Sales Slump Due to Combined Inflation and Rising Delivery Costs
Although delivery culture has expanded due to COVID-19, the rise in delivery fees has been pointed out as a problem. The issue of delivery fees has recently emerged not only in Korea but also in the United States. Due to labor shortages making it difficult to find delivery drivers, delivery fees have increased and been reflected in product prices, causing price-sensitive customers to hesitate even in purchasing products.
Recently, Domino's Pizza experienced poor performance due to high delivery fees, causing its stock price to plummet more than 10% in a single day. What happened?
According to Bloomberg and other sources on the 27th (local time), Domino's Pizza's stock price fell 12% on the day of its Q4 2022 earnings announcement on the 23rd. This was the largest drop since 2010, resulting in a market capitalization loss of about $1.7 billion (approximately 2.25 trillion KRW). The stock price fell more than 3% again on the following day, the 24th. Domino's Pizza's stock price has dropped more than 40% since the end of 2021, when it surged due to the pandemic.
The reason behind the decline in Domino's Pizza's stock price was weaker-than-expected performance. Sales at stores open for more than a year in the U.S. increased by only 0.9% year-over-year in Q4 last year. In particular, delivery-related sales decreased by 6.6% annually. Russell Weiner, CEO of Domino's Pizza, explained the reason for the disappointing sales by saying, "Customers have shifted to takeout, dining in stores, or cooking at home."
Domino's Pizza expects delivery issues to continue impacting its performance this year. Since last year, consumers worldwide, including in the U.S., have been highly sensitive to high inflation, bringing delivery fee issues to the forefront. CEO Weiner said, "What we confirmed during the last recession is that delivery goes hand in hand with economic issues, especially among customers with lower disposable income," adding, "Delivery customers have to decide daily where to spend their money."
Moreover, as labor shortages worsen, the cost of securing delivery drivers has increased. Domino's Pizza operates its delivery business by securing its own delivery personnel rather than partnering with food delivery companies like Uber Eats or DoorDash. CEO Weiner had warned in March last year that recruiting delivery drivers would be a short-term critical task.
As the situation worsened, Domino's Pizza has been running a campaign from January to May, offering customers who order online and pick up their orders a $3 refund to shift delivery demand to takeout demand.
In Korea, Domino's Pizza began charging a 2,000 KRW delivery fee for purchases under 50,000 KRW starting earlier this month. Previously, no separate delivery fee was charged. Domino's Pizza explained this as a "desperate measure to stably secure delivery personnel amid rising labor costs."
During the COVID-19 period, some regions in the U.S. had caps on food delivery fees. Since securing and selling food directly affects the livelihoods of the public and restaurants, cities like New York, Las Vegas, and San Francisco limited delivery fees to a maximum of 15% of the food order amount per order. However, San Francisco was the first to lift this cap, allowing fees up to 30%, and New York is also considering adjusting its regulations.
Delivery fees are also an issue raised domestically. According to Statistics Korea on the 27th, last year's online transaction amount for food services (delivery food) was 26.0339 trillion KRW, a 1.4% increase from the previous year. The growth rate of online delivery food transactions sharply dropped to the 1% range last year from 78.1% in 2020 and 48.1% in 2021. One reason for this sharp decline in online transaction volume was cited as high delivery fees. According to the Korea Consumer Agency, when comparing delivery fees of Chinese, pizza, and Korean food businesses in Seoul last month with those in November last year, 13.5% of surveyed businesses raised delivery fees, more than twice the 5.8% of businesses that lowered them.
The U.S. online media Axios pointed out, "The issue of delivery fees combined with price increases is affecting food delivery orders."
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