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Why the Uber Eats scandal could give Domino’s Pizza Enterprises Ltd. a share price boost

An evolving scandal involving Uber Eats on the weekend could give fast food chain Domino’s Pizza Enterprises Ltd. (ASX: DMP) a much needed reprieve to its sagging share price this week with the stock hovering close to a two-and-a-half year low.

There are a few reasons for the poor performance of Domino’s, which has seen its share price tumble 36% over the past year compared to the flat performance by the S&P/ASX 200 (Index:^AXJO) (ASX:XJO).

In contrast, KFC franchisee Collins Foods Ltd (ASX: CKF) is 2% in the black although Domino’s shareholders can at least feel some relief that the stock hasn’t sunk to the same depths as Retail Food Group Limited (ASX: RFG) with its 83% fall from grace.

One of the drivers for Domino’s poor performance is the fast-growing popularity of online food delivery services that is estimated to be worth $2.6 billion a year. Uber Eats is a dominant player in this field and threatens one of the traditional key strengths of the Domino’s business, which is using technology for food delivery.

But the Australian Broadcasting Corporation (ABC) is reporting a backlash from restaurateurs on the Uber Eats platform, which are accusing the US giant of forcing unfair contracts on the industry.

The contract states that Uber Eats is not a delivery service and bares no responsibility for food deliveries even though it takes a hefty 35% cut of every food order.

When the food arrives late or cold, Uber Eats is accused of refunding customers at the restaurant’s expense in many cases, even though the restaurant has no control over the delivery service.

This means Uber Eats acts as the judge, jury and executioner when it comes to customer complaints and it’s no surprise that the company will usually side with customers, who are more critical to the success of the service than the restaurateur.

This could allow Domino’s to regain the upper hand if it can exploit this potential weakness in the Uber Eats platform as Domino’s is in direct control of its delivery service (although the pizza company has said it also works with these new online delivery partners).

Unfortunately, this issue in itself won’t be enough to return Domino’s to its glory days when it was the top performing stock on the market.

Its chief executive Don Meij will need to show that the group is returning to profit growth, reversing in same-store growth in Australia and address governance concerns over margin lending loans on his share holdings.

Nonetheless, the crack in Uber Eats’ armour will be welcomed news to besieged Domino’s and shareholders will be grateful for any little piece of good news.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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