2010 June: New & Improved

Few pizza chains –– or restaurant chains, for that matter –– have generated the buzz that Ann Arbor, Michigan based Domino’s Pizza has over the course of the past 12 to 18 months. With the launch of several new products, to a new president, a viral video scandal and a groundbreaking revitalization of its core product –– not to mention increased store sales –– Domino’s Pizza has rightfully earned the title of 2010 Chain of the Year. In the next 10 pages, you’ll find out exactly why.

Although Domino’s Pizza won’t actually celebrate 50 years in the industry until this December, it has come a long way since 1960 when two brothers borrowed $900 and opened a pizza shop in Ypsilanti, Michigan. Today’s Domino’s encompasses 9,000 domestic and international stores with sales topping out at more than $5.6 billion. Even better, the company reports its domestic sales increased 14.3 percent in the first quarter of 2010, while international sales are up 4.2 percent.

Overall, the company saw same-store sales rise 4.8 percent in 2009. It closed 97 franchise stores and 23 company owned units, but opened 346 internationally.

Nearly 50 percent of sales come from the company’s international division, says Jenny Fouracre, director, investor relations and legislative affairs, and that number is rising. “Probably in three to five years, international will be bigger than domestic. We’re in over 60 countries, and if you think about it, those are very immature pizza markets. There’s a lot of opportunity, and a lot of store growth potential.” The company has seen 16 years of same-store sales growth at the international level, and it grew 4.3 percent last year.

“We’ve concentrated on our top markets, especially our top 10 markets,” Fouracre says. Studying growth rates in those markets is key. Outside of the U.S., the company relies on master franchise models. “What we do is we find a really well-financed local family or local business person. They are Domino’s Pizza for that country or region,” Fouracre says. The stores are either corporate-owned or sub-franchised, depending on country. Unlike domestic franchisees, international Domino’s owners are allowed to own other concepts. The company opened its 9,000th store in India last spring, the company’s largest growth market.

In all, there are 4,461 franchised stores and 466 company-owned stores. “Our franchisees are really the heart and soul of our system,” Fouracre says. “We’ve got a little over 1,100 franchisees. We’ve got a great long-term relationship with them. Many of them have been here over 30 years. … They pay royalties weekly and we’ve got a 99 percent collection rate on our royalties.” Most of the company’s franchisees own three to four stores with its largest operating 143.

Aside from Domino’s domestic and international stores, it also owns and operates its own dough manufacturing and supply chain facilities. It is in these 17 units that the company’s fresh dough is made, vegetables are processed and its thin crust is produced.

The company has undergone a number of changes in the past 18 months, from the resignation of its CEO, David Brandon, who left to serve as athletic director at the University of Michigan, to a revamp of its menu capped by a whole new pizza from the crust up. (For more on Domino’s new products, see page 62.)

“The change we made with our pizza –– I mean, it’s our core business –– is something we’re going to talk about for a long time,” says CEO Patrick Doyle. “There’s an evolution of how we’ve talked about it.” There’s a level of excitement about the brand at the corporate and local levels despite the focus group criticisms that fueled its product revamp and a viral video scandal that led to negative sales in the second quarter of last year (see page 70). This is a whole new Domino’s Pizza, figuratively and literally. “Look, it’s pizza. We can’t take ourselves too seriously,” Doyle says, “and we don’t want the consumer to. Pizza is fun. It’s a different occasion for families when they order in pizza. Rules are broken. First of all, they all gather for the pizza. There’s no forks and knives, and maybe not even a plate. It may just be a napkin. It is a fun experience, and so you see that from us –– and frankly you see it from the whole category.”

As a result of Domino’s splashy advertising campaigns and new products, competitors like Pizza Hut and Papa John’s have had to step up their ‘A’ games as well. That has resulted in a return to the competitive pizza wars of the 1980s. All three companies have slashed prices, with Domino’s offering two medium one-topping pizzas for $5.99 each. Papa John’s and Pizza Hut responded with $10 large pizzas –– including specialty offerings. Since Domino’s New and Inspired recipe is pricier, how are they able to maintain food costs in light of its product upgrade? Doyle says profitability “has to be an ongoing part of how we operate. At the same time, there is definitely a different consumer mindset out there than there was part of the equation. Our view is that the right answer is to strike a balance. Have a balance between value and premium. With the American Legends line that we’ve been selling at $12.99 for a large pizza, it did very well for us. If we can balance that with good price points for consumers who are more value-oriented, as the consumer mindset shifts back a little bit, we’re in a terrific place.”

Pizza continues to be a good value for consumers, but less so than 10 years ago, Doyle says. “I think part of that is why the category was not doing as well as it should going back (several years). We weren’t getting the growth in the (QSR) category that we once were. We think value has to be an important part of that. We think it’s why you saw the category be a little bit softer than all of us would have liked. We think us delivering value, and our competitors delivering value to the consumer, is ultimately a healthy thing for the category.”

The company has a conservative growth plan of raising domestic same-store sales between one and three percent annually, while they believe international sales could top out at 5 percent annually. Longterm goals are to open 200 to 250 new units annually with the addition of new international markets. “International has been an absolute rocket shot for us,” Doyle says. “It’s been doing incredibly well.” Balancing domestic and international operations has actually been a benefit, as new products can be shared, like the company’s newest dessert offering which originated from Turkey. “That sharing of ideas and using other markets’ successes or failures as a place to learn is part of what makes the system work,” says Doyle. “The fact that we have this booming international business is only a benefit for the U.S. business.” ?

Domino’s Pizza by the Numbers
2009 sales: $5.6 billion

Total units: 9,000 Total number of franchised units:
Domestic – 4,461
International – 4,073

Total number of corporate stores: 466
Average sales volume per unit:
Domestic – $614,000
International – 642,400
Percent delivery: 71%
Percent Carryout: 29%
Number of employees: 180,000 systemwide

Franchise fee:
$0 for existing franchisees
$25,000 for new franchisees
Royalties: 5.5%
Average cost to open a store: $175,000 – $250,000

Domino’s Top 10 International Markets

? Mexico*
? United Kingdom*
? Australia*
? South Korea
? Canada
? India*
? Japan
? France
? Taiwan
? Turkey *

These indicate publicly traded companies in their home countries.

Mandy Wolf Detwiler is managing editor at Pizza Today.