The pizza business is highly fragmented and subjected to intense competition. Established in 1960 Domino’s Pizza Inc. (DPZ, Financial) is one of the largest pizza delivery companies in the US, working as well the international markets with a growing presence. The firm sells and delivers pizza under the Domino’s Pizza brand, and operates its business in three segments, namely Domestic Stores, segment which includes 4,939 franchised stores and 390 company-owned stores, the Domestic Supply Chain, which manufactures dough and thin crust products for almost all stores, owned and franchised, and International segment, with 5,327 franchised stores outside the U.S.
Competing against strong rivals such as Yum! Brands (YUM, Financial), Papa John’s (PZZA, Financial), Domino’s managed to deliver another outstanding year in 2013, some say due to its great capacity to adapt to the varying market trends and consumers’ preferences. Fourth-quarter 2013 results were indeed above expectations, with earnings up 21.9% year over year, driven by higher top line, margin expansion and lower share count, and revenues increasing 5% year over year due to higher sales both in domestic stores and international units. With increased traffic and higher unit growth, Domino’s seems to be moving in the right path. Expansion is at the order of the day, and international markets seem to be receiving Domino’s with arms wide open, as between 2008 and 2013 the number of stores increased by a 10%. Yet the macroeconomic uncertainty and consumer’s contracted spending capability is always hindering this industry’s firms.
Evolve and Adapt
Domino’s Pizza is one of those companies which continue to impress. Considered the second largest pizza chain in the U.S., this company rules the delivery segment in domestic market. Nevertheless, Domino’s had to overcome some obstacles in order to sustain growth and keep up with the strong competition this industry poses. The 2009 “Oh Yes We Did!” campaign, developed in response to unsatisfied customers who criticized the quality of the pizza and service, successfully increased traffic and brand’s positive image, revealing the firm’s capacity to adapt and improve. Likewise, the introduction of the handmade Pan Pizza was a big success and has been driving order counts since its introduction in 2012 and contributing strongly to the company’s sales.
The company’s distribution process was boosted developing the Domino’s Supply Chain Services (SCS). This network allows Domino’s to supply dough and other raw materials to more than 5,000 stores in the U.S. Another hit was its franchising strategy: the company reduced its ownership and focused on re-franchising in order to minimize capital requirements and facilitate EPS growth as well as ROE expansion. As of Sep 2013, 92% of domestic units and 100% of international ones were franchised, giving Domino’s increased free cash flow and thus allowing reinvestment, especially in intangible assets. By investing on technology-driven initiatives, Domino’s is pioneer in the digital ordering and app development. Digital ordering increased 5% year to year, and new apps have been launched for iPhone, iPod touch, Android smartphones, Windows Phone 8 and Amazon’s Kindle Fire, both in English and Spanish. The Domino’s mobile experience includes the possibility to track the status of the order and store payment information for future orders.
This system offers the company a significant competitive advantage, with more than 40% of revenues in domestic market coming from mobile and online ordering, and has positioned it as one of the top technology-driven brands across the globe. On top of this, associating with Ford, Domino’s revealed a new Easy Order App which will allow customers to order Domino’s from their cars using the SYNC AppLink System. The company’s effort resulted in over $2 billion in digital sales globally in 2012, and revealed Domino’s capacity to take advantage of social media. By offering customers a simplified ordering service, Domino’s might start to outshine the competition.
Working It Globally
Domino’s has accelerated its presence in international markets, establishing its presence in 70 countries. With more than 600 restaurants opened in Australia as to Dec 2013, and operating the massive markets of India and Mexico, management expects further expansion in Japan and China for this year. Nevertheless, the expansion plans are always subjected to macroeconomic tendencies and uncertainty. Domino’s has, though, delivered 79 consecutive quarters of positive same-store sales in its international business, and expects to add 2800 new locations.
It calls some attention the fact that the Chinese market is yet to be explored by the firm, given that its main competitors Papa John's (PZZA) and Pizza Hut (YUM) have an established presence in the region. With less than 20 stores in Beijing and 22 in Shanghai, Domino’s has little more than a trivial presence. The company might explore the potentialities of this market in the near future; however their caution is sound, as the Chinese consumers have their particular customs and the right franchisee system and market branding needs to be developed.
Domino’s continues to expand, and management estimates same-store sales growth for 2014 will be 2% to 4% in the U.S. and 3% to 6% internationally.
Final Thought
The different improvements the company has been making in the past years have proven to be effective, and Domino’s growth momentum is likely to be sustained by the digital ordering, app development and special item introduction, such as the Pan Pizza. However, the consumer spending environment is always subjected to the variations in the macroeconomic scenario. A weakening of the consumer’s spending is expected as the gasoline prices climb, payroll tax increase and tax refund checks are delayed. Some analysts think these might pressure the company’s sales. Higher costs are expected as well in the international support personnel, e-commerce and administrative expenses, all of which may hurt the company’s margin expansion.
Despite these always erratic environmental setbacks, Domino’s has had an impressive development this last year, and its international units are growing even more. The company rewards its shareholders through share repurchase and dividend distribution, giving its investors a solid return, despite the economic ups and downs.
Disclosure: Damian Illia holds no position in any stocks mentioned.
