{audio:0:00:00} Paul, can you provide some context to why you originally wanted to become a Domino's franchisee?

{audio:0:00:09} I was in corporate for in excess of 30 years, in pretty good jobs. I've been lucky along the way, they’re all mostly at C-level and I was kind of getting sick and tired of the routine, the grind and the traffic, all the rest of it and my son was just finishing a science degree. Of course, part time he worked at Domino's like a lot of students do and he talked to me about a local store that was just here coming up for sale, so we had a look at it and decided that we'd purchase it.

{audio:0:00:49} So I quit my corporate roles and he left with a science degree and went into pizza making, which you do of course, and that's how we started. That was the beginning of our five-year journey.

{audio:0:01:05} A son and father business then?

{audio:0:01:07} That's it. So originally, I had romantic ideas about building this family empire and my son would run it and I’d sit back as an active investor and all that. Well, that was quickly quashed when we actually hit the stores and started doing the business stage because being a Domino's franchisee is hard work.

{audio:0:01:31} What was the process of applying for a franchisee?

{audio:0:01:35} That’s pretty involved. The first step is you've got to approach Domino's obviously, and Domino's do a due diligence on you, to make sure that financially they think that you're capable of supporting the business. It doesn't matter so much what you've done or what you've come from. What matters a lot more is one, that you've got the finances, and two, that you've got the energy to be able to run a Domino's store. Now how do you dictate that you've got the energy? I was lucky because my son was with me so they took one look at him and because he was an existing Domino's employee with another franchise, we went straight to the front of the queue. Domino's is very internally focused, in other words if you've been through the system, if you're a driver or you're a service guy or a pizza cutter or you’re somewhere in the system and you've been in it for a few years, you are a prime candidate to become a franchisee.

{audio:0:02:45} What were the financial requirements that they looked at?

{audio:0:02:50} Domino's stores don't come cheap. They're a premium in the marketplace. I'm not sure about the UK and in Europe, but in Australia it's about $600,000 to buy a store. It depends on the sales so the way they measure it is 28 times what they call AWUS, which is the average weekly unit sales. When we bought it, we did about $12,000 a week, so take 28 times that, that's what it's worth. That's not what I bought it for but that's what it's worth on the market. So if you haven't got half a million dollars in your pocket, then you're probably not going to secure a store.

{audio:0:03:47} So that’s the price of purchasing a franchise?

{audio:0:03:51} 28 times the average weekly sales. So if the average sales are $10,000 a week, it’s $280,000. But I've got to tell you, a Domino’s store that’s doing $10,000 a week is a very poor store and you're buying something that's loss-making and you've got to have a game plan in place to change that. The average store volume is probably about $22,000, $23,000 per week which means the buy price is over half a million dollars, heading towards $600,000. Then, of course, you're going to have a little bit for kick off capital. When you get in there you might want to have a kick start marketing campaign and so forth, so you need $600,000.

{audio:0:04:45} So yours was roughly, let’s say $350,000. What do they do to check into your finances? Do they say you need to have half a million Australian dollars?

{audio:0:04:54} You don't have to have half a million in cold cash, but you've got to have access to half a million. Whether that means mortgaging your house etc, you've got to prove to them that you've got that equity. If you're using your home, you're going to get that valued and so on and so forth. It's like buying a business. They're buying into you and they do their due diligence.

{audio:0:05:28} Did you remortgage your house or borrow from the bank?

{audio:0:05:32} No, I was fortunate enough to be able to sell some easily liquidated assets and shares and I had the money. When we bought our first store, I bought it for cash so there was no bank debt. I thought it was important to buy the first one debt free because that gets rid of a lot of stress for the owner and it means that you can learn, you can make mistakes, without having the pressures of a lot of debt of the business.

{audio:0:06:11} Do many of the franchisees in Australia typically borrow to purchase their first one?

{audio:0:06:18} I'm estimating now but I don't think I'd be far out if I said that it would be over 70% that would be borrowed monies.

{audio:0:06:27} Over 70% of the franchises?

{audio:0:06:33} Total franchisees, 70% would be sitting on borrowed monies. Domino’s is a great brand. As far as the banks go, it's a five-star brand. If you know anything about commercial lending, they'll lend generally between 50% and up to about 65% leverage. That means up to 65% of the value of the business, the bank will actually lend you; the rest you've got to put up yourself. Domino's is at the top of that tree at 65% so if I wanted to borrow the money and it was a half million bucks, roughly $300,000 of that would be put in by the bank. That's on a commercial loan that's secured against the business. If the business is trading profitably it's against the business; or if not then you've got to secure it against your mortgage.

{audio:0:07:37} So the banks really want to lend for Domino's because they know how good the units are?

{audio:0:07:41} Correct. The key to any small business lending is that the business has customers and revenue because without that, you’ve got no business. The first thing the banks look for is what's the brand? It's a franchise. Terrific, what's the brand? Does that ensure customers and revenue? Of course the Domino's brand is five star when it comes to that.

{audio:0:08:12} What was the location of your store?

{audio:0:08:14} We picked a local location. We live in Sydney and we live on what's called the Peninsula, which is an upmarket part of Sydney; it’s quite expensive to get in here. For example, a two-bedroom unit will cost you a million dollars to get into up this way, so most of the demographic are reasonably well-off people and their kids, as a consequence of that, are sitting in well-off families. That has its own challenges but I'm sure we'll talk about that. We bought in Mona Vale which is right next to Newport and Narrabeen; that's all surf territory, so lots of pizzas.

{audio:0:09:10} Did you have exclusivity over a certain territory with that store?

{audio:0:09:14} When you buy a Domino's franchise, they have very strictly defined territory boundaries. In fact, when you sign your franchise contract it actually has a map. The map is by postcodes. Australia is divided by a series of postcodes and each geographic location has its own unique postcode number, so in your territory you might have five postcodes; the next guy might have six postcodes. The next one might have three depending on the population density of those postcodes. Generally, they'd like to divide their territories based on population density.

{audio:0:10:06} Do you know the other franchisees that have the postcodes then?

{audio:0:10:11} Every franchisee map is disclosed. If I want to find out what Joe up the road’s territory is, that's public information and the reason they do that is because that territory boundary is protected so I can’t go and send mailers and marketing materials into his territory. When you place orders on the Domino’s dial-in system, whether it's on the app or on a phone or on the internet, all that gets routed to the store. So you can market it all you like, but when the orders get placed it gets routed to the local store. You’ve got pretty strong protection over your territory.

{audio:0:11:08} Really, the territory is just about marketing because you can't actually deliver an order from outside your postcode anyway?

{audio:0:11:18} Yes and that's a good point you bring up because one of the keys to a Domino’s business is delivery. So Domino’s quite openly state that one of the market-dominating positions is that they run the best delivery model anywhere and it doesn't matter whether it's pizza, hamburgers, chips, fish and chips, whatever; the best delivery model is run by Domino's. One of the secrets to that is that Domino's like to keep the distance that the delivery model encompasses within your franchise to no more than about a 15-minute delivery time. So a round trip would be no more than 30 minutes but that's tops. The 80/20 rule, the ideal is that it's three to five minutes so a round trip would be 10 minutes and they do that so that they can keep their delivery times, their average delivery times, under 30 minutes.

{audio:0:12:30} How did Dominos sell you on opening a franchise? When you approached them, how did they deal with you as a potential franchisee?

{audio:0:12:43} Like all things Domino's, the marketing engine is very slick and what they generally do is you make the enquiry, they send you out a kit which tells you about the brand, tells you about what they stand for and tells you about some of the innovations that they have in the franchising model. They get you excited about the actual business unit and then they actually take you to successful stores so you can see a store operate and you see behind the scenes. If you want to, you can have as many of those trips as you like.

{audio:0:13:23} They also do face to face interviews which is more about you being sold on the Domino's system and the way Domino's works than it is an actual interview, per se. They do reject some franchisees because some franchisees, for instance, might come in thinking well, I'm going to be a non-executive director as I call it. I'm going to invest the money and I'm going to have somebody else run this business for me. They make it quite clear, up front, that if you're not physically invested in the business, it won't work.

{audio:0:14:04} The reason is because the business is extremely busy. It's a volume model and that means that you've got lots and lots of customers. When I say that, a fish and chip shop typically might have 300 or 400 customers in a week. A Domino's store typically would have 1,000 to 2,000 customers in a week. When you look at the average sale price of $22 and the average volume is $22,000 per week, it’s 1,000 orders which is about 2,500 to 3,000 pizzas a week. That's a lot of volume and to be able to handle that with a very young employment force, you're going to be very hands on. If you enjoy getting your hands dirty and being involved, you'll enjoy a Domino's franchise because it's flat out all day long from the minute you start to the minute you finish. The day goes quick and so if you have a good vibe and a good team, it can be quite good fun.

{audio:0:15:22} It's a lot of pizzas because they're also distributed at certain peak times on a Friday and Saturday?

{audio:0:15:29} Again it's the 80/20 rule; 80% of your volume will come in in that two to three hours of each of those days when it's dinnertime. In some of the stores, for example the city stores, their peak time might be lunchtime and then their dinner schedule is very small. But in the main, especially in the suburbs, 80/20 rule applies around that dinner time, so any time from kind of 4:30, 5:00 through to about 7:30, 8:00 at night.

{audio:0:16:06} Now I can tell you on a Friday and a Saturday from 5:00 through till about 8:00, 8:30, it is absolute bedlam in the stores. There's so much traffic, so much volume. I mean we've had it where it was five, six across at the front counter, about 10 to 15 deep. These are people wanting to order, wanting to pick up their pizzas and then, at the same time, we've had up to 20 delivery guys delivering pizzas whilst those queues are there and it's all happening at the same time.

{audio:0:16:47} But you must do around 1,000 on a Friday night?

{audio:0:16:52} Yes, that's correct. It's not unusual to do anywhere from 600, 700 pizzas on a Friday night and then again on the Saturday night. When we bought the Mona Vale store, they had five staff and the delivery times were over an hour and they used to turn off the phone by about 7:30, 8:00 because they couldn't cope. So we bought, obviously, a very badly performing store. It was a turnaround job. Within probably about eight months, we had that store sitting at about $22,000, $23,000 a week, so we doubled the revenue and we grew the staff from five up to about 40, 45 staff. Bear in mind, the staff are all casual so some staff do four hours, some staff do 24 hours, but there’s 45 staff to manage. So it's quite a decent sized business.

{audio:0:18:03} What were the guidelines that Domino's provide you as a franchisee to run and operate a store?

{audio:0:18:10} There's a thing called the Domino's Way and the Domino's Way starts from the interview. They tell you openly there is only one way to run these businesses and that's the Domino's Way. So if you're accepted and you pay your money and you buy the store and all that sort of stuff, you begin an induction program – I call it more an indoctrination program – into the Domino's Way. That's about a six-week process and it's daily and you pay for it as part of your investment in the franchise. They take you through an A to Z of everything that happens in a store.

{audio:0:18:58} The Domino's Way is everything from the way you take in order and the questions you ask, through to the way you process that order, the way you begin the make line and the way you manage to make line – that's where all the food is and the pizzas are actually made – through to the way you actually load them into the ovens. There's a system for that, the way it goes through the ovens and the way it exits the oven, gets cut, boxed, prepared with all the ancillary bits, the extra add-ons; whether it's chips or doughnuts or whatever and packaged, ready for either delivery or pick up by the customer, and then the way it's presented to the customer when you hand it over.

{audio:0:19:46} Every single thing is measured, trained and reinforced and that is the Domino's Way. The franchisees that that get to grips with that quickly and do it well tend to do best in their stores. Not all territories are equal; some are more equal than others like every franchise, but the Domino's Way is no different to, say, McDonald's Way or a KFC way. These successful franchisors tend to have a very particular pattern in the store that's tried and proven over many, many years.

{audio:0:20:28}What were the core KPIs that were measured?

{audio:0:20:33} Domino's have probably a list of 30 KPIs because there is nothing that happens in the store that isn't measured. Nothing. It's all utilizing a very sophisticated network of technology and software. It's a massive ERP system. It's global and every single thing along the way is measured, from cameras to manual input to satellite navigation for delivery systems etc. Everything is benchmarked and measured. Then your performance is measured against best practice and, from there, you develop your own methodology, in store, on how you want to utilize that information to better manage your business.

{audio:0:21:33} Our KPI focus was customers and customer churn. For example, not every night went smoothly, as you can imagine. We had a night where we just finished our State of Origin Rugby League. On a rugby league night, your volumes will spike 30% or 40% so if that happens to land on a big night anyway, then you're talking about lifting 700 pizzas to 1,100 pizzas and that's a big task. There are some stores, in some territories, where rugby league is absolutely the fanatical sport where they can quadruple their revenue for a big sporting night. Things like the Olympics and the World Cup, they are all terrific for these stores because they see huge spikes. So to manage that, you can't just throw extra labor in; there's got to be special policies and procedures and so on and so forth.

{audio:0:22:43} The way you plan to do that is through all the tools that they give you to measure performance. You know that, for instance, on a big night you're going to have to have 30% more order intake. Domino’s tend to put all the promos on the internet as opposed to ordering out of the store and people know that.  That eliminates a lot of the orders taken at the front counter. Those staff you can put on onto the make and making pizzas because you're going to have to have double the staff to make the pizzas quick enough and still meet the quality standards and the same with dispatch and delivery. We know that you're going to need another 30% of drivers, so with all the technology we've got, we've got to make sure that we've got the right sort of Domino's signage that sits on top of the cars with the satnav gear in it. We've got to have people trained correctly, in case some of the people that normally do service tonight are going to drive.

{audio:0:23:52} But all of that you can manage through the Domino's system and that's generally why it takes probably six months before a Domino's franchisee becomes comfortable in their franchise and feels like they're in control.

{audio:0:24:10} In terms of the most unique process in the Domino’s store, what do you think is really unique to Domino's versus other pizza players that really makes them, potentially, that much more efficient?

{audio:0:24:32} There are quite a few things. Let's begin at the order intake. Domino’s uses artificial intelligence in their ERP systems and that alone is a unique advantage. Apart from probably McDonald's and maybe KFC, no one else uses artificial intelligence. What does that mean? Well, what that means is when you hop onto the website and you're searching through what you want to put together for your meal for your family, Domino's actually is reading that before you've actually hit the order button.

{audio:0:25:23} So we get a bunch of signals on the screens on our make bench that says there’s about to be five ham and pineapple pizzas come through. Because ham and pineapple is such a common pizza, if you end up not ordering it, it's no big deal because it can go to the next order and the volume of orders is so big that the flow of things will take care of it. So we start making that pizza before you've even ordered it. Then you hit the button, you order it and the order now becomes confirmed and it registers up on the screen and says, this is a confirmed order, start making the ham and pineapple pizza.

{audio:0:26:10} The ham and pineapple pizza, meanwhile, is already in the oven. So six, seven minutes later, it's out of the oven, cut, with the driver five minutes after that. So we're talking 15 minutes after you've ordered it, it's standing at your front door piping hot. That is totally and uniquely dominant in the marketplace. And the customer can track that journey on the app live; everything from when the order goes in to when it's on the make line, in the oven, in the driver's car and at your front door. The whole lot is trackable on the app and it all uses artificial intelligence.

{audio:0:26:52} In addition to that, once you've received your pizza, you have the ability to then score that experience and we use those scores to generate what we call an NPS score – that’s quite a common statistical term – net present supporter propensity. It’s whether you would recommend us to your neighbor next door. The higher the score, the more you're likely to recommend us.

{audio:0:27:23} That's pretty interesting though because I think, when people think of delivery time and quality and having a fresh and hot food, a lot of it is focused obviously on the actual driver time and the distance to the driver which is clearly a huge portion. But actually, if you can make the pizza before I've even ordered it, that's a pretty good use of time and should cut the delivery down a lot.

{audio:0:27:51} Domino's realized, quite a number of years ago, that the delivery time is the delivery time. Unless you change to drone delivery or something radical you're not going to really change that delivery time. If it takes me five minutes to drive to your place safely and without speeding, then it takes five minutes and it really doesn't matter whether it's one pizza, ten pizzas or a can of Coke; it's still going to take five minutes. Eliminating that out of the equation, the only other bits that you can control are the order entry right up to the making, processing, cutting and dispatching. If we can take that from 20 minutes down to ten minutes, you've now got a 15-minute pizza and that is market dominating. Nobody gets anywhere near our delivery times. I've had so many thousands of customers tell me that they just don't know how we do it and it's not simple. There’s big investments involved because all of that technology costs money.

{audio:0:29:07} Is it really the AI that's before the order that tracks it that really saves the time versus the ovens and the process and the customer.

{audio:0:29:14} The AI stitches all of that technology together. You can have bits of technology along the way and if you're prepared to manage that in isolation, fine and good, but it kind of defeats the purpose. But the AI stitches it all together and makes it one seamless event, because it learns. As an example, when the pizzas come out of the oven, Domino's have a big camera that sits above that oven at the exit. The pizza goes from the oven, it’s picked up and it's put onto the cardboard box and then it's cut and the toppings are put onto that pizza, such as the sauces. Now that camera has artificial intelligence and if it grades that pizza, for instance, to be missing its topping, it will signal to the pizza cutter you haven't put the aioli sauce on this or you haven't put the chili sauce on this.

{audio:0:30:18} If there's meant to be tomato on it and it didn't have tomato on it, it'll be around to be remade and all of that artificial intelligence is what stitches everything together. As I said before, it’s the only one in the industry that does it and that artificial intelligence was all developed by Domino’s.

{audio:0:30:42} What was your split between carryout and delivery?

{audio:0:30:45} About 50-50. Each store is very different. There are some stores that are 80% delivery. Those are stores that tend to be in CBD areas, so high density, young people, tons and tons of units, stuff like that and the deliveries will be on e-bikes because parking is exceptionally difficult. They have very fast turnaround because everything is on a e bikes so there's no traffic jams and there’s no waiting in queues.

{audio:0:31:29} They tend to be very different to a suburban store like we had, where our e-bikes only delivered about a third of the deliveries. The cars had to do the rest because of the distance, so for us it's about 50-50. Other stores it can be as high as 80-20.

{audio:0:31:48} Does the franchiser push you to increase the carryout mix?

{audio:0:31:53} That's a really good question. The average value of a delivery versus carry out, obviously, is much higher. I can't tell you how high because that's Domino’s info but it is much higher. So obviously the more delivery you have, the higher your average sell value is in the store. That’s one thing but, more importantly, the more you do delivery, the stickier the customer is. If you think about it, if your competitive advantage is your delivery model, then the more people that are experiencing your delivery model, the less likely they're going to be satisfied going to somebody else. That's the really sticky part of the business model.

{audio:0:32:44} We did increase our delivery in both the stores we owned. And I think at the moment, Domino's is going through quite considerable growth in their delivery part of the business, pushed along by COVID, obviously.

{audio:0:33:00} Do they push you to really actually increase delivery mix?

{audio:0:33:03} Yes, correct. It’s much, much easier to add value to a delivery deal than to a $5 pick-up deal.

{audio:0:33:15} How did you increase the delivery mix?

{audio:0:33:19} There's a ton of different ways. Different reasons why people buy things. Some of it is convenience, so if you do fast turnaround of order, in other words they're getting their pizzas piping hot, they're likely to recommend to their friends and say listen, there's nowhere else to buy; Domino's is it. It’s here within 20 minutes and it's hot and it tastes really good. That's one way. The second way is if you market it. We used to do weekly bombs in the in the letterboxes, offering all sorts of attractive financial deals to try and tempt people onto delivery. It might be a straight-out price like, at the moment, there's a 50% off for the whole order if you get it delivered versus pick up.

{audio:0:34:11} So when you measure the value of each, it costs you like a dollar or two to get something delivered. People get it delivered and on those type of promos you’ll see delivery spike up. If you do a good job on that delivery, the theory is that it becomes a convenience thing and they go oh, you know what, I can't be bothered picking it up today; I'll get it delivered. Marketing is something that Domino’s is very good at and quite aggressive at. Everything from television to letterbox drops to referral, to in-store promotions, whatever it takes. Over the phone, would you like that delivered sir for only $2 more? That often works. If we can see on the screen you haven't had delivery before, you always pick up, $2 more and we'll deliver it for you tonight.

{audio:0:35:09} What made you open the second store?

{audio:0:35:14} It's kind of like a drug, isn't it? Get in and it's a fast-paced business and full of young people. The average age in our store, I think, was about 20, 21 years of age and you get involved in that and you're up to there in pizzas and deliveries and customers and you’re bringing in between $22,000 to $25,000 a week in revenues. A second store became available and it wasn't a particularly well-run store so it was kind of like déjà vu. We've done this before. Let's give it a shot.

{audio:0:36:00} So we bought the second store. Our employee count went up to 110 and the revenues were around $55,000, $60,000 a week. So that starts to become a $3 million business with 110 staff, so you're no longer a little SMB; you’re now a mid-sized business before you know it.

{audio:0:36:23} Was it the same postcode or location?

{audio:0:36:26} Next location, next territory and it had its own territory. So by buying the two strategically because we lived on a peninsula, I basically had the whole peninsula sewn up. Part of our strategy was to own the territory in isolation, because one of the ways that you can make money out of Domino’s stores is if you do what's called a territory split. You own your territory, you put in a second store, you split the territory in half, put in a second store. Now instead of one store that might be worth $700,000, you’ve got two stores worth half a million each and those stores come with a readymade customer base, readymade revenue, processing systems, staff. Everything's in place so it's an attractive proposition for somebody to buy and that was the idea.

{audio:0:37:32} What's your view on the territory split strategy because it seems like some franchisees don't like it, even if the franchiser is pushing it?

{audio:0:37:40} I think it's up to the individual franchise. I actually thought it was a very good strategy. I can understand it from the franchisor’s point of view because they get more stores in place. I can understand it from a shareholder investor because they get stronger footprint. From the franchisee point of view, I think you've got to make sure of the quality of the territory. You might have a territory that is skewed, in other words 60% of the population lies in a three-kilometer zone and all the rest is spread out over a larger territory. Well, the second store is not going to do as well as the first store so you've got to allow for that and you've got to have a game plan in place to suit the new store. You can't just mirror what you've done in one store to the other. It's got to be a different game plan. But when you split the territory, the fact is the capital value increases.

{audio:0:38:47} Now sure, you've got to put in capital as well and it will cost you about half a million dollars to set up a store from scratch, but there are rebates and incentives in place from Domino's that take a large share of that obligation.

{audio:0:39:08} What type of incentives do they offer?

{audio:0:39:11} Rebates. All sorts of marketing investment rebates and things like that. I can't go into specifics, I'll leave that to Domino's, but it's a very strong incentive to do it and, financially, it's not hard to make the numbers work. The trick with a Domino’s store is to get growth. If you can build that second business and have it growing, you'll do well. If you can't get it growing and growing quickly then you'll struggle. It's all about growth. It's a growth model.

{audio:0:39:49} With Domino's it's a high entry price, obviously, but the Domino's brand ensures that you're going to get a certain number of customers regardless of whether you do a good or bad job in the market. It's up to you then to grow beyond that number and make it highly profitable and then sell it on.

{audio:0:40:09} Are you saying that some of the issues with territory splits potentially came from franchisees not doing the correct due diligence on exactly the makeup of the territory and the density and the type of store required?

{audio:0:40:25} Yes. So Domino's have a team that that specializes in in the research for a second territory. If you're interested, they're prepared to throw that time at your territory and they’ll help you put all that together. What you’ve got to remember is Domino's has a different incentive to market from the franchisee. Domino's is run by its shareholders; the franchisee is run by your private wealth.

{audio:0:41:04} Most of the franchisees just want to earn a living?

{audio:0:41:07} Exactly right. Domino’s are always going to try and put the best light forward to split your store and it's not necessarily a good personal wealth decision. Again, that's up to you as the franchisee; Domino’s make no bones about that. You've got to know your own business and know your own tolerance for risk and return and all that sort of stuff and I think a number of these franchisees go in and they end up with too much debt. Then it becomes highly, highly pressurized to get the volume growth, then you get some sort of hiccup like COVID or some other event that happens, there's always something, and suddenly your volume is under pressure and you're under pressure, the financial pressure and all the rest of it. Typical sort of small business scenario, I suppose.

{audio:0:42:07} So it’s actually the over-leveraged franchisees that, potentially, get into the issue of splitting.

{audio:0:42:13} Always. It’s always got to do with debt. I mean if you're if you're making 8% to 10% profit EBITDA and you don't have any debt, you're laughing. As long as you’re prepared to get up and make pizzas all day long, you're laughing. But if you've got debt, you've only got to have a small hiccup and suddenly your business is under stress and you're having to take evasive action instead of focusing on your core business, which is the customer.

{audio:0:42:45} In terms of the economics then roughly, you mentioned let’s say $20,000 in revenue per week. What was your typical cost base? You mentioned 8% to 10% EBITDA. How did you split your cost base?

{audio:0:43:00} I can't go into the specifics of each cost but it's roughly a third, third, third. So a third is labor, a third is food and the third is the rest. You're going to hear all sorts of things that happened in the franchise community about food costs. The first thing that a lot of franchisees that are disgruntled will raise is that the franchisor gets these huge rebates from food suppliers and, therefore, their food is overpriced. The reality is, if you enter a franchise, the franchisor does get rebates; that's how they live. That's part of the model and you've got to be prepared to live with that.

{audio:0:43:51} So you need to do your due diligence before you go in there to make sure what is the gross margin that I'm getting after food costs, after labor, what is left and is that enough to cover my fixed overheads and financing? And if it's not, don’t buy it. When we got into it with the Mona Vale store, we were in a little bit of a different situation because we bought a turnaround store, so we knew the store was losing money every week. We knew that. But what we also knew was how to generate more customers and how to get fast growth.

{audio:0:44:29} Because the owner had, basically, run it like an accountant and once you start cutting costs and you're not focused on your customer anymore, it spirals and it just gets more and more difficult and it's a never-ending spiral. That's not exclusive to the pizza industry; that's in any business. Once you lose track of customer growth the business is screwed. You can get away with it in the short term, three to six months, do some heavy cost-cutting, bang, bring it back to a decent baseline and then you've got to focus back on your customer and get that growth going.

{audio:0:45:08} With Domino's, it’s even more critical because it is a volume model so the exit costs or the cost to breakeven is high, but once you go above that cost, the rewards are good. So your number one job, as the franchisee, is to make sure that you're sitting above that breakeven line and that's all about customer growth.

{audio:0:45:37} That's it because, as you said, you might have $6k in food costs, $6k in labor costs just to cover your overheads?

{audio:0:45:45} That’s just to open the door and that doesn't include financing or if you own some of the cars or any financing on equipment that you might have or utilities costs. You can imagine what we burn in gas and electricity. I think my gas bill was something in the vicinity of $3,000 or $4,000, per store, per month. It really is a volume model. You need to be doing volume.

{audio:0:46:15} Like you said, if you're borrowing money as well, it hits your margin.

{audio:0:46:22} It adds another layer and out of a business that typically does 8% EBITDA and that would be a reasonable business, 5% of it's going to disappear in financing costs so that leaves you with 3%. You don't need to make too many mistakes to lose that 3% or if the ground moves from under you. For example, we had penalty rates introduced by the government so instantly, the delivery costs went up 25% to 30%.

{audio:0:47:03} The market pricing doesn't change. KFC doesn't change their pricing. McDonald's doesn't change their pricing and the Ubers of the world and Menulogs and so on, they weren't paying their drivers as employees. They were paying them as contractors so their costs didn't go up, but the Domino's one did. So that's something that's left field and it was done by government so it's legislation. It’s not as if you’ve got a choice and the whole hospitality industry got smashed by it severely. What ensued was about two years of massive fines and audits of hospitality, big restaurants and food chains; Domino's used to get audited all the time. They never got pinged because they were pretty strict on it and the franchisees did a good job with it but so many restaurants and food groups got fined heavily – and I'm talking hundreds of thousands some of them – for underpaying employees because it was very complicated and the cost increase was so dramatic that it was difficult for the industry to absorb it.

{audio:0:48:21} How does the franchisor – Domino’s in this case – work with you to make sure that you're running a sufficient margin to run your business?

{audio:0:48:32} They have a whole team of business development managers and they have a territory and you form part of that territory and we used to have a meeting every month. Some of the stores that needed more would get more and you sit down, you go through your P&L, you outline the issues. That's for one-on-one engagement. Then once a month, you would have a marketing meeting which is all franchisees welcome to come into, that's run by Domino's and all sorts of issues were floated at that meeting. Typically, those meetings get attended by senior executives so you do get a voice up high in the food chain and, at the end of the day, does that really fix any trading issues that you've got?

{audio:0:49:29} It really only fixes trading issues if it's part of a solution that's for the greater good of Domino's nationally. In other words, if it's an issue that you've got, for example pepperoni is too expensive or the quality is not right because they've changed something, now that’s something that affects every single franchisee so they'll take that up. But if it's something that's just affecting your franchise, then you really are dependent on having a good business development manager and being able to resolve that through one-on-one.

{audio:0:50:02} I've got to say, the franchisees themselves are pretty good. If you phone any of them and build a relationship, they're quite happy to share information because we've all got protected territory so we're all in the same boat. We're travelling in the same direction and, generally, we've got the same issues and some of the more experienced guys, they’ve been through a lot of these problems that you have, they’ve been through them before. They may not solve it for you but they certainly will give you ideas and head you in the right direction.

Domino's Pizza Enterprises: Running a Domino's Store

The cost of acquiring a store and possible financing options

The most unique processes within the store that give Domino’s a competitive advantage

Domino's Pizza Enterprises: Running a Domino's Store

Former Domino's Pizza Franchisee

inpractise.com/articles/dmp-franchisee

Why is this interview interesting?

Executive Bio

Paul van Eck

Former Domino's Pizza Franchisee

Interview Transcript

Related Content

Domino's Pizza: US vs UK Franchising

Domino's Pizza Group: Master Franchising

Former CEO at Domino's Pizza Group

Domino's Pizza: Managing the US and UK Franchise Network

Former Operations Director at Domino's Pizza Group and Former VP at Domino's Pizza

Restaurant vs Hotel Distribution & FDM Group

Audio

Domino's Pizza Enterprises: Running a Domino's Store(November 19, 2020)

PARTNER

Speak to Executive