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Chain LeaderEditorial Archives2004 — May — World Partners

Domino Effect
Domino’s Pizza out-delivers its U.K. rivals with a bare-bones formula and strong financials.

Dough boys: Domino's Pizza UK Chairman Colin Halpern (l.) and CEO Stephen Hemsley are rapidly increasing their slice of the home-delivery market.

A few weeks ago Jay Rayner, a restaurant critic for the Observer newspaper, ordered a meal delivered to his house. His family was away, and he was “too fagged to cook,” he says. Yet despite his practiced palate, he didn’t get anything trendy or exotic. Rayner, a Londoner, called Domino’s Pizza instead.

“They turn up when they say they’re going to,” he explains. “Plus the product is really not bad. Not exactly great, but not bad.”

Stephen Hemsley is pleased to hear that. “That’s exactly what we are striving to do. Keep it simple. Limit our promises. And deliver on those we do make,” claims the chief executive of the chain’s master franchisee in the United Kingdom and Ireland. “We are not trying to be all things to all people.”

There hardly seems any reason to. Domino’s Pizza UK & Ireland is out-gunning its main rivals by sticking to the bare-bones formula—pizza, wings, soda—that has made the $4 billion global brand the largest pizza-delivery operation in the world. With 320 units and access to roughly 30 percent of households on the Sceptred Isle, the company is far ahead of 200-unit Papa John’s (and sister brand Perfect Pizza) and Pizza Hut’s 195 delivery-only shops. Domino’s expects to extend its reach by 50 units this year, the same as last.

Fifty units is a blistering pace. Franchisees opened just 22 stores three years ago and 34 units in 2002. Pizza Hut, backed by giants Whitbread and Yum Brands, will open 45 this year. Papa John’s is budgeted for merely 20.

Domino's Pizza UK & Ireland plc
Milton Keynes, United Kingdom
329 (17 company, 312 franchised)
2004 Systemwide Sales
174.5 million ($320 million; company estimate)
Average Check
12.50 ($23)
Expansion Plans
50 franchised units in '05; 50 in '06

Hemsley is comfortable with 50 delivery stores a year until the system reaches 500 at the end of 2006. That’s still not capacity, however. Where is that? “North of 800 units? I don’t know where,” he claims. Yet when Hemsley does the math—22 million U.K. households divided by 20,000, the number of “addresses” required per store—there’s suddenly room for 1,100 units, he says, sounding pleased.

Taking Stock
Why shouldn’t he be? The former accountant can take credit for the recent growth spurt, which began shortly after he joined the company as financial director in 1999. Under his guidance, Domino’s floated 8 million shares, raising 4 million ($7.4 million in today’s U.S. currency) on the London Stock Exchange’s Alternative Investment Market, which is made up of small, rapidly growing companies.

Sales are rising as swiftly as the company can find good locations. That’s not an easy task because town councils strictly control the mix of retail and restaurant space along main thoroughfares. Once the space is secured, Domino’s leases it and collects marked-up rent from franchisees.

Yet there is no shortage of eager applicants. “We now have to put people off,” brags Hemsley. Management accepted 2,500 franchise applications last year. “We made only 20 appointments,” he adds.

The company says the average delivery unit rings up 10,000 ($18,000) a week, though annual volumes range from 261,813 ($480,000) to 1.1 million ($2 million). Figure in a cost of sales at 25 percent, royalty, advertising contribution and rent, and a Domino’s (or preferably two) can be a tidy business. The largest franchisee operates 13.

Heading North
Franchisees come from all over. “We have a huge ethnic mix,” Hemsley says. Among them are many Indians and Pakistanis who, he adds, are most likely to lead expansion efforts into new markets. Native British franchisees tend not to stray far from home because they know the market well.

Total number of foodservice outlets in the United Kingdom 48,840
Fast-food sales, 2003 $11.8 billion*
Size of home-delivery-only market, 2003 $1.9 billion
Sales of home-delivery/ take-away pizza, 2002 $684 million
Sales of home-delivery/ take-away fish & chips, 2002 $1.7 billion
Sales of ethnic take-away food, 2003 $3.1 billion
Sales at public houses (pubs), 2003 $6.2 billion
Sources: “The UK Catering Equipment Market Development,” MBD Ltd., 2003; “Delivering the Future for Pizza,” The Future Foundation, 2002; *does not include home-delivery sales

Yet Hemsley wants to expand Domino’s horizons by venturing to Liverpool and points north, where home delivery is sparse. Only 15 to 20 of the 50 new branches opening this year will be in these locales. Who will step up? “The guys who would [open stores outside their regions] are at the pinnacle of entrepreneurship,” Hemsley says, admiringly. “And they’re likely non-British.”

Last year’s growth helped push systemwide sales by nearly 20 percent, to 142 million ($256 million). All-important comparable sales rose 7.4 percent on the year, though considerably off 2002’s 11.2 percent pace. So far this year—amid high consumer debt, though low inflation and unemployment—they’re hovering around 4 percent. “I’m not expecting 7.4 percent this year,” Hemsley says.

But the real story at the Milton Keynes headquarters is that profits climbed 54.2 percent last year, to 6.5 million ($11.7 million) on a pretax basis. The fat bottom line pleased investors, who sent the stock upwards, from 100 pence ($1.81) in April ’03 to 192 pence ($3.62) in early April ’04. They were rewarded by a dividend that increased 75 percent, to 3.5 pence (6 cents) per share.

Oh, Happy Days
Returning dough to shareholders is the company’s mandate. “We always said that we didn’t want to go off and do something with the money,” declares Hemsley, who owns 5 percent of the outstanding shares, now worth about 5 million ($9.2 million). Sticking to its kneading recently helped sway mutual-fund giant Fidelity Investments to take a 10-percent position in the closely held company—an event the 47-year-old CEO describes as “happy days.”

While a good portion of franchise fees, royalties and rent markups fall to the bottom line, there’s nothing like a revenue stream from a commissary—three in fact. The facilities in Penrith, Milton Keynes and Dublin produce fresh pizza dough and warehouse about 75 products, including tomato sauce from Portugal. The only product they don’t stock is bulky liters of soda. Thirty-five leased trucks distribute to the stores three times a week, generally at night. The drivers and an assistant restock.

Although the company doesn’t disclose results from the commissaries, they may comprise a third of total operating profits. “It depends how you cut the cake,” says Papa John’s U.K. CEO Dan Cousineau, a former corporate executive for Domino’s in charge of European operations. “It’s a blend between royalty income, distribution and corporate stores.”

Hemsley explains it this way: “As you develop a franchise model, there are huge up-front costs to service before revenues are generated. It’s a happy day for the bottom line once they become fixed or, at worst, semivariable. We passed that situation two years ago.”

Franchise Players
Commissaries are common among fast-feeders. Domino’s UK had one when British-born brothers Colin and Jerry Halpern paid Ann Arbor, Mich.-based Domino’s Inc. $1 million for master-franchise rights to England, Wales, Scotland, Northern Ireland and the Irish Republic in 1993. Originally a franchise market, the United Kingdom was run by corporate when the Halperns took over. “It was an unloved business with little attention paid to franchisees. And no investment,” recalls Colin Halpern, chairman (Jerry Halpern retired in 2001).

The commissary was attached to the company’s main offices in Milton Keynes. “I remember these four big guys in rubber boots hosing off dough trays and leaving dough behind,” Halpern says. The brothers thought the process looked old-fashioned and quickly automated with an expensive machine that required new trays.

“People thought we were nuts. The cost of changing those dough trays was more than we made that year. But it worked. It raised morale,” he says. Meanwhile the Halperns, who had emigrated to the United States in their teens and were by now wealthy businessmen, divvied up the large territories Domino’s had granted early franchisees. The brothers promised things would get better.

Mozzarella Millionaire
Today, Halpern boasts, “Our franchisees become millionaires.” The company sent Chain Leader a clip from a BBC television interview with an alleged millionaire franchisee named James Swift, a former pizza-delivery man who tools around in a red Ferrari.

Things aren’t likely that good for most franchisees. But the company regularly spruces up units and markets its products on television.

Barely finished rolling out its “Image 2000” redesign, which is now in 90 percent of outlets, Hemsley recently announced a new reimage program. Undoubtedly few existing franchisees will switch over so soon aftr the last facelift, which cost them 20,000 ($36,152) a unit. Sales spiked 15 percent to 20 percent after the change, officials contend.

Growing Pains
Of course, many customers never see the shops, preferring to order pizza by phone or from their televisions. People who have interactive Sky TV, for example, can order pizza while watching the telly—though perhaps not for long. Hemsley gripes that the message dispatched from Sky to shop is often delayed. While Domino’s doesn’t guarantee 30-minute delivery, most customers generally presume that a pizza-bearing mo-ped will arrive in less than a half-hour.

Other e-commerce outlets include the Internet, chiefly Domino’s Web site, and cell phones. Halpern talks about technology that can determine a cell-phone caller’s position, though what this offers beyond avoiding prank calls (“100 pizzas for Buckingham Palace, please”) is unclear.

The company is also drumming up business the old-fashioned way: It’s sponsoring The Simpsons on Sky One. Officials say the tie-in is worth 2 million ($3.6 million) a year to Domino’s, though they decline to reveal its cost. Television looms large in Domino’s future. Last year, Hemsley organized advertising co-ops among franchisees in Scotland, Wales and London—areas in which Domino’s is rapidly expanding.

Those moves may not sound particularly innovative to stateside operators. But they impress the British. Declares food critic Rayner: “In this market, a big, slick operation like Domino’s can clean up.”

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