits have not materialized.
Between 2020 and 2023, Domino's China accumulated losses of nearly 1 billion yuan.
The brand's development space is still limited to the two first-tier markets of Beijing and Shanghai.
Since 2022, Domino's China has changed its strategy to reduce or even eliminate delivery services in most newly expanded areas, determined to move out of Beijing and Shanghai.
Due to the decrease in the proportion of self-operated delivery, the contribution of delivery revenue dropped from 59.2% in 2023 to 46.1% in 2024.
During the same period, Domino's China's salary expenditure ratio decreased by 3.6 percentage points to 35%
This has made it difficult to maintain the high average order value supported by delivery in the past.
In the past year, Domino's China saw its average order value drop from 86.8 yuan to 82.1 yuan.
During the earnings presentation, Domino's China executives introduced that currently, delivery revenue in mature markets accounts for over 70%, while in emerging markets it is slightly below 30%.
However, the growth in order volume has temporarily offset the impact of the lower average order value.
The average daily order volume for 2024 is expected to increase from 145 to 160, with the average daily sales per store at 13,100 yuan, a year-on-year increase of 2.5%.
Compared to Beijing and Shanghai, the two major first-tier cities, the rental costs in lower-tier markets are relatively low. The cost recovery period for new stores in Beijing and Shanghai is 33 months, while in new cities it only takes 12 months.
Benefiting from the optimization of store cost structure, in 2024, Domino's China's store profit margin has reached 14.5%, exceeding Pizza Hut's 12%.
<h2>Seeking Growth in Lower-Tier Markets</h2>
Domino's first entered the Chinese market in 1997, not far behind Pizza Hut, but its operating rights were dispersed and changed hands several times, leading to an uneven development history.
It wasn't until the total franchise rights were reconfirmed in 2017 that Domino's China entered a relatively stable development phase.
That year, Domino's China had 100 stores in three first-tier cities;
By 2024, Domino's China's layout in first-tier cities is close to that of Pizza Hut, with over 500 stores.
However, there is still significant expansion potential in new first-tier and lower-tier cities.
From 2023 to 2024, the number of newly entered cities reached 13 and 10 respectively, with the revenue share previously dominated by Beijing and Shanghai diluted to less than 40%.
The first-store effect in new markets is significant, with the first store in Shenyang achieving sales of over 11.1 million yuan in its first month, setting a record for the highest first-month sales of any global store.
In the next two years, Domino's China still expects to open 300 to 350 new stores, corresponding to a store growth rate of 22% to 35%, with no signs of slowing down in store expansion.
Management revealed that new stores will still be concentrated in cities other than Beijing and Shanghai.
In new first-tier and lower-tier cities, Domino's China will focus more on opening new stores in shopping centers.
However, accelerating penetration does not mean giving up the comparative advantage of &#34;self-delivery.&#34;
Domino's China CEO Wang Yi stated that as the brand gradually matures in new markets, Domino's will slowly move from city centers into communities to increase the delivery ratio.
In the future, as the proportion of delivery revenue in new markets increases, rising labor costs may again impact profits.
Additionally, the current Western fast food sector is facing intense market competition, and the degree of pizza pre-preparation is higher than that of hamburgers, making it more susceptible to price wars.
In recent years, Domino's has been promoting the &#34;Tuesday and Wednesday pizza at 30% off&#34; campaign, with a 9-inch pizza priced at only 27.3 yuan after the discount. When opening new stores in several cities, they also offered promotions to upgrade a 9-inch pizza to a 12-inch pizza for free.
As a competitor, Pizza Hut is strengthening its cost-performance development route.
The average order value has dropped from 132 yuan in 2017 to the current 82 yuan, aligning with Domino's and showing a trend of continued decline
More and more stores are being transformed into WoW stores that cater to young people's &#34;solo dining,&#34; with an average spending of only 30 to 40 yuan.
At the end of last year, Domino's also announced a price reduction for 30 of its products, with the cheapest pizza currently selling for 36.9 yuan.
Lin Yue, chief consultant at Lingyan Management Consulting, told Xinfeng: &#34;The price war has reached its limit; it's already difficult to lower the price of a pizza further, and with delivery costs, it becomes even harder to make it cheaper.&#34;
Lin Yue believes that Domino's still has development opportunities in community markets, single-serving pizzas, and casual afternoon tea. &#34;Instead of focusing on price, we should pay more attention to innovation in products and services.&#34;
Wen Zhihong, general manager of Hehong Consulting, believes that Domino's has certain advantages in cost-effectiveness, which may impact the Pizza Hut stores in second-tier cities.
Currently, Pizza Hut's focus is not on &#34;defense,&#34; but rather on accelerating penetration into lower-tier markets through a franchise model.
In 2024, 10% of the 412 new stores opened by Pizza Hut will be franchise stores. This proportion will gradually increase to 20%-30% in the coming years.
How much market share Domino's can capture from Pizza Hut is both an opportunity and a challenge for Domino's China

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- Domino's Pizza has entered a rapid expansion phase in China, opening 97 new stores in Q1 2024, reaching a total of 1,031 locations.  
- Despite maintaining a self-delivery model, the company has reduced its delivery service in new markets, which has contributed to a turnaround with a 41.4% revenue increase and a net profit of 0.55 billion yuan in 2024.  
- As it expands beyond major cities, Domino's faces challenges from competitors like Pizza Hut, particularly in pricing strategies and market penetration, while exploring opportunities in community markets and single-serving products.

After letting go of the obsession with food delivery, Domino's has started making profits in China