This MBA waxes poetic:
Domino’s is one of the major purveyors of relatively cheap delivered pizza. Increasing cost of raw materials, fuel, and low-end labor is going to be felt more acutely by those dependent on low cost/high production. It appears from the article below that they are having to deal with an organizational culture that has become complacent over the last several years. Now with the high tide of prosperity naturally ebbing to low tide, the rocks below the waves are starting to reveal themselves.
Those who have built strong cultures of quality and efficiency will float out on this low tide rather than breaking up on the rocks and sinking. The high tide will eventually return… and with fewer competitors still afloat.
[size=5]Domino’s Pizza puts franchisees on notice[/size]
Posted by Stefanie Murray | Press News Service February 26, 2008 14:38PM
ANN ARBOR – Frustrated by a group of underperforming franchisees whose shops are pulling down U.S. sales growth, Domino’s Pizza Inc. CEO David Brandon warns the company is prepared to replace lagging store owners by refranchising some shops.
Brandon also said the economy is having a major impact on consumers’ pizza buying habits, going so far as to agree with one analyst’s assertion that the United States is in the midst of a working-class recession.
“We’ve got some disengaged operators who are not performing … in 2008 we will challenge our franchisees much more aggressively than we have in the past,” Brandon said during a conference call today with analysts and investors. “We need to get our domestic franchisees fired up about competing to win and move out those who can’t or don’t want to engage in what it takes to succeed.”
Brandon’s remarks top what was a rough year for Domino’s.
Higher interest payments the company had to pay on big new loans it took out during a financial restructuring last year drove Domino’s 2007 profits down 64.3 percent to $37.9 million, on revenue that increased less than 2 percent to $1.46 billion.
The pizza delivery company earned $1.03 a share last year, down from $1.56 in 2006. Analysts had forecast earnings of $1.09 a share. For the year, Domino’s more than 8,600 worldwide stores increased global retail sales by 6.6 percent, a gain driven almost entirely by strong international pizza sales. Total sales were weak among the company’s U.S. stores.
Domino’s same store sales in the U.S. fell 1.7 percent in 2007, while its international same store sales were up 6.7 percent. Same store sales measure performance only at stores open at least one year, which is a retailer’s best metric of health.
Across the board, Domino’s roughly 570 company-owned pizza shops performed better than its stores owned by franchisees. Domino’s has about 2,000 franchisees who own more than 8,000 stores.
As a result of Domino’s not meeting its internal earnings target, none of its full-time employees were granted company performance-based bonuses for 2007, for the first time since the program started in 2001.
Throughout 2007, Domino’s bottom line was held down by costs from its financial restructuring as well as rising costs of energy, cheese, wheat and labor. U.S. sales improved in the midyear before declining.
“The U.S. economy looks weak and consumers are clearly reining in their spending,” Brandon said. “Food costs, particularly the commodities we rely on in the pizza business, continue to be extraordinarily high.”