#004 - Domino's Pizza
Some are die-hard Domino's fans while others despise their pizza, nonetheless, Domino's has an impressive historical stock price performance but what makes Domino's special?
#004 - Domino’s Pizza
This week is Domino’s Pizza. As many of you are aware, Domino’s is the largest pizza company based on global retail sales, but what you might not know is that the majority of revenue is from selling equipment, supplies, and raw ingredients to franchisees. Let’s dive into Domino’s and review their 10-K!
If you enjoy this analysis, sign up for more 10-Ks here! 👇
Industry Overview
Domino’s competes in the quick-service restaurant (QSR) pizza industry with various competitors. The U.S. market is estimated to be ~$37.8bn and steadily growing. This is the second-largest category in the broader $279bn QSR market. The QSR pizza industry is primarily comprised of delivery, dine-in, and carryout. Unsurprisingly carryout and delivery are the two largest segments.
Domino’s is the leading market share leader for U.S. pizza delivery and the second-largest market share for carryout. The four industry leaders, Pizza Hut, Papa John’s Pizza, Domino’s, and Little Caesars Pizza account for 61% of the U.S. pizza delivery market and 51% of the carryout market.
The international pizza market is more underdeveloped than the United States. Domino’s is one of three companies with a global presence.
Business Overview
Domino’s was founded in 1960 by two brothers. The two brothers initially focused on opening stores near college campuses and military bases. Fast forward almost three decades and Bain Capital buys 93% of the business in 1998. A few years later, Bain proceeds to IPO Domino’s in 2004, and it’s been a public company ever since.
Domino’s has three different revenue segments:
U.S. Stores
International Franchises
Supply Chain
We’ll dig into these different business lines and how they all work.
U.S. Stores
U.S. stores consist of both company-owned stores and franchised stores. Roughly 6% of all U.S. stores are company-owned. These stores are typically used for testing sites for new innovation as well as training and developing future talent.
There are more than 6,100 U.S. stores, with ~340 stores being company-owned and ~5,800 being franchisees. The ~5,800 franchised stores are operated by 777 U.S. franchisees. These franchisees are able to benefit from Domino’s brand image with a low capital investment. The largest U.S franchisee operates more than 176 locations.
Domino’s has a rigorous process for U.S. franchisees. Those interested in being a franchisee must manage a store for at least a year and graduate from its franchise management school program. This is successful as there is a 99% franchise agreement renewal rate. Franchisees must pay a 5.5% royalty fee on sales and certain technology fees.
Stores must also contribute 6% of sales to fund national marketing and advertising campaigns. These contributions go into Domino’s National Advertising Fund, which is a not-for-profit advertising subsidiary of Domino’s.
International Franchises
Domino’s has more than 10,894 international franchises in more than 90 markets. The main source of revenue from these stores is royalty payments. Domino’s top ten international markets account for 63% of international stores.
Domino’s grants franchisees exclusive rights to develop and sub-franchise stores and the right to operate supply chain centers in particular geographic regions. This means they can create their own Domino’s in international markets. They control the franchisee options, the supply chain centers, and other decisions. These franchisees pay an initial one-time franchise fee and a fee upon the opening of each additional store. The master franchisee pays a continuous 3.0% royalty fee on sales,
Supply Chain
Domino’s operates 19 dough manufacturing and food supply chain centers, 1 thin crust manufacturing center, 1 vegetable processing center, and 1 center providing equipment and supplies to U.S. and some international stores. The management team is continuously looking to expand and build more centers.
Domino’s sells food and supplies to more than 6,600 stores. Domino’s believes that franchisees buy directly from them due to cost savings, efficiencies, quality offerings, and consistency. Franchisees also benefit from profit-sharing arrangements with supply chain centers. This program offers participating franchisees 50% of its regional supply chain center’s pre-tax profits.
Total Addressable Market
The global QSR pizza market is already well established with the biggest opportunity being in expanding in international markets and same-store sales growth in more established markets such as the U.S. One of my main concerns is just how big the pizza market can be. I feel as though the pizza market is already well-established, but Domino’s talks about their fortressing strategy which is adding more Domino’s stores within one area to improve on delivery times, customer service, and cost efficiencies (cheaper to deliver pizza the closer the customer), and other important areas.
Competitive Advantages
Brand
Domino’s is one of the strongest brands in the world. They benefit from brand recognition almost anywhere you go in the United States and I’d bet it’d be similar in some foreign countries. There are definitely some die-hard Domino’s fans and then there’s also your local pizza restaurants that arguably have better pizza than Domino’s but these companies can’t compete on price.
Basically, when ordering from Domino’s you know what you’re getting.
Scale
Since Domino’s is the largest pizza company, it’s able to benefit from economies of scale through purchasing power over suppliers, can test changes on a small scale, and then roll these features out globally. Scale also gives Domino’s the benefit of operating leverage. As the international franchise store count grows, Domino’s will collect royalty fees that do not require extensive operating margins so operating margins grow slower than international royalty fees giving Domino’s operating leverage for this segment of the business. The same can be said for US stores that are not company-owned.
Financials
Domino’s breaks down revenue into U.S. stores which include company-owned stores, franchise stores, U.S. franchise advertising, then supply chain, and international franchise royalties and fees. Other important financial numbers are global retail sales growth, same store sales growth, and total store count. These numbers are all listed below.
2019:
Total revenue = ~$3.6bn
U.S. Store revenue = ~$1.3bn
Supply chain = ~$2.1bn
International franchise royalties and fees = $0.2bn
EBIT (Operating income) = ~$0.6bn
EBIT margin = 16.6%
Global retail sales growth = 8.0%
Total store count = 17,020
U.S. stores = 6,126
International stores = 10,894
2018:
Total revenue = ~$3.4bn
U.S. Store revenue = ~$1.3bn
Supply chain = ~$2.0bn
International franchise royalties and fees = $0.2bn
EBIT (Operating income) = ~$0.6bn
EBIT margin = 16.6%
Global retail sales growth = 10.8%
Total store count = 15,914
U.S. stores = 5,876
International stores = 10,038
2017:
Total revenue = ~$2.7bn
U.S. Store revenue = ~$0.8bn (but did not include advertising revenue)
Supply chain = ~$1.7bn
International franchise royalties and fees = $0.2bn
EBIT (Operating income) = ~$0.5bn
EBIT margin = 16.6%
Global retail sales growth = 13.0%
Total store count = 14,856
U.S. stores = 5,587
International stores = 9,269
What’s Interesting
Domino’s has outperformed Facebook, Google, Microsoft, and many other companies since it’s IPO in 2004. This isn’t random. Domino’s has been able to build a brand and continue to expand in the U.S. and internationally while rewarding shareholders.
Domino’s has a share repurchase program and also dolls out dividends each year. This combined with revenue and net income growth is a good recipe for any successful company.
Domino’s also seems to be the original cloud kitchen model. Many of its stores do not include seating which would increase capital expenditures. The majority of Domino’s business is carryout or delivery.
Future Questions
How long is Domino’s runway?
Domino’s is already a mature company with more than 17,000 stores worldwide. Future growth will come from cost efficiencies and some store openings, but I feel like it’d be hard for Domino’s to make a case that store count can double worldwide because of how many stores are already in existence. International store count can probably double at some point in time, but going from even ~11,000 international stores to ~22,000 will be a big challenge.
The good part is that royalties and other fees associated with international franchises are basically pure profit since international franchises are operated by a master franchisee that takes care of all the headaches in foreign countries. Through operating leverage, if the international franchise store count doubles, then the profit will more than double.
Domino’s only has a market cap of ~$15bn meanwhile companies like McDonald’s have a market cap of ~$150bn. Domino’s definitely has room to expand, so if I were to do a deep dive on Domino’s I’d have to answer the question of how many stores can Domino’s operate throughout the world.
What effect does Uber, Grubhub, DoorDash, and the food delivery market have on pizza delivery and carryout?
In the past, carryout and delivery were typically done by pizza companies. These companies often don’t have any seating in their stores and therefore benefit by having less capital tied up in stores rather than inventory, buying back shares, or paying dividends. Families, college students, and professionals would order a pizza rather than ordering a bunch of different food from a Chinese restaurant or whatever other food option there is available.
How does the new wave of food delivery companies impact pizza’s delivery and carryout appeal? Do families increasingly order from somewhere else instead of the pastime of fresh pizza delivery? Are the costs of ordering from Grubhub, Uber Eats, DoorDash too expensive for a typical family of 4? Does the cheap cost of pizza relative to other options give Domino’s and its pizza staying power in this new age of food delivery?
Conclusion
Domino’s is an interesting company that I’d have to put in the more mature bucket. It’d be interesting to figure out if food delivery is a net positive or net negative for Domino’s and other pizza companies. Domino’s has historically been a great investment for hopefully many people, but it might be too late for me. Domino’s is already at the stage of giving out dividends to its shareholder base and that’s not what I’m personally looking for. I’m a young investor so I’m looking for growth and I’m not worried about short-term volatility in the pursuit of long-term gains.
Fun Facts
There are international Domino’s franchises that are public companies. Not all of these companies are specific to Domino’s and these firms often combine various franchises into one holding company. But here’s a shortlist:
ASX: DMP - Domino’s Pizza Enterprises
BMV: ALSEA - Alsea
L: DOM - Domino’s Pizza Group
L: DPEU - DP Eurasia
NS: JUBLFOOD - Jubilant Foodworks
Domino’s has very different food options depending on local customs. Some of these were highlighted throughout Domino’s 10-K such as the Mayo Jaga in Japan (bacon, potatoes, and sweet mayonnaise), the Saumoneta in France (light cream, potatoes, onions, smoked salmon, and dill), and some others. I thought these were funny and it’s always interesting to learn more about different customs in foreign markets.
If you’ve enjoyed this edition of Weekly 10-K please considering subscribing below, sharing it on Twitter (feel free to tag me @StratusYoung), or share it with friends and colleagues.