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Domino's Pizza (DPZ +11%) is sharply higher today after announcing a deal with Uber (UBER). Basically, the agreement allows US customers to order Domino's food through the Uber Eats and Postmates apps. Delivery will still be handled by Domino's drivers.

The idea is that this partnership will help Domino's reach a new segment of customers and what it believes will be a meaningful amount of incremental delivery orders once it's widely available. The initial US rollout will begin this fall in four pilot markets, with nationwide ordering expected to be enabled across the country by the end of 2023. Uber Eats will be the exclusive third-party platform for Domino's in the US until at least 2024.

Why is the stock reacting so strongly?

• There has been a notable divergence in recent quarters, namely that its carryout comps have been quite strong but delivery comps have been weak. DPZ has cited a migration of demand from the delivery channel to the sit-down channel as the reversion to pre-pandemic consumer behavior continues. Also, constrained budgets are prompting people to avoid delivery fees/tips and shift to cooking at home more. This deal hopefully sparks some more orders on the delivery side.
• The news is also pretty shocking from a strategic viewpoint. Unlike its main rival Papa John's (PZZA) which has used DoorDash since 2019, DPZ has been steadfastly opposed to farming out delivery to third party delivery aggregators, even when there was a shortage of drivers in 2H22. Domino's is very protective of its brand and it's known for providing a quality delivery service. Clearly, investors are pleased to see them bend a bit on this.
• Domino's drivers will still be making the deliveries. However, we were surprised to see DPZ take this step. It's clear they want to shore up their delivery business. Also, we think this deal could expand to Uber drivers making deliveries down the road. We think this deal likely builds an infrastructure, wherein DPZ could perhaps shift some delivery capacity to Uber if DPZ faces another driver shortage in the future. Also, Uber Eats' exclusivity window (at least 2024) is not very long, so maybe DPZ will expand to other services like DoorDash in the future.

We were quite surprised to see Domino's make this move. We remember being on earnings calls in 2020-22 when the pizza giant was adamant that it would not use third party delivery aggregators. However, several quarters of weak delivery comps appear to have changed some thinking. Also, we think this strikes the right balance where DPZ will still use its own drivers, but they are still able to tap into Uber's huge customer base. Investors are clearly happy to see this shift in strategy.