Domino’s Pizza

3 million pizzas a day!

I regularly talk to all kinds of investor types. One is extremely cautious and safety-oriented, another loves the total thrill of investing. Well, personally I'd put myself somewhere in the middle. Of course I take on a certain amount of risk when buying stocks - after all, there's no return without risk. Nevertheless, I would never put my money into some highly speculative stocks that might possibly go completely through the roof. And I'm stressing the "might" here! I'd rather put my money into market leaders - companies that have shown they understand their business and have been highly profitable with it for a long time.

If you go looking for exactly these kinds of companies, sooner or later you'll inevitably come across Domino's Pizza. The food delivery company has perfected its processes and impresses with lots of innovative ideas.

The history and business model of Domino’s Pizza Inc.

Tom Monaghan was born in Michigan on March 25, 1937. When he was 4 years old, he lost his father. His mother couldn't take care of him and his brother Jim, so the two ultimately grew up in foster families and orphanages. Alongside school, Tom did some odd jobs to earn a little money for his brother and himself. High school didn't go much better either. He once wrote in the yearbook: "The harder I try to be good the worse I get, but I may do something sensational yet." How true that sentence would turn out to be. For several years, Tom tried to save up enough money for college; among other things, he joined the Marines and saved $2,000. However, he was ripped off by a con man and lost all his money. Eventually he went back to his brother, who by then was working at the post office and doing small carpentry jobs on the side. When he got a job at a pizzeria called DomiNick's, he heard the owner talking about selling the business. The two brothers knew immediately that this was their chance. So they took out a $900 loan and bought DomiNick's Pizzeria in December 1960.

The shop was pretty small and had little room for eating in, so from the start they focused on delivery. However, the business got off to a rather bumpy start, and within just 8 months Jim decided to trade his share of the business for a beat-up VW Beetle that the two had previously used as a delivery car. Tom hired the first drivers on a commission basis, and little by little revenue rose. Much like the McDonald's brothers, Tom focused early on efficiency-boosting processes. Once, he and his staff had to deal with a real rush, so he spontaneously decided to shrink the menu and drop the special sizes. When he then checked the numbers, he found that he was significantly more profitable that way than usual. So he decided to keep the slimmed-down menu. In the following years he opened more stores in neighboring towns. To finally break away from the old name, they decided to call themselves Domino's Pizza Inc. starting in 1965.

Soon the first franchisee came on board too, opening a Domino's store in Ypsilanti (Michigan). Looking back, Tom Monaghan said he made the franchise fees far too cheap, but it served the purpose of expansion. Things slowly got rolling, and in 1983 they were able to celebrate the opening of the thousandth Domino's pizzeria. That same year they opened the first stores in Canada and Australia. Within just 6 more years they already counted 5,000 stores, and the expansion carried on merrily. Back then, Domino's also had its 30-minute rule. If the pizza took longer than 30 minutes to reach the customer, it was free. Either way, the customer could only win. Either they got a delicious oven-fresh pizza or they didn't have to pay anything. In 1993 this rule was dropped again, because the company couldn't take responsibility for employees driving fast and unsafely. In 1998 Tom decided to retire and sold a majority stake of around 93 percent to the Boston investment firm Bain Capital for roughly 1.1 billion US dollars. In 2004, Domino's Pizza went public. To hold its own against frozen pizzas, the company fundamentally changed its recipe. Since then, Domino's worldwide expansion has continued without interruption. Today there are already more than 17,000 stores in more than 90 countries.

Can Domino's Pizza hold its own in the future too?

A world without pizza? Help, please no! I'm sure I'm not the only one who thinks that way - lots of others do too. Admittedly, I'd love to stand in the kitchen myself and bake my favorite pizza. But I'd rather spend my time writing articles like this one and leave the pizza baking to the pros - good for Domino's and probably good for my stomach too :-) So, if it's up to me, Domino's has a fabulous future.

Domino's is the global number 2 in the pizza game. First place "still" goes to Pizza Hut from Yum! Brands. Pizza Hut is stronger in dine-in, i.e. eating at the restaurant, whereas Domino's clearly dominates the delivery market. The company has by now perfected its entire logistics network. It tests an extreme number of innovative ideas, including autonomous driving, as well as drone and robot deliveries. Maybe these systems aren't fully mature yet today, but they give a great idea of where the journey is headed. Beyond that, they still want to keep adding more and more stores. Even if they might "steal" delivery areas from each other that way, it's the way to give customers the best and fastest result. I'm sure Domino's won't settle for second place. But of course Pizza Hut won't give up without a fight either. These are the kinds of rivalries that keep the market lively.

Domino's Pizza has its biggest presence in its home country, America, with more than 6,150 stores. That's followed by 1,330 stores in India, where the market is currently growing rapidly. Rising population + a growing middle class = perfect conditions for Domino's Pizza. After that come England (1,180), Australia (830), Mexico (800), and Japan (650) - to name just the biggest.

So how is Domino's business actually doing right now in the coronavirus crisis?

Well, people are supposed to stay home and not run to the supermarket unnecessarily. So it's obvious that business for food delivery services is booming in times like these. And the whole thing probably won't change that quickly either. Especially since happy customers order again. It's fast, tastes good, and doesn't cost much - no wonder a business model like this is among the corona winners. Of course, food is currently handed over contact-free so as not to put themselves or their customers at risk.

And what about the dividend?

Domino's Pizza already paid a dividend to its shareholders in its IPO year, 2004. Due to restructuring, it had to suspend the payout from 2008 to 2011. From a business point of view, this step made complete sense. In 2012 an increased special dividend was paid, before regular payments resumed in 2013. Since then, the dividend has been raised every year at a decent pace (⌀ of the last 5 years: 20.4 percent). The current dividend yield of 0.7 percent isn't high, but that's also due to the excellent run in the share price. And the payout ratio of just 26 percent suggests there's still plenty of room to grow.

Conclusion:
Domino's Pizza has a totally simple and lucrative business model. Bake tasty pizza and bring it to your customers fast - that's it. With this recipe for success, the company has been on an expansion course for years, and there's no end in sight. Pizza lovers and dividend investors alike can wonderfully take part in a promising future here.