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Fast food seller cannibalises existing sales territory to keep growing
Thursday 20 Oct 2016 Author: Daniel Coatsworth

Market saturation is a major problem clouding the casual dining sector. Cracks are appearing everywhere and investors would be wise to take a cautious stance towards the sector.

Restaurant chains are obsessed with growth for growth’s sake. This is unsustainable and threatens to damage shareholder returns unless the restaurant has a good value proposition that can steal market share from rivals.

Food in a flash

Competition is intense from both physical restaurants and takeaways. New delivery services like Deliveroo mean you can have any food imaginable in just a few swipes of a smartphone.

Sitting in the middle of this fanfare is Domino’s Pizza (DOM) which continues to feed the nation with its cheese-laden goods. It’s quite impressive how the rise of the sourdough pizza, smokehouse barbeque joints or superfood salads from a wide range of start-up companies have yet to derail the appeal of Domino’s.

Domino’s earnings disappointed the market last week – and the shares have since been weak.

You may be surprised to see how its UK growth is playing out. Thirty four of its 51 new stores so far this year have been created by opening sites in existing trading areas rather expanding into new geographic territories. This is referred to as ‘splitting’ in its results.

That suggests to me it is finding growth harder to achieve in the UK. It also raises the risk that the new stores could cannibalise sales in territories that have been split into two smaller areas.

A local nightclub near my house recently reopened as a Domino’s site. It is less than a mile from another outlet. I’d theoretically get my pizza delivered a bit faster from the new site due to its proximity to my home but I can’t ever recall the service being slow when Domino’s only had one hub from which to send out orders.


At bursting point

At some point something has to give. There are simply too many restaurants and too many brands in the industry to meet demand. For Domino’s, how can it keep sales growing when consumers have so many alternatives?

Langton Capital suggests it should expand overseas and buy DP Poland (DPP:AIM), the AIM-quoted Domino’s Poland franchise owner.

The point at which everyone is opening restaurants or takeaways left, right and centre is when investors should take profit and look elsewhere. You could argue this situation has been in play for several years, yet the market refuses to acknowledge the problem. It can’t act blindly for ever. (DC)

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