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Domino's pizza pulls out all stops to cut costs, but soft drink swap 'dangerous'

Madeleine Heffernan
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Domino's Pizza is pulling out all stops to cut costs, but treads a risky path pleasing both customers and investors.

Domino's shares peaked at more than $80 in August last year, thanks to strong demand for its cheap and cheerful food, the company's strong use of IT, and successful international expansion.

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'If you're not a favourite, you're going to lose'

Consumer advocate Michael Fraser on the Domino's pizza franchisees.

But the company has been one of the worst-performing stocks over the past three months, due to concerns about its earnings growth, that it was too expensive, and that it faced a much bigger wages bill following alleged underpayment scandals. 

Recently it emerged Domino's was changing the soft drinks it would sell - to Pepsi from Coke - and rolling out smaller pizzas.

Dean Fergie, director and portfolio manager at Cyan Investment Management, said the two pieces of news "add fuel ot the fire that their earnings might be under pressure".

From September Domino's will sell Schweppes Australia soft drinks and bottled water. At one million cases of drinks, analysts suggest this means $29 million revenue loss for Coke's bottler and distributor Coca-Cola Amatil, another company in the doghouse with the market.

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Coke is the world's biggest-selling soft drink in history. It came sixth on a survey of 3000 people about which big brands they couldn't do without, according to researchers Canstar Blue.

Ben Willee, of advertising firm Spinach, said the shift was "very dangerous" and potentially not worth the money Domino's will save.

"They operate in a very competitive market that's only getting more competitive," he said, adding Arnott's and Coke were two brands that learnt the hard way not to tamper with winning formulas. 

Another advertising executive, Adam Ferrier, said Domino's "would have weighed up the consumer preferences for one brand over the other versus the presumed cost saving they make switching suppliers.

"In general consumers don't like change and reward brands that stay consistent. It just means they can think less about routine purchases and consumers don't like to think more than we need to. 

"So there will be some disappointed, annoyed and inconvenienced consumers.  However, at the end of the day it's only the drink people consume when they buy a pizza - they'll get over it."

There will be some disappointed, annoyed and inconvenienced consumers

Advertising executive Adam Ferrier

Wage hikes expected

Deutsche Bank said the soft drink swap would "lead to lower food costs for franchisees which we believe is in an effort to mitigate the pressure stemming from penalty rates."

"We also understand Domino's is planning to reduce the size of its pizzas to provide additional cost relief. Domino's has already conducted trials on selling Pepsi products and is about to conduct trials on the smaller pizzas, but we see some risk to consumer perception from both of these initiaitives."

Investment bank Goldman Sachs said weaker consumer spending, competition from food delivery aggregators such as UberEats and MenuLog and the independent review of Domino's pay were three risks for Domino's.

Pizza is estimated to account for 8 per cent of  Australia's $28.7 billion quick service restaurant market.

Originally published on smh.com.au as 'Domino's pizza pulls out all stops to cut costs, but soft drink swap 'dangerous' '.

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