1405.HK

The recently listed company is aiming to boost its store count to 1,500 by 2026 from 588 at the end of last year

Key Takeaways:

  • Domino’s China franchisee DPC Dash has announced plans to roughly triple its store count by the end of 2026
  • The company is moving aggressively into smaller Chinese cities, where it has enjoyed strong initial sales after opening its first new stores

  

By Doug Young

Maybe it’s something in the water. Whatever the reason, there’s something about China that seems to captivate western fast food chains into launching turbocharged growth plans for a country that has huge potential but is also quite different from their home markets.

DPC Dash Ltd. (1405.HK), which operates the Domino’s Pizza (DPZ.US) chain in China, has become the latest to jump on the turbocharged China expansion train, announcing a plan last week to nearly triple its store count to around 1,500 over the next three years. The plan is noteworthy for its attempt to ride the recent trend for takeout and delivery dining, which is Domino’s specialty and gained big popularity in China during the pandemic.

DPC is also hoping to use more centralized kitchen facilities to fuel its rapid expansion, which looks more feasible for a takeout dining specialist than it would be for the operator of traditional sit-down restaurants.

The numbers DPC Dash is talking about certainly look feasible when compared with what other big western chains have done in China. The company had 588 stores in China at the end of last year, and said it plans to open around 180 this year and another 240 in 2024, according to its announcement last Thursday. It would then open another 250 to 300 restaurants in both 2025 and 2026, bringing its total to the 1,500 we mentioned earlier.

By comparison, Yum China (YUMC.US; 9987.HK), which operates the market-leading Pizza Hut chain in China, had nearly 3,000 Pizza Huts at the end of March, up roughly 10% from a year earlier as it added around 300 stores over the past year. Yum China also operates the much larger KFC chain in China, and is the nation’s largest restaurant operator with more than 13,000 outlets at the end of March.

But the China roadmap is also littered with quite a few high-profile failures for western brands that started out with similar big ambitions, only to stumble later when their recipes to tap local consumers didn’t pan out. We’ll look at some of those shortly, and the reasons for their lack of success.

But first we’ll return to DPC’s latest plans, which are also noteworthy for their strong focus on moving away from the megacities of Beijing and Shanghai that are almost always the first stops in most of these aggressive expansions. DPC is no exception, and its final prospectus just before its Hong Kong IPO in March shows about half of its stores at the end of last year were in Beijing and Shanghai.

But the company has been quickly moving into a number of smaller cities, including its first new store openings in second-tier locations like Qingdao, Changzhou and Wenzhou at end of April, bringing its total to 20 cities.

Those smaller cities seem to perform quite well, at least initially. DPC said its first store in the city of Jinan set global Domino’s records for best sales in its first week in December, and for best sales in its first 30 days. It added the Jinan store, together with other newly opened stores in Chengdu and Wuhan, have been Domino’s best recent global performers for first-month sales.

Novelty factor

Those strong figures show there’s clearly potential in China’s smaller cities. But it’s far from clear whether such potential has staying power, or whether the growth is simply due to a novelty factor that could quickly fade.

A good example of a company that started strong on the novelty factor, only to fizzle out later, comes from U.S. fast food chain Popeyes. The fried chicken chain entered China with a bang in 2020 by attracting huge lines to its first store in Shanghai. At the time, its parent, Restaurant Brands International (QSR.US), announced plans to open 1,500 Popeyes in China over the next decade.

But the company never made it very far, and recently closed its last remaining stores in Shanghai. Sources have told us the venture was plagued by disagreements between Restaurant Brands International and its local partner, which is relatively common in China and has undermined similar ventures in the past.

DPC looks a little more solid in that regard, since the company’s history of working with Domino’s in China dates back to 2010, and includes an extension of its initial master franchising agreement with the U.S. chain’s parent in 2017.     

Next, we’ll look at DPC’s recent performance, which also looks relatively solid due to its focus on takeout and delivery dining that gained popularity during the pandemic. The company’s same-store sales have shown a broadly upward trend, rising from 9% in 2020 to 18.7% in 2021. The figure fell back to 14.4% last year when many stores were forced to close for extended periods during some of China’s toughest-ever Covid control restrictions.

The company’s revenue rose 25.4% last year to about 2 billion yuan ($289 million), which represented a slowdown from the 46% growth the previous year. But again, that slowdown was probably temporary, and we would expect the growth to return to a more solid track this year, especially as the expansion accelerates. The company’s bottom line was also relatively solid, with its net loss roughly halving to 222.6 million yuan last year from 471.1 million yuan in 2021.

DPC’s shares have done relatively well since the IPO, though they lost 4.1% last week on the two trading days after the latest announcement. The stock is still up about 13% from its IPO price of HK$46, though it was up as much as 38% last month. That could indicate investors are relatively positive on the company, but are also growing more cautious.

In terms of valuation, the company trades at a relatively strong price-to-sales ratio of 4.04, which is quite a bit higher than the 2.70 for Yum China. But the figure is roughly in line with the P/S ratio of 4.54 for TH International (THCH.US), operator of the Tim Hortons chain in China, which is at a similar stage in its own China plans that include boosting its store count from around 600 at the end of last year to 2,750 by 2026. 

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