Domino’s Pizza: An introduction to this high-performing pizza giant

Domino’s Pizza: An introduction to this high-performing pizza giant

Domino’s Pizza overtook Pizza Hut earlier this year to become the world’s largest pizza seller.

The group offers investors a simple store rollout story in each of its markets, and tends to generate a high return on capital where it is successful. On the London Stock Exchange, we currently have three listed Domino’s Pizza master franchisees, each of them at different stages of development.

It all began when two brothers, Tom and James Monaghan, took over a pizza restaurant in Michigan in 1960.

The three dots on the logo symbolize the three stores which were initially planned (versus over 15,000 operating today!)

The original business, Domino’s Pizza Inc (DPZ), is listed in the US and has delivered strong returns since its 2004 IPO.

Domino’s Pizza Inc (DPZ) share price since IPO.

Source: Google Finance

The original Domino’s Pizza store in Michigan: Domi Nick’s in 1960

Source: Domino’s Pizza Inc

The Domino’s Pizza franchise system

Franchising is the secret to both Domino’s Pizza’s rapid growth and its high return on capital employed (ROCE). Domino’s Pizza Inc franchises stores in the USA and grants master franchise agreements around the world.

The company receives royalty payments from store franchisees in the USA as well as the master franchisees. This has enabled Domino’s Pizza Inc to generate an eye-watering 127% return on capital employed.

US-listed Domino’s Pizza Inc generates eye-watering returns

Source: SharePad

Master franchisees sub-franchise stores, within their territory, if they are able to attract entrepreneurs. The Domino’s Pizza franchising setup resembles a set of Russian stacking dolls and is more profitable the higher up you are in the chain.

Store franchisees are at the bottom of the chain but are attracted by the brand and the scope to develop a profitable business. The physical stores occupy a relatively small footprint and can be located in low cost locations.

Domino’s Pizza master franchisees are in the middle of the chain

Source: Domino’s Pizza Group

Three UK-listed Domino’s master franchises

There are three UK listed Domino’s Pizza master franchisees in the UK with the largest being Domino’s Pizza Group (DOM). The company listed in 1999 and, while the shares initially fell 61%, they are now up 28X on the IPO price.

The company’s main market is the UK but the group also has operations in a number of Scandinavian countries. Domino’s Pizza Group (£1.2 billion market cap) also owns a third of the master franchise for Domino’s Pizza in Germany.

Domino’s Pizza Group (DOM) opened its first UK store in Luton in 1986

Source: Domino’s Pizza Group

Domino’s Pizza Group since listing in 1999

Source: Google Finance

The remaining London-listed master franchises are DP Eurasia (DPEU) and DP Poland (DPP). DP Eurasia started in 1996 and currently has 672 stores; DP Poland started in 2010 and currently has 60 stores.

DP Eurasia (£160 million market cap) generates the bulk of its revenue from Turkey but its long-term growth opportunity is in Russia. DP Poland (£41 million market cap) operates in Poland and is at a relatively early stage of its development.

Domino’s Pizza Group listed 13 years after opening its first store while DP Eurasia listed 21 years after opening its first store. DP Poland did things the other way around and listed a year before opening its first store!

Three Domino’s Pizza Master Franchisees

Source: SharePad

Summary

Domino’s Pizza master franchisees stand between the main US listed company and their sub-franchisees. They are in the middle of the franchising food chain and have the potential to generate strong returns.

In my next report I will evaluate the investment case for the three London-listed Domino’s Pizza master franchisees.  All three companies are experiencing share price weakness and may prove to be attractive long-term investments.

 

At the time of publication, the author holds a long position in DPEU.

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    If you want to read a report on DP Poland you can read one here – it is free to everyone. Paid for by the company.
    https://www.hardmanandco.com/research/corporate-research/fully-proven-model-rolls-out/

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      Thanks streetsoj – I have read that report and in my view it is a great report from Hardman and their analyst. It not only gives an insight into DP Poland but also how the Domino’s Pizza master franchisee system works and the roll-out approach works.

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