02/08/2016 5:14 PM IST | Updated 04/08/2016 8:48 AM IST

Is Dominos India Toppling Over?

Anindito Mukherjee / Reuters

If the recent news of HSBC's devaluation of Zomato by half and Flipkart losing bellwether status has been difficult to digest for you, Dominos India ceasing to be a unicorn is definitely going to have you reaching for the antacids. The poster boy of India's food industry and the country's most loved pizza brand has taken a beating in its stock price, which has plummeted sharply from ₹2000 in Aug 2015 to ₹1000 in June'16, resulting in valuation of just under $1 billion, the benchmark level used to define startups as unicorns.

Their "30-minute delivery" promise has always wowed us, hasn't it? What's actually taken for granted now in pizza delivery is actually not a mean feat, especially in a country like ours that proliferates in serpentine traffic jams and maze-like streets. So, it's surprising to see Dominos struggling despite its successes. As it happens, there is more than meets the eye to the pizza giant's downward spiral.

What's really going wrong at Dominos India?

For any retail store, a key metric is SSSG (Same Stores Sales Growth) and growth in number of outlets. SSSG primarily highlights repeat orders and new stores indicate new customers (newer stores tapping into new customers). Below is a fact sheet on how Dominos has performed over the past few years and the contribution of online ordering in the overall sales.

The SSSG over the years has shown a consistent decline and the way it looks, 3% SSSG is the new normal for Dominos. What that means is this: the company's premium valuations in the range of PE (TTM) of 60x (due to its higher growth forecast) may see deeper corrections in the coming quarters. The recent Q4 results paint a grim picture too.

The SSSG pressure is also highlighted by the fact that Dominos India in the ongoing quarter (Apr-Jun 2016) has offered a Buy One Get One (BOGO) deal on more than 20 days out of 60 days gone by in the quarter. The management itself has said in earlier quarters that they do "One on One Wednesday" prudently as it is EBITDA dilutive, which means it may give revenue growth but doesn't make sense at the unit economics level. This clearly highlights the pressure Dominos is feeling. Even Pizza Hut (Yum Brands) has been facing the heat in Same Sores Sales Growth since 2015.

5 reasons why Dominos India should be seriously worried

The slump in Dominos India is not temporary trouble and not due to a slowdown in discretionary spends. The real reasons boil down to a changing competitive landscape and the evolving Indian consumer.

1. Gradual shift towardshealthier/homely options: The Indian consumer has become more conscious about health and fitness over the last few years. Emerging players that focus on salads and fresh/home-style cuisine such as Innerchef, Frsh, Eatonomist, Yumist, Calorie Smart and several others are catering to the on-the-go needs of health-conscious consumers.

2. Availability of international cuisines available: The consumer in Gurgaon today has a variety of options to choose from, such as Twigly (for sandwiches), World in a Box (healthy gourmet meals), Fresh Menu and many more. People are not shirking away from trying out newer brands. The consumer is even willing to shell out extra moolah for the chance to sample international cuisines.

3. Indian "fast food" is picking up: Prominent Indian QSR players have emerged (such as Faasos, Holachef), giving consumers the choice of Indian meals on a platter. The competitive landscape is getting hotter as the Indian consumer is seeking variety rather than going for pizza regularly, which is often a costly affair. As Pizza Hut found out, their main competition is Indian food tech which is highly aggressive.

4. More meal options for individuals: Online food delivery players have ensured that there are standalone meals available for individuals whereas Dominos' main focus has been party/get-togethers. Swiggy has enabled several restaurants to get their food delivered by being an efficient online food delivery partner.

5. Controversies such as carcinogens in bread: Recent controversies such as breads testing positive for bromate, a carcinogenic agent and a main ingredient in pizza making, is making consumers reconsider the wisdom of consuming pizzas. Consumers are also more conscious about fresh ingredients and calorie intake.

Online ordering: The way to go

Online food ordering has flourished in India thanks to the increase in disposable income and customers who are always on the go. Zomato has doubled its revenue in the past nine months and Food Panda has finally become operationally profitable in spite of its discounts being the main driver for consumers to try out newer restaurants and cuisines. Food ordering apps that get your food to you fast and offer cash on delivery services have been the icing on the cake. Swiggy has recorded one million orders in April'16. No wonder online food ordering has been predicted to be the prominent channel by 2020 as per the Euromonitor Report on Food in India.

Is recovery possible?

Fast food as a category might not be growing in India but the daily changing menus at on-demand food delivery startups is a reflection of the variety-seeking consumer who considers food as an extension of his personality and mood. Health consciousness goes hand in hand with this trend, with a growing craze for weight-loss-aiding tech wearables.

The future of food tech is not as bleak as some media reports might suggest, although there is likely to be a greater shift towards home cooks/chefs. In an excellent article on the food tech revolution in India, Miten Sampat touches on a number of points that would have been relevant here and lot of other issues, which I specifically didn't address because he has already done a great job.(In fact, the article by Miten was the inspiration to write this detailed post) . However, of late, the sector has taken a beating, seeing a rapid slump in investments – a contrast to the over $3.5 billion that was poured across 380 disclosed deals in the first of half of 2015.

Zomato, the blue-eyed startup of India, is being touted to be valued at $0.5 billion after its markdown by HSBC, although CEO Deepinder Goyal has posted a strong logically explained analysis on how Zomato has emerged as a leader across several markets, and encouraging the teammates to not get distracted by the noise.

Dominos India probably needs to expand its menu, taking into account today's consumer's affiliation towards health. Even McDonald's and Pizza Hut are fighting it out to stay relevant in today's times. However, I believe Dominos India will not give up on the quest for high growth and we may see them acquiring a bigger Indian QSR player that complements their existing offerings. Miten has a different view. He believes that Dominos needs to become a dining platform for families (like Pizza Hut) to sustain and grow Same Store Sales. Adding to their Indian range could help too.

The fact is that Dominos has been an Indian favourite for many years, its cheese burst pizzas and choco lava cakes gracing many a birthday celebration and office farewell party. It trailed McDonalds four years ago, but now has become double its size.

Can it regain its lost footing? We'll have to see which side the pizza flips.

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