Domino's Unsafe Strategy and Why It Matters to Investors

Fast-food franchisor Domino's Pizza (NYS: DPZ) is getting better press than it deserves. The pizza chain last week introduced gluten-free options for everyone but those who need it most: food allergy and celiac disease sufferers.

"While Domino's new Gluten Free Crust is appropriate for those with mild gluten sensitivity, Domino's and the NFCA [National Foundation for Celiac Awareness] do not recommend it for those with celiac disease. Domino's and the NFCA found that while the crust is certified as gluten free, current store operations at Domino's cannot guarantee that each handcrafted pizza will be completely free from gluten," the company said in a press release announcing the new option.

Seriously? Is this a tease? Why even offer gluten-free crusts without reorienting kitchens to cook them separately from crusts slathered in flour and wheat dough -- exactly the ingredients that keep most celiac sufferers from even thinking about ordering a pizza? No wonder the Center for Celiac Research is recommending that those with gluten-related disorders avoid the new Domino's crusts.


As I see it, Domino's wants to appear to serve the estimated 18 million Americans with some form of gluten sensitivity without putting in any of the actual work. A publicity stunt, in other words. One that probably wasted precious shareholder capital that could have been used to gain an edge on Papa John's (NAS: PZZA) and Yum! Brands (NYS: YUM) , parent to the Pizza Hut franchise, especially considering that Papa John's spiked 20% higher on impressive earnings last quarter and Yum! Brands has outpaced Domino's by more than 20% so far this year.

Cynical, you say? Perhaps. But we've seen this sort of nonsense before from no less than McDonald's (NYS: MCD) , one of the biggest names in fast food. This time, Domino's is trying to cash in on gluten-free dieting becoming fashionable, while genuine efforts, such as the separate fryers you'll find at Red Robin Gourmet Burgers (NAS: RRGB) , tend to go unnoticed.

And yet, as troubling as the strategy is, Domino's shareholders can probably rest easy. Failure to win a gluten-free following isn't likely to have much of an impact, if only because Domino's has done so well at generating high returns on its capital up to this point.

The bigger lesson here is there's a large and growing opportunity for serving those with medically challenging diets. It's a niche, sure, but sometimes niches grow to become chasms, which expand to become canyons that must be bridged. Here are 3 bridge builders that might help you retire rich.

At the time this article was published Fool contributor Tim Beyers has family members who suffer from food allergies and celiac disease. He is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Check out his web home, portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.The Motley Fool owns shares of Red Robin Gourmet Burgers and Papa John's International. Motley Fool newsletter services have recommended buying shares of Yum! Brands and McDonald's. Motley Fool newsletter services have recommended writing covered calls on Red Robin Gourmet Burgers. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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mlibrach

I run a company called CeliAct and we make nutritional supplements specifically for people with celiac disease (http://www.CeliAct.com). We took Domino’s gluten-free pizzas from three different cities and tested them in our lab for gluten. The results speak for themselves. Check it out on our blog: http://www.celiact.com/blog/2012/05/31/108-dominos-gluten-free-pizza-gluten-free-lab-test

June 01 2012 at 4:18 PM Report abuse rate up rate down Reply