The Ideal Cloud Kitchen: How Did Domino’s Grow?

Food delivery is one of the new normal today. People order food online and wait for it to be delivered straight to their doorstep. Although this is so convenient, especially during the lockdown period, there is one factor that may stop people from doing so: the high price.

Some people believe that the kitchens in our homes may soon become antiquated, for the same reasons we don’t sew our own clothes anymore. Longer working hours has led to shorter dining time. People working in the city have no time to prepare their own meals. This presents an interesting problem: the demand for food delivery is high, but the barrier (price) is also high.

The price is high not because the restaurants or delivery companies are hoarding profits, but because of high fixed costs with food delivery. The courier requires a minimum wage. The ingredients can only be so cheap. There aren’t a ton of things through the food delivery value chain that restaurants can innovate without significant technological advances.

One way to solve the problem is to transform into cloud kitchen. Businesses can rent smaller spaces with less foot traffic, cutting down their biggest operational expenses: real estate cost. And this is what Domino’s Pizza has been doing for years.

The similarities between cloud kitchens and Domino’s:

·       Stores have small / no dining space and are optimized for delivery

·       Location of real estate is focused on the best routes, not the best foot traffic

·       Food product travels well and can feed a lot of people inexpensively

Stock Returns (%)

Additionally, Domino’s adopts the franchise model. This helps the business grow incredibly. Unlike other businesses, a franchise model allows a business to expand without huge capital to fund growth. They can source the capital required to open new locations through their franchisees.

However, not every business can adopt a franchise model. The reason Domino’s can do this, is because their pizza is cheap and a standard product that is easy to make. Simple ingredients and repeatable baking steps. They do not need high quality control on their dining environment like Starbucks.

Because of the capital efficiency of franchises, consistency of growing revenue, and strong asset base — they are able to maintain a high debt level (4.5x - 5.0x EBITDA). And with interest rates at all-time lows, their interest expense does not cripple their operations.

Domino’s business model made them perfectly situated in a quarantine, delivery-first world. It is still one of the leading Pizza brands with strong international presence. Its revenue has also risen sharply in the last five years. All this to say that Domino’s is the platonic ideal of future cloud kitchens. The company’s foresight to optimize for delivery, place stores in low-cost and route-optimized retail locations, and build a digital brand and app is now paying off.

 

Reference:

1.     Adam Keesling, How Domino’s Stock Returned 4,595% https://divinations.substack.com/

2.     Abhijeet Pratap, Revenue Model of Domino’s Pizza https://statstic.com/