Food MarketWatch

COMPANY SPOTLIGHT: DOMINO'S PIZZA Domino's: pigs fly off the menu as outlet goes halal
Domino's decision to remove pork products from the menu in one of its branches in Birmingham to target more Muslim consumers has attracted harsh criticism from some local customers. Despite this, Datamonitor views this move as a demonstration of the company's commitment to growth in these uncertain times. In an effort to gain more Muslim customers, Domino's has decided to go 100% halal in one outlet in Birmingham, a certification that means that each animal must be killed by having its throat cut by a Muslim and that the flowing blood of the carcass must be completely drained. The company has replaced ingredients such as bacon, ham and pepperoni with halal spicy beef sausage, roast and tandoori chicken, halal pepperoni and halal cured turkey, all produced and used within the Halal Food Authority's guidelines. According to the firm, it "thought long and hard" about the decision not to offer pork at its eatery in Hall Green, Birmingham, which serves an area with a large Muslim population. Despite the widespread demand from local communities for a 100% halal store, the move has attracted criticism from some customers because they now have to travel two miles to another branch if they want the option to buy pizzas such as the Meteor, which is topped with pepperoni, sausage, meatballs, ground beef and smoky bacon. Responding to the criticism, Domino's issued a statement saying: "We appreciate we cannot please everybody but there are alternatives, such as turkey ham, and we have thought long and hard about this decision and we are sure it is the right one." Datamonitor views the move as a key part of Domino's ongoing attempts to diversify its product offerings and grow its market share. Responding to changing dietary preferences and population dynamics will be key for marketers seeking to grow their share of the industry. Looking forward, the opening of a 100% halal Domino's outlet will be an important testing ground for a company determined to diversify its product offerings. Despite criticism, the company has set a bold precedent for marketers seeking to capitalize on the UK's evolving population.

Business Description
Domino's is one of the world's leading pizza delivery companies. The company operates through a network of 8,624 company-owned and franchise stores, located in all 50 states of the US and across 55 countries. The company operates 17 regional dough manufacturing and supply chain centers in the US, and six dough manufacturing and supply chain centers outside the US. Domino's operations are segregated into three business divisions: domestic stores, domestic supply chain, and international.

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The domestic stores segment is comprised of 4,584 franchise stores and 571 company-owned stores. The domestic franchises are operated by entrepreneurs who own and operate an average of three to four stores. Seven of the company's domestic franchisees operate more than 50 stores, including its largest domestic franchisee, which operates 143 stores. The principal sources of revenues from domestic store operations are company-owned store sales and royalty payments based on retail sales by its franchisees. The domestic company-owned store operations are divided into 13 geographic areas located throughout the US, while its domestic franchise operations are divided into five regions. The domestic supply chain segment is comprised of dough manufacturing and supply chain centers that manufacture fresh dough on a daily basis and purchase, receive, store and deliver quality pizza-related food products and complementary side items to all of the company-owned stores and over 98% of its domestic franchise stores. This segment operates 17 regional dough manufacturing and food supply chain centers, one supply chain center providing equipment and supplies to some of its domestic and international stores and one vegetable processing supply chain center. Each regional dough manufacturing and supply chain center serves approximately 300 stores. The international segment oversees the company's network of 3,469 international franchise stores in more than 55 countries. This segment also distributes food to a limited number of markets from six dough manufacturing and supply chain centers in Alaska, Hawaii and Canada. The company has 566 franchise stores in Mexico, 467 franchise stores in the UK, 405 franchise stores in Australia, 289 franchise stores in South Korea, 277 franchise stores in Canada, and over 100 franchise stores in each of Japan, India, Taiwan and France. The principal sources of revenues from its international operations are royalty payments generated by retail sales from franchise stores and sales of food and supplies to franchisees in certain markets.

Table 2:

Key Facts:

Address: 30 Frank Lloyd Wright Drive Ann Arbor Michigan 48106 0997 USA Telephone: Website: NY Ticker: Employees: Turnover: FY end: 1 734 930 3030 www.dominos.com DPZ 12,500 $1,462.9m January

Products include:

Beverages Branded merchandise Desserts Pizzas Sides (bread sticks, cheesy bread)

Source: Datamonitor

DATAMONITOR

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SWOT Analysis

Table 3:

SWOT Analysis

Strengths

Weaknesses

Leading market position Strong brand equity Extensive distribution network Global franchise system

Decline in US same store sales Declining profits

Opportunities

Threats

Expertise in Pizza delivery system Differentiation through innovations Growth in India and China

Intense competition Increasing health consciousness

Source: Datamonitor

DATAMONITOR

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Strengths
Leading market position Domino's is one of the leading pizza delivery companies in the US with a 19% share of the pizza delivery market based on consumer spending. The company has 5,155 stores located in all 50 states of the US. The company's domestic store delivery areas cover a majority of the US households, and it sells over one million pizzas every day, on average, across the globe. Domino's strong market position and scale allow the company to leverage its purchasing power, supply chain strength and advertising investment across its entire store base. The company also has a strong international presence as it runs a network of 3,469 franchise stores located across 55 countries worldwide. In Mexico, Domino's is the largest quick service restaurant (QSR) company in terms of store count in any QSR category. Similarly in India, Domino's has the largest network of stores and is the fastest-growing international QSR brand. The company leads the Indian market in the pizza delivery business, with a segment market share of more than 60%. Strong market presence enhances the brand image of the company, which helps it in new product launches and while penetrating new markets. Strong brand equity Domino's enjoys strong brand equity in the market. The company pioneered the pizza delivery business and has built its brand into one of the most widely-recognized consumer brands in the world. Strong brand image results in loyal customers and also helps the company to leverage its brand strength to introduce new products. Moreover, together with its franchisees, the company invested heavily to support its brand (with an estimated $1.4 billion in domestic advertising spending over the past five years). In addition, the brand Domino's has frequently been named a MegaBrand by Advertising Age. The company also enhanced the strength of its brand through marketing affiliations with brands such as Coca-Cola and NASCAR. According to industry research reports, approximately 80% of pizza consumers in the US are aware of the Domino's Pizza brand. Strong brand equity increases brand recall and promote repeat purchases. Since Domino's operates in an industry which is largely driven by customer perception of brands, strong brand image in the pizza delivery market provides it with a distinct competitive advantage. Extensive distribution network The company is vertically integrated with a strong internal dough manufacturing and distribution network. The company's distribution division manufactures dough and distributes food and supplies through 17 dough manufacturing and distribution centers, to all the domestic company-owned stores and over 98% of the domestic franchise stores. The company has a leased fleet of over 400 tractors and trailers. Each regional dough manufacturing and distribution center serves approximately 300 stores, generally located within a one-day delivery radius. The company supports 5,000 stores with various supplies and ingredients, of which nine product group's account for nearly 90% of the volume. The company also operates six company-owned dough manufacturing and distribution facilities worldwide. A strong distribution system ensures operational efficiency for Domino's. Global franchise system

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The company has a globally diversified franchise network which proves to be a critical factor for its success in the pizza delivery market. Domino's operates a franchise store network of 8,053 stores across the globe. Moreover, the company shares 50% of the pre-tax profits generated by regional dough manufacturing and distribution centers with those domestic franchisees who agree to purchase all of their food from the company's distribution system. This arrangement strengthens ties with franchisees by enhancing their profitability while providing the company with a continuing source of revenues and earnings. This arrangement also provides incentives for franchisees to work closely with the company to reduce costs. Domino's strong mutually-beneficial franchisee relationships is evident from the fact that it has over 99% domestic franchise contract renewal rate, and over 99% collection rate on domestic franchise royalty and domestic distribution receivables. Internationally, during the period 2001 through 2006, the company's international franchise network increased 43%, from 2,259 stores to 3,223 stores. A strong franchise system enables the company to enhance its reach, cater to a wider customer base and meet their diverse needs efficiently.

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Weaknesses
Decline in US same store sales The company recorded a consecutive decline in same store sales during the financial years 20062007. Same store sales are the net sales of stores that have been open for a year or more. The company's same store sales from the US witnessed a negative growth rate of 4.1% in FY2006 and 1.7% in FY 2007, as against a growth of 4.9% in FY2005. Continuous decline in same store sales does not augur well for Domino's as it indicates that Domino's stores could not attract enough number of customers or offer an effective product mix.

Declining profits Domino's has witnessed a trend of declining profits in the recent past. During the last four year period (2004-2007), the company's net margin recorded a negative CAGR of 15.3%. During the same period, the revenues grew at a meager rate of 0.4%. Moreover, the company's profitability witnessed a steep decline during the last three financial years. During FY2007, the net profit stood at a meager $38 million as compared to a net profit of $108 million in FY2005. Similarly, the net margin declined from 7.15% in FY2005 to reach 2.5% in FY2007. Weak margin and a negative CAGR in profitability indicate the company's exposure to high debt burden and may have a negative effect on investor confidence.

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Opportunities
Expertise in Pizza delivery system The company's focused approach towards an efficient pizza delivery system has provided it with a significant competitive advantage relative to its competitors who are more inclined on multiple components of the pizza category, particularly dinein. Domino's has been focused on pizza delivery for the last 47 years and has gained an edge in the market place. Moreover, the demographic and lifestyle changes such as rise in the number of women in the workforce, longer working hours, increasing number of dual-income households, the ageing of population and a fast-paced environment has boosted the trend of carry outs and home delivery. In addition, as Domino's domestic stores and most of international stores do not offer dine-in areas, they typically do not require expensive real estate, are relatively small and are relatively inexpensive to build and equip. This operational structure helps the company enhance its operation efficiency with minimum expenditure and optimal returns. Differentiation through innovations Owing to strong emphasis on product and process innovations, the company has carved out a niche in this highly competitive quick service restaurant (QSR) marketplace. These include its vertically-integrated supply chain system and the Domino's HeatWave hot bag, which keeps pizzas hot during delivery. In order to facilitate its order taking and delivery capabilities, Domino's has installed "Domino's PULSE point-of-sale system" in every company-owned store in the US and a majority of its franchisees. This system has touch screen ordering to improve accuracy and facilitates more efficient order taking, and a delivery driver routing system which improves delivery efficiency. Domino's also enhanced its online ordering capability through the inclusion of Pizza Tracker. Such innovative measures may help the company to sustain its growth and gain a leading market share in the QSR market. Growth in India and China The Chinese economy is expected to maintain strong overall growth during the period 20062010, whereas the Indian economy is also estimated to grow during the same period, and is expected to sustain this momentum for the next few years. Rapid urbanization and an increase in disposable income in these two economies, the fastest growing in the world, is leading to higher demand for more and quicker service restaurant and fast food chains like Domino's. Domino's has a strong presence in these two markets. For instance in India, Domino's has the largest network of stores and is the fastestgrowing international QSR brand. The company leads the Indian market in the pizza delivery business, with a segment market share of more than 60%. Domino's can further capitalize on this growth trend to boost its market presence and revenues.

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Threats
Intense competition The US and international pizza delivery and quick service restaurant market remains highly competitive as key players and new entrants compete for market share. International Pizza chains continue to expand their base while existing local players enhance their product offering and become direct competitors. Domestically, the company competes against regional and local companies as well as national chains, including Pizza Hut and Papa John's. Internationally, it competes against Pizza Hut, McDonalds and other regional and local pizza companies. Domino's generally competes on the basis of product quality, location, delivery time, service, price, and also competes on a broader scale with quick service and other international, national, regional and local restaurants. Intense competition could put pressure on the company's margins. Increasing health consciousness The company is highly vulnerable to changes in consumer tastes and preference, especially inclination towards a healthy lifestyle or dietary preferences. Growing health consciousness worldwide is resulting in higher demand for healthy and nutritious food. The overall diet food and drink market is forecast to expand from $94.4 billion in 2004 to $112.4 billion in 2009, at a CAGR of 3.8%. Not only is this trend apparent in the US but also in other parts of the world where people are becoming increasingly concerned about healthy eating habits. With a change in lifestyle, people are becoming more aware of the negative effects of unhealthy eating habits. Growing health consciousness in the US may result in lower sales of fast foods such as pizza which could affect the revenue growth of the company.

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