Food delivery has been gaining steady popularity worldwide. That is, until the pandemic, when it exploded to mass adoption as dining in restaurants was restricted by governments.
That has been bad news for Domino's (NYSE: DPZ). For decades, consumers had few choices when they wanted meals delivered to their homes. With the rise of businesses like DoorDash (NYSE: DASH) and Uber Eats (NYSE: UBER), folks can order a substantially more comprehensive array of restaurant meals for delivery.
The rise of competing services is already giving Domino's difficulties. While many restaurants have contracted with third-party food delivery services, Domino's has chosen not to do so. Let's consider that decision and its implications for Domino's.
A driver shortage is hurting performance
The most urgent effect on Domino's from not partnering with DoorDash or its peers is a shortage of delivery drivers. Sandeep Reddy, Domino's chief financial officer, said in the company's conference call on July 21 that "stores in the top 20%, those that are essentially fully staffed on average, outperformed stores in the bottom 20%, those that are facing the most significant labor shortages, by 7 percentage points."
In other words, driver shortages are causing some locations to underperform. Many sites have had to operate for fewer hours. The problem has become so acute that management undertook a deep dive into the delivery labor market. Based on that inquiry, it believes it can solve the shortages internally.
Flexibility is one of the primary reasons that drivers choose to work for DoorDash or Uber Eats instead of Domino's. The third-party aggregators consider the drivers to be contractors and don't give them schedules or require exclusivity.
That's in contrast to Domino's, where drivers are given schedules they must stick to in their job. Domino's management thinks that if it can offer drivers shorter shifts, fewer hours in a week, and shorter lead time, it would encourage more folks to join the team.
The most significant comment from the company's second-quarter conference call was by CEO Russell Weiner pertaining to the company's delivery-driver research: "Until we fully answer this question, all options will remain on the table."
In my opinion, that statement opens the pathway for Domino's to finally partner with a third-party food delivery company. The move would arguably immediately solve the driver shortage problem. Whenever a local Domino's is short-staffed, it could allocate orders to its chosen partner, whether it be DoorDash, Uber Eats, or others.
Domino's could have a Netflix moment
This decision would not be unlike the one recently made by Netflix (NASDAQ: NFLX). For years, it refused to offer an ad-supported service tier. But once the pressure mounted from decreasing subscriber numbers, it acquiesced and has now decided to launch an ad-supported tier in 2023. Domino's is under similar pressure. Franchisees are struggling to find enough people to staff their locations, and it is costing them dearly.
Domino's could have a valid reason for not partnering with the food delivery aggregators. The companies are increasing the competition for the pizza chain, and it might prefer not to help them thrive. For the most part, the food delivery providers are unprofitable. Partnering with them only helps to strengthen them, an outcome that is arguably not in the long-term interest of Domino's.
However, the pizza chain must weather short-term pressures in the hope of some uncertain long-term benefit. Ultimately, I expect that Domino will acquiesce and partner with one or more of the major third-party food delivery providers.
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Parkev Tatevosian has positions in Netflix and Uber Technologies. The Motley Fool has positions in and recommends Domino's Pizza, DoorDash, Inc., and Netflix. The Motley Fool recommends Uber Technologies. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
