Delivery fees - short-term opportunity versus longterm brand positioning debate
We view Domino's charging delivery fees (ranging from Rs21-42) as a positive (for stock) in the near term as it will help mitigate headwind of negative operating leverage. Yes, consumers are not prioritising value (in FY21) and hence negative price elasticity is not a worry. However, implementing a price increase in times like these, seen in conjunction with 'variabilisation' of delivery personnel wages and renegotiation of rentals may potentially be interpreted as opportunistic. Importantly, Domino's brand has worked hard, since 2017, to improve the RTB (reasons to buy) of "value". This might be at risk in long term. Ceteris paribus (which is unlikely!), this delivery fee leads to ~20% upgrade in recurring profits (FY22 and beyond). Though we remain structural bulls of Jubi story, we highlight that gaining market shares in a likely declining industry that too in a high operating leverage industry is a tough journey to traverse. HOLD.
* Delivery fees being charged for the first time: Domino’s has started charging delivery fees (for the first time in its 24 years of operations) irrespective of the order value, on every order placed from own app, website, phone call or food aggregators like Zomato and Swiggy. The delivery fee charged is Rs 21 / order during the day and Rs 32 / order (Rs 43 / order for Bangalore) during night from 11 PM to 3 AM.
* Consumers are not prioritising value at the moment: We believe this move is driven by the fact that consumers are not (fully) value conscious in these times and are ready to pay the extra fee for convenience. We also believe that consumer demand now is need-based and inelastic as the "value conscious" and "reluctant to order outside food" consumers have already led to significant drop in the total orders. This move of charging delivery fees is likely a short-term action given that Domino’s has been working hard to improve the value proposition and value positioning.
* Delivery fee will help mitigate negative operating leverage: Increased revenue from delivery fee will help Jubilant mitigate negative operating leverage along with other initiatives like converting delivery personnel cost to variable from fixed (pay based on his hours worked), renegotiating rentals etc.
* Valuations and risks: We increase our earnings estimates for FY21-22 to incorporate the delivery fee; modelling revenue / EBITDA / PAT CAGR of 9 / 14 / 29 (%) over FY20-22E. Maintain HOLD with DCF-based revised target price of Rs1,650 (was Rs 1,500). At our target price, the stock will trade at 45x P/E Mar-22E. Key upside risk includes faster-than-expected recovery post-COVID lockdown ends and downside risk includes raw material turning inflationary.
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