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Fool's Eye View

[ May 19, 2000 ]

Spotting Domino's

By Maynard Paton (TMFMayn)

Carburton Street, London -- When it comes to investing in pizza parlours, most people will think of two companies -- PizzaExpress (LSE: PIZ) and ASK Central (LSE: ASK). Have a look at this opinionated Fool's Eye View, or this slightly more balanced Qualiport feature, for a comparison.

But there is a third player taking a slice of the action in the pizza sector -- Domino's Pizza UK & IRL (LSE: DOM). This small AIM-listed company caught my eye after I reported its seemingly impressive results in the Foolish Market News back in February.

Domino's differs to the other two high-profile outfits in that it solely offers and delivers takeaway pizzas from its rapidly expanding chain of stores, rather than operating traditional sit-down restaurants.

The financial history

Capitalising on the growing trend towards delivered fast food, the financial record of Domino's is reasonably good, but not overly spectacular.

                  1999  1998  1997  1996

System Sales (m) 63.5  54.9  44.1  34.5
Group Sales (m)  25.6  20.7  17.2  14.0

Operating
profit (m)        2.1   1.6   1.1   0.6

Earnings per
share (p)          3.1   2.7   1.9   1.4

Stores at 
year end           201   175   153   125

Like-for-like store
sales growth (%)   5.6   6.3  11.1   14.7

The company, owning the master UK franchise agreement provided by the US firm Domino's Pizza Inc., oversees a large sub-franchised estate of stores. System sales are the total sales made throughout this estate, while group sales represents Domino's cut of the franchised takings.

When it comes to the all-important growing "acceptance" of the Domino's service, measured by like-for-like sales growth figures, then Domino's hasn't really inspired in the last year or so. Having said that, sector doyen PizzaExpress is currently experiencing just 5% like-for-like growth from a similar number of outlets to Domino's.

Store potential

But where PizzaExpress have stated they can only realistically double their number of UK restaurants to around 400, the potential for Domino's is far greater. At the latest set of final results, Domino's Chairman Colin Halpern commented that the country could support 900 or 1000 stores, a possible five-fold increase on Domino's size today. The group also expects to raise its market share of the pizza delivery market from the 20% seen now to 50% in five years time.

Domino's has two advantages over the other traditional restaurateurs. Firstly, it has no real need for prominent and expensive locations. Whereas PizzaExpress and ASK Central vie for sites with a high "footfall", Domino's can look for cheaper premises albeit in the same populous areas. When you're having a pizza brought to your door, you don't care where it's actually made, just as long as it's suitably near for a prompt delivery.

But the main advantage Domino's has over its sector rivals is that upcoming technological changes could see drastic sales improvements.

Interactive couch potatoes

The favorable reception towards interactive television could witness Domino's becoming a major force in the niche pizza delivery market. Last year, Domino's became the first company to launch online and interactive ordering services. According to Domino's, this "first mover" initiative has already "earned the company the reputation as the primary food-delivery brand in the UK both on the Internet and on interactive TV".

Anecdotal evidence from TexasPete and lemkin (although his anchovies were "much too salty") over on the Domino's discussion board suggests that the Domino's online service is not problematic. In fact, an online service without too many problems is unusual in itself.

Could there be any more suitable service for the interactive television couch potato than ordering a pizza? Although many other retailers are moving into the interactive age, most of their services are unproven. Will the efforts of the major supermarkets to encourage home delivery ever become the norm? Or indeed, ever become profitable?

When considering an investment in online retailers, Domino's has more "certainty" than most. The demand for its home delivery pizza has already been proven. The infrastructure, albeit involving a bunch of kamikaze moped riders, is already in place. And most importantly of all, Domino's has proved it can generate a profit out of its existing service.

In summary

The really exciting part about Domino's potential is that the company is the only national operator of its kind. There are scores of "one man band" pizza delivery businesses around, but no other really big player (with the exception of Pizza Hut, which is mainly a restaurant operator with some delivery outlets). Domino's, quickly establishing itself in new electronic media, has the true potential to become the de facto interactive pizza delivery service.

I have a feeling that a business "moat" can be created through the unique national position and digital initiatives of Domino's. Although its early days, my investment nose is beginning to smell the makings of an "interactive television consumer franchise".

Related Links

Domino's discussion board
Domino's website

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