One Growing Global Trend That Neo Group Ltd is Participating in

When it is raining heavily and you have a growling stomach in Singapore, there are a few online delivery options that you can consider. One option which might stand out would be Domino’s Pizza.

The reason? You could order online and Domino’s would deliver its pizzas in 30 minutes. It is this level of convenience which is driving sales growth at Domino’s internationally, and local restaurant chains should take note.

The table below shows a selection of recent same store sales growth for pizza restaurants. Keen-eyed investors would have picked up that there is a large disparity in same store sales growth between Domino’s and its competitors.

Company Period, End Date % Change
Chuck E. Chesee’s Q3, 9/29 (2.1)
Domino’s pizza, U.S. Q2, 6/15 5.4
Domino’s Pizza, International Q2, 6/15 7.7
Pizza Inn, U.S. (franchised) Q3, 3/24 (8.1)

Source: Nation’s Restaurant News

Thankfully, Domino’s has provided a big clue in its recent quarterly report on what’s setting it apart from its peers.

The pizza restaurant credited the sales growth to its digital ordering strategy, reporting that 45% of its US sales comes from online, smartphone, or tablet orders. Further, half of the digital sales came from mobile or app orders. Meanwhile, NPC International (a large franchisee for Pizza Hut) has lamented that Pizza Hut’s lack of digital innovation is hurting its sales.

This observation would suggest that digital sales are coming to the fore to drive topline growth for restaurants. The argument becomes more compelling, when you consider that overall US same store traffic declined by 1.4% in the second quarter.

It is this trend that local restaurant chains should take note.

On the local front, Neo Group Ltd (SGX:5UJ) launched its Online Order System in Jan 2013. This system has helped push delivery sales up by an impressive 51.4% for the financial year ended 31 January 2014. This tasty performance has, in turn, improved its topline for its Food Retail Business by 15.5%, and drove its same outlet sales growth by 9.3% for the financial year.

Moving forward, Neo Group is working to increase the capacity of its centralized kitchen by three to four times in part to support this trend. But, the company has taken on debt to finance the expansion, therefore it may not appeal to more conservative investors. Neo Group ended 31 January 2014 with more debt than cash (S$16.2 million in borrowings versus S$8.5 million in cash) whereas the situation was reversed just a year ago (S$7.5 million in borrowings versus S$11.7 million in cash).

Currently, Neo Group’s share price trades at a PE (price/earnings ratio) of 20.4, and has a dividend yield of 2.95%.

Fellow restaurant chain Sakae Holdings Ltd (SGX:5DO) has also been investing in its mobile website and interactive ordering platform. There are less numbers shared about the performance of its delivery services, but the company recorded a 5.5% growth in same store sales in 2013. The overall top-line growth for the company came in at 4.3% for the year. Sakae Holdings’ shares currently trade at a PE of 14.3 and has a dividend yield of 3.6%.

Digital or app ordering is catching on for all walks in Singapore. From the 363 Katong Laksa outlet at Holland Village to Beppu Menkan at China Square central, ordering food now involves the use of apps and mobile devices, and less on vocal hollering across the shop.

If the growing trend is any indication, there is increasing evidence that convenient digital ordering might turn into a pre-requisite for restaurant chains in the future. Over time, these digital sales may turn into a significant driver of top-line growth. And that’s something you might want to keep in mind the next time you look at a restaurant share.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.