Promoting from within
One of Domino’s Pizza, Inc. (NYSE:DPZ) greatest success stories is how it develops from within. Domino’s has roughly 1,000 franchisees within the US, and more than 900 of those franchisees started as hourly workers for the company. Domino’s builds its brand from within, following in the footsteps of fast food giant McDonald’s Corporation (NYSE:MCD). This gives Domino’s franchisees a leg up, as they know their business from the ground up.
Competition
McDonald’s Corporation (NYSE:MCD) success came from years of marketing and experimenting with the franchising business model. Both McDonald’s and Domino’s Pizza, Inc. (NYSE:DPZ) operate in the ultra-competitive restaurant business. In developed markets like the US and Europe, their businesses are mostly expanded at the pace of population growth, and the biggest opportunities continue to be overseas. McDonald’s and Domino’s are now in a race to gobble up market share and create customer loyalty, as this segment of the economy has some of the weakest barriers to entry.
McDonald’s Corporation (NYSE:MCD) earnings growth rate stalled last year, as the golden arches fought increased commodity prices and pushed for growth overseas. McDonald’s currently has some of the highest operating margins in the fast-food segment at 31%, while Domino’s Pizza, Inc. (NYSE:DPZ) has margins of just 18%.
Going forward we will see these companies improve their product offerings to increase same-store sales, while breaking into new markets. McDonald’s most successful innovation over the past few years has been the McCafe line of beverages. These companies will continue to leverage the products that are created in their test kitchens to add to their bottom lines, and in turn reward shareholders.
Global growth
Yum! Brands, Inc. (NYSE:YUM) Pizza Hut franchise has been one of the fiercest competitors to Domino’s in both the US and growth markets. Yum! Brands, Inc. (NYSE:YUM) was one of the first brands to break into the Chinese market with the successful launch of the KFC brand, following with Pizza Hut and Taco Bell. Yum! Brands, Inc. (NYSE:YUM)’ operating margins are close to that of Domino’s.
Yum! is the largest fast-food restaurant company in the world with over 39,000 restaurants across the globe, and is looking to continue that expansion. During the fourth quarter of last year, Yum! stated that it will be more than doubling its rate of expansion overseas within the next five years. Yum! will also be shifting its focus to the Russian and African markets to mimic its “first mover” strength that it gained in China.
Domino’s is expecting huge international expansion numbers as well. Within the next five years, Domino’s is expecting to increase store count in Turkey by a factor of two, Japan by a factor of three, and France by an extremely aggressive factor of four!
Domino’s Pizza, Inc. (NYSE:DPZ) is leaning on its franchisees and the entrepreneurial spirit to accomplish this. Domino’s international expansion model has been working wonders over the past few years. Domino’s sells a “market” franchise license for an entire country to one entity, and then it is up to that person or company to sub-franchise it out to local business people.
This model allows Domino’s to dictate standardized processes, while outsource the enforcement (and costs related to enforcement) of these rules, while allowing the country-level franchisee to make region-specific menu changes that appeal to their direct market. This model also allows Domino’s to step on the gas during its expansion phase while not creating a giant corporate bureaucracy.
Foolish bottom line
Domino’s has seen massive growth, and a corresponding run-up in its stock. Going forward, Domino’s still foresees massive growth in its international division. Domino’s Pizza, Inc. (NYSE:DPZ) leadership has stated that it is dedicated to continue rewarding its shareholders with an increased share price and increases in its newly issued dividend.
The article Domino’s Stock to Deliver Larger Slices to Investors originally appeared on Fool.com and is written by Wes Patoka.
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