DPC Dash bakes up hot growth in drive to more cities

The exclusive franchisee of the Domino’s pizza in China said its revenue rose 51% last year, as it reported its first audited annual profit

Key Takeaways:

• DPC Dash’s revenue grew more than 50% last year, as it ramped up its strong push into second-tier Chinese cities
• The exclusive franchisee of Domino’s pizza in China aims to double its store count from 768 at the end of last year to more than 1,600 by 2026

By Doug Young

DPC Dash Ltd. (1405.HK), the exclusive franchisee for Domino’s pizza in China, is quickly discovering that in China, there’s always growth potential in expanding your footprint to more of the nation’s many cities.

The company spent most of its history focused on the mega-cities of Beijing and Shanghai since it began working with Domino’s in 2010, catering to more sophisticated palates in China’s biggest cities. But like many Western fast-food chains in China, it has more recently discovered a vast untapped goldmine beyond first-tier Chinese cities, which DPC calls “new growth markets,” where pizza and other Western fare are seen as trendy and even exotic.

The company has begun localizing its senior management since 2017. The appointment of current CEO Aileen Wang, whose resume includes tenure in other global brands like McDonald’s China, may explain why DPC Dash has begun pursuing a more aggressive expansion in China in recent years. In addition to being the exclusive franchisee for Mainland China, the company has also extended its coverage to Hong Kong and Macau.

DPC’s new growth markets business passed a significant milestone in the second half of last year when it overtook Beijing and Shanghai in terms of its revenue contribution, according to the company’s maiden annual results following its Hong Kong IPO in March last year.

The results, also included in its annual report issued this week, showed how such stores in these new growth markets have become some of Domino’s global superstars in terms of performance, including remarkably quick store payback periods that would make other restaurant operators’ mouths water. The company’s same-store sales grew at a high single-digital rate last year, versus double-digital growth in the previous two years, and easily continuing with a 26th consecutive quarter of positive same-store sales growth.

Truth be told, pretty much any Chinese fast food chain operator would be quite pleased to submit a report like DPC’s to its shareholders. Major highlights included 51% revenue growth last year to 3.05 billion yuan ($422 million), as well as the company’s first annual profits. Its full-year net profit of 2.28 million yuan marked a major shift from a 201 million yuan loss a year earlier. It was also profitable on an adjusted basis, which typically excludes employee stock-based compensation and one-time listing expenses, reporting an 8.78 million yuan profit on that basis versus a 114 million yuan loss a year earlier.

The strong growth came as DPC Dash opened 180 new stores last year, boosting its total count by 31% during the year to 768 by the end of 2023. It opened another 67 stores in this year’s first quarter, putting it on course to open 240 stores for all this year. The company now operates in 33 cities since starting its expansion, including recent entries to Taizhou, Jinhua, and Huizhou, and has previously laid out a roadmap to operate more than 1,600 stores in China by the end of 2026.

It can expand that quickly by using its relatively small store formats and heavy emphasis on delivery orders that are Domino’s signature. It also relies on a centralized kitchen model, which includes facilities in its main three regions of East, South and North China, with plans to open a fourth in the city of Wuhan before the end of the year to serve Central and Western China. The company also intends to relocate and upgrade the central kitchen in the northern region to accommodate growing demand.

“We believe our consistent success in newly entered cities and the overall strong performance in the newly opened stores in 2023 is a strong testimony of the growing consumer recognition of our high-quality pizzas and outstanding services, as well as Domino’s Pizza’s brand strength and brand momentum in China,” DPC said in the report.

Deep dive into second-tier China

From those big-picture numbers, we’ll take a deeper dive into the data that shows just how lucrative smaller city stores have become for DPC. The company pointed out that its stores hold the top 19 spots for Domino’s global best performers in terms of sales during their first 30 days. Nearly all of those record-holders are from the new growth markets.

With such strong sales, at least initially, it shouldn’t come as a huge surprise that those smaller-city stores can also recoup their investment quite quickly. DPC said the 48 new stores it opened in six cities it entered in the first half of last year had an average payback period of just nine months – far less than the two to five years usually required for many fast-food restaurants worldwide.

And while average daily sales per store in Beijing and Shanghai fell slightly last year, even while showing an increasing trend since 2020, the figure for new growth markets rose 51% over the same period as those newer stores gained traction. As a result, such smaller-city stores generated an average of 12,285 yuan in daily sales last year, up sharply from 9,009 yuan a year earlier and quickly approaching the 12,881 yuan in average daily sales last year for stores in Beijing and Shanghai.

The company’s new growth market store count officially passed the figure for Beijing and Shanghai in the first half of last year, accounting for 54% of its total by the end of last year.

In an interesting twist, diners in those smaller markets are far more likely to dine in the company’s basic restaurants or pick up their own orders, with only 42% using the company’s delivery services. That’s well behind the 76% of all orders that were deliveries in Beijing and Shanghai, and could reflect a preference for in-restaurant dining in these smaller markets where pizza is seen as more exotic and part of a dining-out experience.

While the numbers were generally quite rosy, we should also note that given the strong same-store sales growth in the past, especially during Covid, DPC’s same-store sales growth slowed to 8.9% last year from 14.4% in 2022 and 18.7% in 2021, which probably partly reflects a return to people eating out more in the post-pandemic era. Still, even 8.9% growth is comparable and even slightly ahead of same-store sales gains over that time for other names like Yum China (YUMC.US; 9987.HK) and TH International (THCH.US), operators of the Pizza Hut and Tim Hortons chains in China, respectively.

DPC Dash’s shares rose as much as 63% after the IPO last March as investors ate up its strong growth story. They’ve given back some of those gains since then, but still trade about 15% above the IPO price of HK$46. At that level the company’s stock leads its peers with a price-to-sales (P/S) ratio of about 2, higher than the 1.48 for Yum China and well ahead of TH International’s 0.77 and the 0.58 for Japanese noodle chain operator Ajisen (China) (0538.HK).

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