Christmas menu fail drags down Domino's sales

A single menu change "backfired" horribly for pizza giant Domino's. Photo / AAP

Domino's was forced to throw out food following a disastrous Christmas menu change in Japan which dragged down sales and put a dent in the pizza giant's first-half financial results.

The fast-food chain lifted its first-half profit by 17.3 per cent to A$58.7 million ($63.1m) off revenue of A$567.6m, an increase of 5.2 per cent, reaffirming its guidance for the full year of 20 per cent profit growth off what it says will be a stronger second half.

The sour note in the results announcement, which sent shares in the company plunging by more than 9 per cent in early trade on Wednesday, was a 1.1 per cent decline in Japan same-store sales after a "restricted" menu over the crucial Christmas period backfired.

"Last year we were forced to turn away 40 per cent of our customers. On some of the high streets in Tokyo we caused traffic jams and had to get the police involved," said Domino's chief executive Don Meij.

"Pizza is an event food mostly in Japan — it's not an everyday meal replacement for most of the population — and because Christmas and New Year is such a large event and pizza is one of the biggest foreign foods that's consumed during those windows, we've always struggled with capacity to deal with the volume."

In an attempt to help staff more efficiently prepare orders, Domino's Japan cut back the menu to set pizzas, removing the ability to customise — one of the key features of its online ordering experience.

"We were playing with fire during the biggest part of the year and it backfired," Meij said.

"We completely misread that for our business. We lost a lot of our heavy users. We could see that conversion rate in our online order platform — people would go in and decide not to place an order."

While it was "still a big day", Meij said it "wasn't to the size and scale we forecast".

"As you know Domino's is a fresh made-to-order company, so when we therefore didn't meet the capacity, we had to throw away fresh food," he said.

Meij said the company fixed the mistake in time for New Year, with sales quickly rebounding. "Our like-for-likes were only down 1.1 per cent for the first half, so it wasn't the end of the world, but it was material," he said, adding that the brand's reputation had "absolutely not" been damaged as a result.

Domino's added 58 new stores in the period to a total of 2193, with 799 in Australia and New Zealand, 891 in Europe and 503 in Japan.

Australia and New Zealand same-store sales increased 5.9 per cent in the first five weeks of the second half. Domino's has cut its full-year sales guidance for the region to 6-8 per cent, down from 7-9 per cent, while maintaining guidance for Europe and Japan.

Domino's will pay a 40 per cent-franked interim dividend of 58.1 cents per share, up 20 per cent on last year.

Meij would not comment on the share price drop. "That's up to shareholders to decide," he said. "What I'm really proud of is we're a company that's going to grow NPAT by 20 per cent this year."

Domino's said an audit of stores launched in response to allegations of underpayment had now largely been completed with 669 Australian stores assessed, and 646 of those requiring "little or no action".

The review resulted in 15 stores operated by four franchisees being issued breach notices for a "variety of issues", five assessments being delayed due to change of ownership, and three full external audits being conducted. Ten stores were not captured by the assessment due to having recently opened.

"We were extremely disappointed [that] the odd franchisee has chosen to do the wrong thing," Meij said. "Our job is to make sure all our team members are protected and we will continue to audit. But yes, we were disappointed with those individuals."