Too big too soon for Domino’s?
A UNSW School Business Professor says looking after franchisees needs to be at the heart of the Domino’s strategy.
Published on the 16 May 2019 by Ibrar Khan
As part of its strategy, Domino’s are expecting to have 1200 stores operating in Australia/New Zealand by 2025.
UNSW Business School academic believes the problem with Domino's, the largest pizza chain in Australia, is that it’s gotten “way too big, too soon”.
School of Taxation & Business Law Professor Jenny Buchan said there is a fundamental problem with the Domino's franchisor, which is a public company.
“Domino’s is in so many countries. It struggles to meet the expectations of public company shareholders, while also providing proper support to the franchisees who are ultimately generating the revenue,” Prof Buchan said.
Prof Buchan said if franchisees aren’t making enough profits then there won’t be any dividends to share – information that is not being communicated to shareholders to manage their expectations.
“If the franchisees aren’t growing their businesses, if they’re dissatisfied and failing or if they’re litigating then it’s going to have an impact on the dividends to Domino’s shareholders,” she said.
Domino’s 2018 annual report showed its dividends to shareholders increased by 15.5%, paying 107.8 cents per share, having sold more than 82 million pizzas in Australia alone.
Domino’s Chairman, Jack Cowin said in a statement that the company’s key to future growth is by investing in more stores.
“There is significant demand to support our long-term targets of 4650 stores by 2025, including 1200 stores in Australia/New Zealand,” he said.
Professor Jenny Buchan, UNSW Business School, School of Taxation and Business Law.
Prof Buchan is a member of the Australian Competition and Consumer Commission’s Small Business and Franchising Consultative Committee, a forum established by the regulator to air issues affecting small business and franchising.
The UNSW Business School academic said the firm has struggled recently with share prices not performing well as expected with franchisees struggling to make profits selling pizza for $5 or less.
“They’re selling a pizza at the end of the day – Domino’s introduced the $5 pizza and took the wind out of Pizza Hut’s sails,” the UNSW professor said.
Prof Buchan, who has extensively researched the franchise sector, says Domino's should develop a holistically smart way for each franchisee to run their business.
“They should be competing on speed out to the customer, value pizzas and not cheap pizzas. They’ve got to use their economies of scale to figure out how their franchisees can make money,” she said.
“Maybe it’s about reducing running costs, reducing electricity charges, which must be huge due to the ovens and possibly introducing solar.”
Domino’s share price has almost halved since the highs of 2016, where it reached a peak of $76.91. Professor Buchan said, “Domino’s can pull through, but it will have to start treating the franchisees really well, providing great support to them, and adjusting shareholders’ growth expectations considerably.”