Growth and Strategy at Domino’s Pizza

Despite or perhaps because of difficult economic times, the pizza delivery company Dominos UK & Ireland has enjoyed rapid growth over the last couple of years. The company, which owns the Master Franchise to the Domino’s brand in the UK and Ireland, now operates through over 130 franchisees with an average of 4.5 stores each. And their long-term strategy contains the target of rolling out at least one new Dominos store per week in each of the next ten years, growing the business into a billion pound brand in the UK – almost double the current size.

Shareholders in Dominos are happy! The company floated on the Alternative Investment Market (AIM) in 1999 and moved into the FTSE-250 mid-cap index in 2007. It now trades at £5.20 per share contrasted with an initial floatation price of 17 pence. Measured by turnover, Dominos is now bigger than the combined income of its largest four rivals including Perfect Pizza and Pizza Hut.

The sheer scale of the Dominos operation is a vital part of its competitive advantage. In the year ended December 27, 2009, it delivered to 3.4milllion homes, 500,000 more than in 2008. And their network of stores services between 35-40 per cent of the UK population. They want to grow to over 1,000 stores in five years, drive over the £1 billion mark for turnover and make in excess of £100m annual profits.

One aspect of Dominos success that has impressed stock market investors is the rapid like-for-like growth in sales. “Like-for-like” is a measure of growth in revenues which makes an adjustment for the changing number of stores and sales floor space to give a better indication of business growth from one period to another. You will usually see quoted retailers using “LFL” to explain the underlying growth in sales.

Domino’s has made gains in three key measures:

1. Penetration i.e. the percentage of all households in the UK that has ordered at least once from Dominos in the last year (last year Dominos delivered to 14% of all homes!)

2. The frequency with which a customer re-orders (about once per month)

3. The average value on the receipt ticket from each order (typically around £18)

For a hugely consumer-centric business Dominos must always be keenly aware of consumer needs and wants and stay tuned to when they change. My own experience is probably not atypical. I want hot pizza, competitively priced, produced to a consistently good standard, delivered on time and ordered and paid for over the internet with the minimum of fuss! That gives Dominos five operational and quality hurdles to overcome and doubtless there are many more for different groups of consumers – for example the hundreds of thousands of people who enjoy a pizza but who are glucose intolerant.

But the challenge is clear – a successful business must innovate and maintain a high quality of product day in day out. The value and sustainability of the brand also depends crucially on the performance of thousands of employees at the front end of the business – Dominos employs over 25,000 people in the UK. There is a clear link between the quality of Dominos people and the quality of the customer experience and product.

So what are the core ingredients for the rising profitability of the Dominos operation?

Ultimately the success of the brand depends on the people who run it and finding the right franchisees is crucial to the chances of Dominos meeting those ambitious growth targets mentioned earlier. But two aspects of the business seem to me to stand out. In this note, I’ll focus on the scale and productvity of Dominos.

Costs and Efficiency

The typical Dominos store has a weekly turnover of £17,000 making and delivering close to 1000 pizzas per week. Annual turnover is close to £800k per store and each pizza sold makes £3 profit. In 2009, 68 stores had sales in excess of £1 million.

A crucial element of the commercial viability of the business is in improving efficiency within the stores and here Dominos focuses a metric known as “out of the door time” – the time it takes between new orders being placed online or in store and the ready to eat pizza leaving the store en route to the customer. Dominos has managed to get this down from 17 to 13 minutes in recent years (typically it takes less than a minute for the pizza to be readied before going into the oven!) and their average delivery times has shrunk to just twenty three minutes.

Once on the road, investment in improving routing software for Dominos vehicles provides another way of cutting costs. Although Dominos cannot be immune from rising fuel and food prices globally, for a pizza delivery business they have become ultra-efficient in getting products to the consumer – in 2009, fuel accounted for only 10% of total distribution costs.

Smart Marketing

Few businesses or brands invest as much as Dominos in marketing.

Four and a half per cent of the turnover of each Dominos franchise store goes into a fund used for national marketing of the Dominos brand. In 2010 the business is expected to spend around £40million on marketing, a figure bigger than the top-line revenue of many of their rivals. The marketing fund is used to develop high-profile communications such as the sponsorship of Britain’s Got Talent, The Simpsons and the X-Factor.

Television advertising remains the drug of choice for most fast-food businesses although Dominos has also joined the flood of companies seeking to establish and build an effective social media presence through Facebook, Four Square and other social network sites. A case in point is that a Domino’s iPhone app already delivers 3-4% of online sales.

Price discrimination has been successful for the business. The Two for Tuesday promotion has been so effective that Dominos now sells as much pizza on a Tuesday (traditionally the quietest night of the week) as it does on a Saturday. Price discounting mid week help to smooth the pronounced ups and downs of daily sales during a normal week. Two for Tuesday generates extra revenue and grows volumes – all helpful to franchisees with large fixed overhead costs.

Dominos is also targeting core groups of consumers. They have sponsored the setting up of Pizza Societies at numerous universities in the UK (how long before the idea takes root in schools?). And this is a business fully aware of the importance of changing demographics. Pizza eating is less popular among people aged 55 and over, but younger generations have become used to the Dominos model and as this group ages, the commercial opportunities are sizeable.

And because forty per cent of their business comes over the internet, Dominos has built up a terrifically valuable database of location-specific customers – a mine of information that can be used to great effect when promoting special offers, new products and reinforcing brand awareness. Put simply, Dominos knows where you live and the ever-expanding size of their customer database has great commercial value. Since 2007,

Since January 2007, an additional 3million new customers have ordered from Dominos – here is a business that understands a business truism, namely that the cost of selling to an existing customer is always lower than searching for a new one! Incidentally, the average customer orders from Dominos once every 34 days – are you a more or less frequent customers?

There are many businesses that are successful because they focus in a single-minded way on identifying a model that works for them and then concentrating on carrying it out extremely well. Don’t expect Dominos to diversify into exotic areas! They are happy to allow competitors to grow the market for pizza delivery and then use their undoubted muscle to take a growing slice of it.

For a business founded fifty years ago in Michigan whose distinctive 3 dots on their logo marked an early ambition to run just three stores, Dominos hasn’t done too badly! It has a justifiable claim to be the most profitable pizza delivery company in the world.