Dominos Pizza - Growth & Strategy (Part 1) - Driving Competitive Advantage

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)