Delivery Man
Domino’s David Brandon concentrates on quality and new products to drive top-line growth.

By David Farkas

David A. Brandon, CEO, Domino's Pizza

David A. Brandon shifts uncomfortably in a leather chair in his refurbished office on Domino’s Farms in Ann Arbor, Mich. “That whole question boggles my mind,” he says wearily. “If you aggregate and compare us over the last several years to Wendy’s, McDonald’s or any Yum brand, you will find we did better.”

Brandon, chief executive officer of the newly public Domino’s Pizza, has just been asked if he’s annoyed that same-store sales for U.S. stores have tumbled annually over the last five years. It’s a prickly question because the steady decrease from 4.5 percent in 1998 to an estimated 1 percent this year coincides with his tenure at the $4.5 billion company.

What’s more, the chain’s share of the $25.8 billion pizza market has scarcely budged, rising just three-tenths of a percent, to 11.6 percent, a recent Smith Barney research report says. On the other hand, Domino’s controls nearly 20 percent of the $11.7 billion pizza-delivery business, a niche it has plied with unparalleled success for 44 years.

Of course, as the strapping CEO maintains, context is everything. The fact that there is growth at all in the saturated pizza segment is reason to brag. Total sales at the largest pizza chains shrank 1.3 percent last year, to $13.1 billion, reports Technomic Inc. in a survey of the country’s top 100 restaurant companies. Technomic predicts that overall pizza sales will remain essentially flat, growing a compounded 2 percent over the next four years. Foodservice sales of hamburgers, sandwiches, Mexican food and doughnuts are expected to outpace pizza.

Cheap Eats
Big pizza makers appear desperate to boost volumes. This summer, Domino’s began promoting three 9-inch pizzas with one topping for $5 each. That’s nearly as cheap as value-leader Little Caesars, which last year began peddling a $5, 14-inch pepperoni pizza—baked, boxed and ready for pick-up. “For the pizza industry, and especially for large chains, the product is a bit of a commodity,” says Steve Coomes, senior editor at pizzamarketing.com.

This isn’t surprising. Experts estimate 85 percent of pizza transactions involve some sort of discount. It may also account for the fact that people are not eating as much pizza as even last year. According to the NPD Group, pizza servings among all restaurants were flat from July ’03 to July ’04 and down 1 percent among QSR restaurants, which serve the lion’s share.

Despite rocky times, Brandon is proud of his company’s achievements. “We’ve grown systemwide sales by $800 million over the last five years, built 1,200 stores and increased our market share every year. So this notion that because the last three or four years have been exceedingly tough for the QSR business, our positive sales were not as positive as they could have been—absent any relative comparison—well, I just have to scratch my head.”

This fall Domino’s debuted an unconventional pizza called the Doublemelt in which the crust contains a cheese sauce spiked with herbs and garlic.

Credit Brandon’s leadership for keeping Domino’s out of serious trouble. Since joining the company as chairman and CEO in March ’99, he has improved store-level execution by adding more field support and simplifying the way the company rated store operations. The number of stores earning grades of 4 and 5 (the highest possible) has jumped from 14 percent to 53 percent since 2000. “We had an auditing program, but it was very complex, with 150 different measurements that were more important to us than to our customers,” he explains.

Quality Rules
“It’s not just the delivery aspect that’s important to us but also the quality of the product,” says Brandon, 52, a graduate of the nearby University of Michigan, where he played football for legendary coach Bo Schembechler.

Quality has been a sticking point for Domino’s, a company long hailed for its 30-minute delivery of piping hot pizzas—and not much else. It wasn’t needed. There seemed no end to entrepreneurs eager to cash in on the country’s mania for a quickly delivered meal. The franchisor was even getting in on the delivery business, its trucks dropping off products made to spec in its own commissaries.

To improve store-level execution, CEO David Brandon dispatched more field support and simplified the way Domino’s rated store operations.

It wasn’t quite a no-brainer. Founder Thomas Monaghan weeded out wannabes by first making them toil for a year in an outlet; those who survived had to agree to operate only his brand. Forty-four years later, Brandon oversees 1,350 franchisees, who operate 4,925 stores in the United States. The chain has another 2,605 Domino’s branches in 50 other countries.

Bain Capital hired Brandon shortly after it acquired the company from the founder in 1998 for $1.1 billion in a cash-debt deal. Brandon has since restructured the balance sheet and managed this summer’s $336.9 million initial public offering with CFO Harry Silverman. A portion of the July offering, $109.1 million, went to paying down part of $400.1 million of senior subordinated notes, borrowed to recapitalize the company in ’03. Brandon pocketed $3.3 million in that deal.

Domino’s, which has accumulated an eye-popping $940 million in long-term debt, can live with such leverage, insists Silverman, who has worked for the company since 1985. “Our four-year track record with Bain gave us an opportunity to go out, pay a substantial dividend to our investors and take on additional debt without really hurting the company,” he says.

Global Dough
The key to avoiding pain: strong cash flow fueled by a steady royalty stream, particularly from abroad. Same-stores sales for outlets outside the United States are leaping roughly 6 percent year-to-date (see Chain Leader, May 2004). Smith Barney analyst Mark Kalinowski, who rates DPZ a “buy,” predicts that the 2,605 international stores will generate $113.5 million in revenue, an 18 percent increase over ’03 and 8 percent of the company’s total revenue for ’04, estimated to reach more than $1.4 billion.

Colin Halpren, chairman of Domino’s Pizza UK & Ireland, a 329-unit master franchisee that dominates its market, says he’ll dispatch a check for $8 million this year. “One might ask, ‘What have you done for me lately?’” he chuckles.

There’s the rub. Driving the top line of franchisees, especially in domestic markets, is tough in a slow-growth and brutally competitive segment. Even the buoyant Silverman isn’t quite convincing when he describes Domino’s market-share gains as “a tenth here, a tenth there—it really starts to add up.”

Then again, a pizza is never just a pizza among the major players, who introduce at least one new pizza product every year. Price, once crucial to pizza makers, is becoming less critical. “Price has to be a part of it. But to grow in this category, you need to be much more than price. The value equation I’ve been driving since I got here is real simple. It’s product plus service plus image over price,” declares Ken Calwell, executive vice president of marketing and an expert at launching new products; he was responsible for developing Pizza Hut’s Stuffed Crust Pizza.

An unhappy Brandon had dismissed then-Vice President of Marketing Cheryl Bachelder within a year of his arrival because he was dissatisfied with the “Bad Andy” campaign. The company was losing sales and market share. “We needed to come up with a stronger message, to put out powerful promotions that are a call to action,” Brandon recalls.

Even though it offers new products now, Domino’s had built its reputation on its 30-minute delivery of piping hot pizza.

But even more important to the brand, he adds, are innovative new products. Domino’s had never enjoyed the reputation of a Pizza Hut or upstart Papa John’s, both of which devised and promoted a new pizza style at least once year. “We were considered pizza experts. That was our heritage. As a result, we shied away from pizza innovations,” Brandon says.

Enter Calwell, who had recently helped create Wendy’s wildly successful Garden Sensations. Brandon wanted that kind of action at Domino’s and told Calwell, who arrived in 2001, to come up with new items. His biggest hit so far was last year’s Philly Cheesesteak Pizza, which helped drive annual same-store sales 1.3 percent.

This year his department proposed 60 menu “concepts.” The company eventually tested 12 of them in markets with as many as 250 stores. “I feel real comfortable testing that many products,” Calwell explains. “What you have to realize is that we’ve got three or four different national ‘windows’ where we can test them. That’s three or four products per window, and it’s similar to what I’m used to at other restaurants.”

Angel Food
One of his new items is salad, though Calwell doesn’t expect it to drive sales. So there will be no TV promotion for the product. Still, he thinks salads will help improve Domino’s image.

“When we did the testing, people saw us as having a healthier halo,” Calwell says. “We also learned [having a salad] makes the brand feel more contemporary, like, ‘They get it. They’re paying attention to what’s out there.’”

The salads, $2.99 to $4.99, can also boost profits. “You don’t have to worry about a significant food-cost challenge,” Brandon says.

This fall the chain debuted an unconventional pizza called the Doublemelt, whose crust contains a cheese sauce spiked with herbs and garlic. Calwell can take only partial credit for it; designed in Japan, the product was so successful that it was recently in short supply in other markets. “They had to slow the promotion because it did so well,” Brandon says.

Even so, Domino’s doesn’t dare to play up innovation alone in its ads. The company will stick with what, for better or worse, has worked for many years. Says Brandon: “You’re going to see far more emphasis in terms of the delivery experience because that’s who we are and what we are known for and what we are good at."