DPC Dash Finds Savory Growth In China's Underserved Markets

Key Takeaways:

• DPC Dash reported strong double-digit revenue growth in the first half of 2024, as it opened 146 net new restaurants in China, bringing its total to 914
• The exclusive master franchisee for Domino’s Pizza in China became profitable during the period on both a reported and adjusted basis for the first time

By Doug Young

Domino’s Pizza too popular to need delivery?

It may sound strange, but that’s exactly what DPC Dash Ltd. is discovering these days as it brings the famous Western staple to hundreds of millions of people in the many new cities it’s recently entering. The China exclusive master franchisee for Domino’s Pizza DPZ has been expanding aggressively into new cities lately, which became the company’s biggest breadwinner in the second half of last year. Consumers in those cities are gobbling up the brand and its pizzas and other fast food, raising its visibility.

That movement to new markets was front and center in the company’s recently published financial results for the first half of this year, which showed its revenue grew at a turbocharged 48% as it expanded rapidly in its race to catch up with more established brands.

As many food and beverage chains have discovered, Chinese consumers are tightening their purse strings as the nation’s economy slows after years of rapid growth. However, DPC Dash achieved a rare distinction by managing to post positive same-store sales growth in the first half of the year, even as nearly all of its rivals posted declines, some quite large. The company credits its success to its “value for money” strategy.

Still, we should point out that DPC’s same-store sales growth is now relatively stable after posting impressive double-digit gains in 2022 during the pandemic, followed by high single-digit growth in the first half of 2023. Same-store sales growth was at 3.6% in the first half of this year versus the 8.8% in the year-ago period.

The rapid opening of new stores outside its original markets of Beijing and Shanghai since 2022 will affect overall same-store sales growth as sales for those stores normalize after strong interest around their grand openings. As that happens, the company is aiming to attract more regular customers through steps like boosting its value-oriented meal choices, continuous product innovation, and building up its loyalty club.

DPC was a relative latecomer to China, starting its relationship with Domino’s Pizza in 2010. It spent its early years in Beijing and Shanghai, but more recently began aggressively expanding into other cities under a more localized management team led by CEO Aileen Wang, whose tenure includes stints at other global brands like McDonald’s MCD.

The company opened 146 net new stores in the first half of the year, bringing its total to 914 and easily on track to reach its goal of 240 new stores for the year. Of the new openings, the vast majority 134 were in markets other than Beijing and Shanghai.

The company operated in 33 cities around China at the end of June, up from 20 a year earlier, as it entered the new cities of Jiangmen, Taizhou, Jinhua and Huizhou in the first half of the year. Of the 42 stores DPC opened in 12 cities since December 2023, 18 have already paid back their investments, with the average payback period for all such stores expected to average nine months. It has previously said it aims to operate more than 1,600 stores in China by the end of 2026.

“We believe we will be able to continue to successfully roll out our Domino’s Pizza stores into new cities in China and make our products accessible to more customers in China and further strengthen our brand national awareness,” the company said. “Looking forward, with further strengthened brand name and rising brand momentum, we will continue to execute our go-deeper and go-broader network expansion strategy, entering more new cities while further penetrating our existing markets.”

Calling Customers

DPC Dash is following in the tracks of other major Western restaurant chains like KFC, McDonald’s and even the more upscale Starbucks SBUX in tapping into China’s underserved markets where their fare is often considered unusual and even exotic. In that process, DPC Dash has discovered that patrons often prefer to eat in or take away when a new brand enters the market. As such, long queues often appear at newly opened stores, mostly composed of local youth eager to try new products.

As a result, DPC said it took the unusual step of temporarily suspending delivery service in some of its newly entered markets to ensure the quality of both its products and service, adding it would “gradually open up the delivery service when the time is appropriate.”

On the top line, DPC Dash, which listed in Hong Kong early last year, reported its revenue jumped by 48.3% in the first half of 2024 to 2 billion yuan ($280 million), attributing its continued rapid growth to new store openings and increased sales per store. Revenue from new growth markets grew far faster, doubling to account for 61% of the total.

Reflecting the strong performance in new growth markets, such stores make up 28 of Domino’s 30 best-performing new stores globally in terms of sales in their first 30 days.

The company’s average daily sales per store rose 10.1% to 13,515 yuan in the first half of the year as both newly opened and existing stores gained traction.

As we’ve previously noted, DPC’s ability to keep growing same-store sales looks relatively impressive compared with Starbucks’ 14% decline for its China same-store sales in the second quarter, and an even larger 20.9% plunge for local coffee giant Luckin LKNCY.

DPC has been attracting customers by introducing creative pizza products like its “Volcano Crust,” as well as through regular promotions like offering 30% off all pizzas on Tuesdays and Wednesdays.

The company also continues to build its loyalty program, which grew to more than 20 million members by the end of August from 10.9 million a year earlier. At the same time, its cost controls, including use of centralized kitchens and small store formats, helped to lift its store-level operating margin by 1 percentage point to 14.5% in the first half of this year. That helped to fuel a year-on-year 59% jump in its store-level operating profit to 296 million yuan.

The company reported a net profit of 10.9 million yuan for the period, up from 8.8 million yuan a year ago. And it also became profitable on an adjusted basis, which excludes share-based compensation and one-time gains and losses from changes in the value of its convertible shares. By that measure, it reported an adjusted profit of 50.9 million yuan in the first half of the year, versus a 17.4 million yuan loss a year earlier.

DPC Dash’s stock has performed quite well since its listing and is now up more than 40% from its IPO price – easily outperforming most China stocks that have struggled over that time. That strong performance has given it a relatively strong price-to-sales (P/S) ratio of 2.35, well ahead of the 0.47 for TH International THCH, operator of the Tim Hortons chain in China, and the 1.22 for Yum China YUMC, operator of KFC and Pizza Hut stores in China.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.