{audio:0:00:01} Steve, can you share a short introduction to your career at Domino’s, please?

{audio:0:00:09} I spent almost 13 years at Domino’s. I was recruited to head up the Asia-Pacific region, based in Hong Kong. That was in 2007. When I moved out to Hong Kong, there was a decent-sized business already operating in the region. There were about 700 stores. We were in about 10 countries. Our system revenues, at the time, were around $700 million. Over the next 12 to 13 years, while I was managing that region, I was really focused on accelerating growth from the decent foundation that we had. I grew the region from the 700 stores, up to around 4,000 stores and to approximately $2.5 to $2.6 billion in revenue. It was an amazing acceleration of growth. In the process, we entered six or seven new countries and established the Domino’s footprint for the very first time. These countries included Indonesia, Vietnam, Cambodia, Thailand, Sri Lanka, Singapore; markets that had never ever seen a Domino’s store before, with a consumer that had not experienced Domino’s pizza in their home country, although they may have experienced it in other parts of the world. That was a really exciting piece of the growth story; opening these new markets and taking the Domino’s brand to new consumers, as well as really consolidating growth in some of the established markets.

{audio:0:02:09} For example, a market like Malaysia, where we already had presence, with only a small footprint of about 27 stores, we grew that to well over 250. Japan, where we had about 180 stores, so a very decent sized business, we grew that to more than 700 stores. It was really an incredible period of growth for the brand and it was, actually, one of the fastest growing regions, for Domino’s, on the planet. Just tremendous growth.

{audio:0:02:50} Can you share a brief history of Domino’s in China?

{audio:0:02:57} China was a very important project of mine. There were 10 stores when I arrived. They were in Beijing. The brand didn’t really know what it wanted to be, to put it bluntly. We had stores that had a very big dining area and we were selling fried chicken in our Domino’s stores. There was a delivery component, but the delivery and takeaway component wasn’t the primary focus of the brand. It was more of a dine-in experience; more of a fast-casual. It really wasn’t the core of what the brand was about, so we struggled.

{audio:0:03:55} These stores in Beijing weren’t the very first stores. Domino’s had opened stores in Shenzhen, back in the 90s. With the partner that we had there, they ran into difficulties, closed all those stores and then a new partner came on board and moved the operation to Beijing. It was very interesting in that it probably wasn’t the best city to begin operations in. We probably should have opened in Shanghai. The focus for me, immediately, back then, was to establish a presence in Shanghai. We also went through a master franchisee change and brought in a new partner. We tweaked the model to have it be more focused on what is our traditional model, which is primarily focused on delivery and carry out. We got rid of the fries and the fried chicken and really narrowed down the menu.

{audio:0:05:03} Over a period of time, we began to see momentum come into the business. Today, we have more than 300 units which, for China, is not a lot of stores, if you compare it to some of the other big QSRs, but there is a strong foundation to really accelerate growth into the future.

{audio:0:05:28} Why was Domino’s serving fried chicken and had dine-in, in the first place?

{audio:0:05:34} I think some of that had to do with the fact that Domino’s primary competitor was Pizza Hut. Pizza Hut, in China, really was more of a casual dining experience and, initially, was really the introduction to the Western dining experience. They had big, fancy restaurants, quite different from the red roof that we call them here in the US and other parts of the world. They offered all kinds of things on the menu. Pizza Hut really introduced pizza to the Chinese consumer. We felt, in order to compete with them, we needed to broaden the menu. Fried chicken is a real staple in China. As you may know, KFC really been the number one success story in QSR. It is, by far, the largest QSR chain in China, with around 7,000 stores. Fried chicken is a staple part of the Chinese consumer’s diet. They love fried chicken.

{audio:0:06:56} At the time, Domino’s felt that it had to have fried chicken and they had to have real fried chicken, fried in real deep fryers, so that they could compete on more of a level playing field, with the likes of KFC and Pizza Hut.

{audio:0:07:17} Do you still think that is the case today?

{audio:0:07:19} No. I think what has made Domino’s successful in China is the focus on what is the core aspects of the brand; making really great pizza and making a good quality product at a value price and delivering that product, consistently, to a defined delivery area around the store. What has also made is successful is that it has grown. With China, it is my belief that brands tend to gain more credibility when the Chinese consumer sees that brand more often. Now, with a 300-store footprint, penetrated quite well in Shanghai, as well as several other cities, consumers are getting used to seeing Domino’s and they are trying Domino’s. Also, many years have passed where the pizza category continued to grow and Chinese consumers have got used to eating more pizza and so this has been a great opportunity that Domino’s China has seized and now they are reaping the benefit of that.

{audio:0:08:44} You mentioned how Domino’s had a partner in China, had some troubles, maybe financially, in the Asian crisis and then you had a new partner. What is the current corporate structure and relationship with the master franchisee in China, today?

{audio:0:09:00} There is a master franchisee called Dash and they have the rights to all of China. Previously, the master franchisee only had rights to Beijing and Shanghai. Several years ago, with this new partner, the brand awarded the rights to all of China. That was very important because that has allowed that master franchisee to attract talent, to attract investment, because investors and talent know that there is a large-scale opportunity. It had been difficult to hire the kind of talent that we needed, when we only 50, 60, 80 stores and only with the rights to Beijing and Shanghai. Although they are big markets, bundling all of China under one master franchise has made it a lot more attractive for employees, for talent and for investors. As I said, there is a very strong foundation now and, in fact, Domino’s Pizza Inc, the franchisor, earlier on this year, made an equity investment into that master franchisee, to help it accelerate growth into the future, knowing that China is such a great opportunity, going forward, for the brand.

{audio:0:10:32} What is the rationale for the equity investment?

{audio:0:10:34} I think there are a couple of things. It provides equity and it also has Domino’s Pizza Inc being more involved at the board level, providing more support because they have an equity interest in the brand and also to enjoy the potential upside that is associated with the accelerated growth that is going to occur in the coming years and, perhaps, a possible listing. Primarily, I think, what better partner to have, if you are a franchisee, than the franchisor? It’s really a win-win situation for everyone. But primarily, it’s to guarantee that growth is accelerated.

{audio:0:11:32} What are the major differences in the Chinese market versus other Asian countries you worked in?

{audio:0:11:42} China is just a monster; it’s a big market. The opportunity, the scalability is just mind-blowing. Some of the cities in China are the largest cities in the world, by far. Some of the challenges that Domino’s has as a brand, in China, are that pizza is still a relatively new food for the Chinese. As we see new generations, I think they are becoming more comfortable with pizza. Dairy has never been a staple of the Chinese diet; I think that’s changing.

{audio:0:12:36} Yes; I think it’s starting to change. There are more than 2,000 Pizza Huts; there are 300 Domino’s stores. We’ve got McDonald’s.

{audio:0:12:52} But Pizza Hut don’t really sell much pizza, do they?

{audio:0:12:59} They do sell a lot of other things but they really did introduce pizza to the Chinese. Starbucks has grown tremendously. As far as dairy and lactose products go, such as milk and cheese, I think the Chinese are being more exposed to those products as there continues to be expansion of those products into the country. I think the Chinese consumer is willing to try different and new things. I use the example of kids now, that are five or six years old, in China, love to have pizza. This new generation that are being exposed to pizza, that are being exposed to dairy, are enjoying it. I don’t believe that there are major issues with lactose intolerance. I think we are going to see the Chinese embrace dairy products, more and more, in the future, as they continue to experiment with all kinds of different foods, in the future. It’s just part of their evolution.

{audio:0:14:19} How does Domino’s, as a brand, overcome the Chinese aversion to dairy products?

{audio:0:14:27} I think, as Domino’s grows and provides terrific value and convenience with pizza and various offers to stimulate trial, it’s all about taste. I think Chinese consumers are trying pizza and they are enjoying it. The pizza there can be quite different, in terms of some of the other toppings that go on the pizza. For example, we do a lot of seafood pizza in China. There is also a very successful potato pizza. But there is always a foundation of cheese. We never really had any issue with consumers not wanting to try the product. It was more a question of the availability of a Domino’s store, getting the pricing right, getting the menu right. We do have a pretty high degree of repeat business, but it will take some time. The frequency level of pizza in China is not what it is in other parts of the world but I think that will change, over time.

{audio:0:16:14} How does the Chines consumer really compare pizza versus other Western foods, such as KFC or even their own dishes, in terms of how they consume? Is it dine-in? Is it delivery and when and how?

{audio:0:16:29} I think the Chinese are consuming more and more pizza every year, because of the availability of pizza. Not only have Pizza Hut and Domino’s grown, but other brands from around the world, like Pizza Express, have opened in China and are growing. We are also finding pizza appearing on the menus of other types of restaurants. We are seeing more Italian restaurant chains open, as well. I believe the Chinese are being more exposed to pizza and that is what is helping the growth of the category.

{audio:0:17:18} It is going to take time for Domino’s to really scale. It’s a very big country. Domino’s strategy is to really fortress certain cities before it spreads itself out to all of the different provinces. To scale up to 1,000 stores will take several years. The potential beyond 1,000 stores is several thousand stores and there is nothing to stop Domino’s growing to 3,000, 4,000, 5,000 stores in the future, in China.

{audio:0:18:06} I read that, historically, the Chinese consumers didn’t necessarily order pizza for delivery, but would only consume it when it was dine-in, at Pizza Hut, for example. How did you see that change?

{audio:0:18:23} It changed a lot around five years ago, when we saw the proliferation of the food aggregators, owned by Alibaba, Tencent, Ele.me, that really exploded and just expanded the delivery category overall, in China. To this day, there is something like 40 to 50 million deliveries that are taking place, through these aggregators, from a number of different restaurants. Prior to the aggregators coming on the scene, there was an awareness of pizza but you are right, most of the pizza was consumed in the restaurant, at the store. With the aggregators bursting onto the scene four or five years ago, the habit of ordering and having food delivered was created. That really helped the pizza category, especially on the delivery side.

{audio:0:19:46} Now, we are seeing the majority of Domino’s sales coming out of delivery. Prior to the aggregators, delivery accounted for about 30% to 40% of the business; now it is way up in the 70% range. This is due to both the aggregators and also the digitalization of the ordering process, with delivery. Everyone now has an app; on that app there are a number of restaurants. In fact, Domino’s leverages the aggregators in China and that also helped to boost Domino’s awareness and reach; leveraging the incredible and might presence of these aggregators that continue to be very strong in China and have really changed the habit of eating out versus now, being more open to getting food delivered.

{audio:0:20:56} Do consumers order pizza for delivery, or is it more Chinese and functional orders?

{audio:0:21:02} Frankly, they are ordering everything. They order pizza when they feel like eating pizza. If they have Domino’s close to them, they will typically choose Domino’s. They are ordering everything. These delivery aggregators are delivering noodles, they are delivering traditional Chinese food, Japanese food, Thai food.

{audio:0:21:29} Is the price competitive?

{audio:0:21:32} A lot of what they are delivering tends to be low-priced items, which has raised the question as to whether the model is viable, in the long term, for the aggregators. The average check on pizza tends to be a little higher than other fast food, such as fried chicken or burgers.

{audio:0:22:04} How much higher is it, roughly, compared to Chinese and other Western foods?

{audio:0:22:09} Based on our research, in terms of what the average check on an aggregator order is, the average check for a pizza order would be double of what the average check in general is, for an aggregator. That makes it more viable for the aggregator. It is important to point out that Domino’s may take the order through the aggregator but the food, the pizza, is then delivered by a Domino’s delivery driver. The brand does not allow third-party delivery drivers, anywhere in the world, to deliver Domino’s products. They leverage in some countries and, especially in China, the delivery aggregator network and their portals. The order is sent to the Domino’s store and then a Domino’s driver will complete the order and take it to the consumer.

{audio:0:23:18} Domino’s believes that it needs to ensure food safety and quality. The decision was made in order to protect the brand and to ensure that quality control is kept. From when the product leaves the store and gets to the consumer, it is handled by one of our drivers. We have a network in place, anyway, in every single store, to handle deliveries, so we leverage that. It also helps to negotiate better rates with the aggregators, in that they are not having to do the actual delivery.

{audio:0:24:06} The aggregators are purely a demand generation channel, for Domino’s in China?

{audio:0:24:14} Correct. It is an acquisition channel; it is a pass-through channel. Domino’s feels that it is important to participate with those aggregators in China because they are so big.

{audio:0:24:29} Is that also because Domino’s doesn’t have as strong a brand as it would in the West, that they have to use that to get scale and leverage?

{audio:0:24:38} Yes; that’s partly the reason. You have to understand that these aggregators are behemoths. They are multi-billion-dollar companies and offer all kinds of incentives to consumers, to utilize those services. Yes, when Domino’s partnered with these aggregators, there were only around 100 Domino’s stores so the aggregators did help, as well, with creating better brand awareness for Domino’s.

{audio:0:25:12} Why does Domino’s use aggregators in China, for example, but not touch them in the US or UK?

{audio:0:25:24} In the US, they believe that they don’t need them. The brand is right. They have spent many, many years establishing the brand. It is a 60-year-old brand, here in the US. They have invested millions and millions in providing an incredible digital interface with consumers as well as an incredibly robust digital infrastructure to handle orders and deliver those orders through its fleet of delivery drivers in more than 6,000 stores. Domino’s believes that it doesn’t need the aggregators and that partnering with the aggregators would only, eventually, lead to a cannibalization of margin.

{audio:0:26:30} To date, there are no plans to partner with aggregators and I don’t believe that will change at any time in the foreseeable future.

{audio:0:26:43} Let’s assume it’s 2030 and we look back, what would be the reason why Domino’s didn’t resonate with Chinese consumers?

{audio:0:26:56} I don’t think we’re going to look back in 2030 and see that. I think, in 2030, we’re going to see, most likely, thousands of Domino’s stores in China. We’re going to see it present in, probably, 50 or 60 cities, all over the Republic. I see, in 2030, Domino’s continuing to expand at the rate of 200 to 300 stores a year. Because of the foundation that has been established there, I have confidence that Domino’s will have success, going into the future, in the next 10 years.

{audio:0:27:55} Does it need to reduce the price? You mentioned how it’s almost double the average ticket for other food.

{audio:0:28:02} I mentioned it was double the ticket versus what the average aggregator is delivering. If we look at the average price of a Domino’s order in China, it’s incredible value when you compare it to other menu items and other categories. Typically, when you order from Domino’s, you’re not ordering just for yourself; you’re ordering for at least one other person and maybe a family of three or four. Family sizes are starting to grow in China. It is good value. It is not expensive. I think that as long as Domino’s continues to provide exceptional value, exceptional service, with great taste, they will be very, very successful. It’s really the formula that Domino’s has used all over the world and it has made them the number one pizza brand in the world today.

{audio:0:29:17} You mentioned 200 to 300 stores a year? Is that all through franchising?

{audio:0:29:28} Yes. Currently, all of the stores in China, to my understanding, continue to be owned by the master franchisee. Effectively, they are equity-owned stores by the master franchisee.

{audio:0:29:45} They are not sub-franchising?

{audio:0:29:49} There is no sub-franchising so far; that may change in the future. Sub-franchising, per se, has not been as popular in China, with some of the other big QSRs. For example, Yum! China owns all of its Pizza Hut stores and did not sub-franchise. They did a little bit of sub-franchising with their KFCs but then pulled that back. Starbucks owns all of their stores; McDonald’s owns all of their stores. Simply put, if the returns are there – and returns in China are quite good – there is a lot more control that you can maintain over having equity stores; you can control that growth. Also, sub-franchising is a relatively new concept today in China. That may change in the future. The bigger brands have found that there is more ability to control and to manage their destiny by continuing to own and operate the stores. I believe that that makes sense.

{audio:0:31:11} In the future, Domino’s may decide to sub-franchise to what Domino’s calls internals. If there are very good store managers that have been with the brand five or 10 years and they would like the opportunity to own a store, that could be a possibility for entering into the sub-franchising side of the business. It is the formula that Domino’s has used, globally, that has been the most successful; utilizing internals that understand the system, that know how to operate stores who then become owners and own their own stores.

{audio:0:32:01} How does that work? Does Domino’s put up part of the cash or is it purely the store owner?

{audio:0:32:08} There are all kinds of different models that Domino’s has, all over the world. Some where they provide financing; some where they provide a rental type buyback, based on profits. It’s difficult to narrow it down to one type of system.

{audio:0:32:42} Do you think the original competitive advantage of Domino’s, in the Western world, still applies in China?

{audio:0:32:54} I do; I think it applies everywhere. It is a real, acute focus on execution. What I like to say, it’s sticking to the knitting. The reason why the Domino’s business model works very well is because it is very focused and it’s also very simple. That said, you really need to be maniacal in terms of execution. Domino’s measures everything. Everything is measured in time and frequency; there are a lot of KPIs around how a store is managed. Menus tend to be quite narrow. It’s all about pizza and offering some sides; not such a broad range of sides that it complicates the operation. It’s all about driving volume. Domino’s talks a lot about HVM, high volume mentality, and really being ready for the rush. If orders come in quickly, at dinner time, it’s all hands on deck to get those orders processed, get the food prepared to get that food delivered to consumers in 30 minutes or less.

{audio:0:34:22} In fact, they changed the benchmark recently to now be 25 minutes or less. There are stores around the world that deliver in 20 minutes or less. It’s very much focused on pizza delivery as well as providing an option of convenient carry out or pick up. During the coronavirus, we’ve seen how that side of the business has really seen a huge uptick, where consumers really don’t want anyone coming and delivering product; they would rather go and pick it up. They have something which is called curbside contactless delivery; they have a contactless pick up. It is really focused on delivery and carry out. There is not a lot of dine-in that happens at a Domino’s store. In fact, most of the stores are not really configured for that, although there is some seating available for those who want to come in, order and have their pizza right away.

{audio:0:35:30} It’s all about the focus on pizza delivery, providing great value, doing it quickly and, also, that digital access. Continued investments in having that consumer interaction be seamless, be fast and for the experience to be extremely consistent. And it is. In general, that is what has allowed Domino’s to grow to 17,000 stores and growing, around the world.

{audio:0:36:06} Let’s just compare the US versus China, for a second. Clearly, in the US, it is the home of Domino’s and the strongest brand, therefore, almost 100% direct traffic. They own the logistics networks; first to the customer. Whereas in China, it’s less of a brand and they are also generating demand via aggregators. I’m just curious as to how you compare and contrast the competitive advantage of Domino’s in both countries?

{audio:0:36:47} It has taken 60 years for Domino’s to get to where it is in the US, today. It will take time for Domino’s to scale in China. Fundamentally, the business model is identical. I believe that, overall, the consumer needs are the same. There are some nuances, as we mentioned before, with the Chinese and dairy. But I think that will change as time evolves. When you go to China now and you walk into a mall, it’s all the stores and all of the boutiques and concepts that you see here in the US. That wasn’t the case 20 years and, certainly, 40 years ago, it didn’t exist at all. It is evolving. I just believe that it will take some time to build, develop and scale the market. But it’s happening and it’s going to accelerate. As we discussed, by 2030, I believe we should have well over 1,000 stores. By 2040, 20 years from now, it could be as big as 5,000 stores. Personally, I believe that, eventually, the China market will be bigger than the US, for Domino’s.  Over time, China will be the biggest Domino’s market in the world, I believe.

{audio:0:38:47} How do you compare Domino’s versus Pizza Hut and Papa John’s, in China?

{audio:0:38:56} We talked a little bit about Pizza Hut being more of a casual dining restaurant, focused more on dining in and offering other products on the menu, apart from pizza, such as salads. They even have steaks and all kinds of different items, including a lot of desserts and beverages. Papa John’s, frankly, has struggled in China and have not grown tremendously. I’m not really sure where they are right now. They’ve had their struggles here in the US. They are getting back on track and I think the pandemic has certainly helped Papa John’s but they definitely went through some challenges with the brand, over the last couple of years.

{audio:0:39:56} Interestingly, Papa John’s, as they were expanding in China, also went the Pizza Hut route. They opened very big restaurants and also expanded the menu. They were like a Pizza Hut ‘me too’. If you walked into a Papa John’s, they had huge menus, with many pages of foods and weren’t really focused on delivery. I believe they are trying to unwind that but I know that they have definitely struggled. I wouldn’t be able to tell you how many stores they have right now, but I can tell you that they haven’t grown much at all, in the last 10 years.

{audio:0:40:47} Given the number of countries you’ve worked in, what are some of the key takeaways from watching the aggregators penetrate the market?

{audio:0:41:00} I think you really need to be very thoughtful in your strategy, in how – or even if – you partner with aggregators. I think, as they were starting to explode, certainly in my region, the Asia-Pacific region, there was almost a panic setting in in many markets, in that they were growing so fast and they were offering all kinds of incentives to the consumer to try them. They were competing, over the short term, hurting Domino’s in some markets. Some markets made the mistake of partnering with them and immediately saw a rather important percentage of their business shift, with really not a lot of incrementality in sales. And obviously, some erosion, in terms of profitability and margin, because of the commissions that they needed to pay to the aggregators.

{audio:0:42:31} What the brand decided to do – which really was the right move – was to tell all of the markets, stop; no one can sign any new deals. Each market needed to go through a rather vigorous and rigorous justification and business model evaluation, to determine whether it would be in the best interests of the brand to get into a partnership with the aggregator.

{audio:0:43:07} What was that decision-making process?

{audio:0:43:10} There were a number of factors. Firstly, the decision was made by the brand, at the same time, that no aggregator would be allowed to actually physically deliver the food. That was a line that was drawn in the sand. If you are working with aggregators right now and they deliver your food, that needs to stop.

{audio:0:43:37} That was because of the consumer experience and the branding of the Domino’s person delivering?

{audio:0:43:43} Exactly. We were looking at some of these delivery aggregators and the delivery drivers and what they were wearing. We were concerned that there could be, potentially, food safety issues and image issues, in general, with the product, once it left the Domino’s store. That was the number one mandate that was established globally.

{audio:0:44:13} Then, with respect to whether a market would enter into a partnership with an aggregator, it depended on several factors. How big a market share Domino’s had in that particular market; how aggressive the aggregators were. What type of commission they would charge? What type of contract was in place? There were also certain mandates on whether data would be kept by the aggregator or not shared with the aggregator and all kind of privacy issues with respect to our customer; who retained the customer data and so forth. There were a number of parameters that each market needed to evaluate, to determine whether the brand would allow them to enter into a partnership with an aggregator.

{audio:0:45:14} Doesn’t the aggregator just keep the customer data in every market?

{audio:0:45:19} It depends. There are some aggregators where they do but, ultimately, the order will go to the store and then our drivers will deliver to a consumer, so we know where that consumer lives. I think there was a lot of focus on trying to convert those customers that had come in through aggregators to direct customers for Domino’s. We would try to steer them towards our own Dominos.com sites, in the particular marketplace and offer them incentives to work directly with us, versus working with the aggregators.

{audio:0:45:59} In some markets, those aggregators continue to be a percentage of the revenue channel or acquisition channel for customers. In some markets, aggregators are utilized maybe more so in highly urbanized centers, like downtown centers of Melbourne or Sydney, where aggregators are very predominant. When you get out to more rural areas, aggregators don’t tend to have as much dominance, because their business model tends to struggle in the suburban type areas.

{audio:0:46:50} How would you look to try and convert those customers that purchase via the aggregators?

{audio:0:47:02} By talking to them directly.

{audio:0:47:06} Actually at the door? Flyers, physically?

{audio:0:47:10} Yes. Flyers, bounce back coupons. There is a loyalty program that Domino’s. Some of these aggregators have their own loyalty programs. Different types of incentives that were only available to consumers if they ordered directly through Domino’s.

{audio:0:47:32} I guess this is going to be a key part of the challenge in China? If the majority of the market are ordering via the aggregators, trying to shift them to your own channel is going to be tricky?

{audio:0:47:44} Absolutely. I think Domino’s, in China, is seeing that. In depends on the contracts that Domino’s China have in place, with the aggregators, with certain levels of commission. Remember the aggregator does not do the delivery, so they don’t have the right to charge too much commission on that order because, really, that order is just being placed through the site.

{audio:0:48:22} So it’s like half a typical 30%?

{audio:0:48:24} I think it’s even less than that.

{audio:0:48:28} I’m not exactly sure what the percentage is right now, but it’s a manageable number; we’ve done the math. For the aggregator, it’s a profitable channel for them because all they are really doing is passing through the order to Domino’s; they don’t need to get involved with the delivery, so it is a good margin. Hopefully, they continue to see and realize that and don’t get too greedy, but you never know.

{audio:0:49:00} How does that change the store unit economics for Domino’s, in China?

{audio:0:49:08} I think, if that commission is reasonable, it’s manageable. It is a good acquisition vehicle. These aggregators are doing a lot of advertising, they have incredible presence. If you are on their home page and you’re getting exposure, it works nicely. So far, it’s been working. Domino’s has been getting a significant amount of traffic from those aggregators.

{audio:0:49:43} Is the cash payback similar to what it would be in the US?

{audio:0:49:50} I couldn’t tell you the exact numbers but, in the US, we don’t use aggregators at all now. The business model, in terms of margins, varies depending on a lot of things, such as labor rates, food costs, rents and so forth and even advertising costs, in general. Domino’s in China is not really doing any television advertising so their actual marketing budget is different from the US. Some of their marketing is really with the aggregator, in that commission that they pay. It is difficult to compare apple to apple, with Domino’s in the US and China and, in fact, with any other market, because there is quite a variation, for example, also in average ticket. Labor rates vary significantly.

{audio:0:50:52} It seems as if it would be lower than that three year cash payback that the franchisees seem to get in the US, for Domino’s, due to the fact that the demand is somewhat driven by aggregators and they’ve got less of a brand and, potentially, they own the stores, as well, in China. Is it a longer payback period, typically, in China?

{audio:0:51:13} Actually, quite similar. The unit economics are very robust, right now, in China, based on the volumes and a number of other factors, such as the investment cost of a new store. As I mentioned, labor rates are significantly lower in China, for now; that may change in the future. When I was involved – and I don’t really see that there would have been much change – average unit paybacks on new stores were very good, well within and better than, expectations.

{audio:0:52:01} Which region had the best cash paybacks and why?

{audio:0:52:11} I was also associated with just an incredible growth period with India. When I took over the region there were about 125 stores. When I retired from Domino’s, last year, they were approaching 1,300 stores. Just phenomenal growth in a period of 10 to 12 years. Unbelievable paybacks in India. A lot of that had to do with labor rates being very low, as well as food cost being quite reasonable. I’m not sure if you know, but there is a dairy industry in India, so there is no need to import cheese and dairy products from anywhere else in the world.

{audio:0:53:10} Another factor that makes the returns pretty good there is that more than 55% of all pizzas are vegetarian. There aren’t many meats and more expensive proteins that go onto a pizza. When you’ve got more than 55% of all of your pizzas being vegetarian, that helps margins significantly. The cost to build a store is relatively reasonable. That said, the average ticket was quite low, but it was a very high-volume business and very good returns; one of the best returns that Domino’s has in the system.

{audio:0:53:55} Malaysia also has very good returns, probably driven, primarily, by occupancy costs, believe it or not, because of the shophouse real estate that Domino’s would look at. I remember seeing occupancy rates of under 2%, which is phenomenal, as well as low labor rates. Some of these shophouses would rent for $500 or $600 a month. It’s a very much shophouse driven retail landscape in Malaysia. That may change in the future. Also, the cost to build a store was extremely low, so there were some of the best paybacks for the brand. The master franchisee was a very good and well experienced operator. He was very focused on managing the P&L, managing costs and not trying to drive prices up for the consumer; very value focused. Reasonable costs in the P&L make for great returns, as well as a very reasonable investment cost to build new stores.

{audio:0:55:46} What are the typical reasons or risk in cash payback lengthening?

{audio:0:55:53} I believe that the more you spend on building a store – and there are some countries where it does cost a bit more to build a store – that will affect your payback. There are some markets that have, I would say, improved the overall fit and finish of stores because that is what has been demanded in the marketplace. If the overall retail and restaurant landscape requires a more upscale look, that ultimately costs more and so that may affect some paybacks in the short term, as you work your way through trying to get that investment cost down.

{audio:0:56:55} The other side of it is when labor rates are extremely high. For example, Australia has some of the highest labor rates in the world that can affect payback rates. There is a lot of socialized labor rules and penalty rates for drivers on weekends or during public holidays where they are required, by law, to be paid twice or two and a half times the normal rate. That will drive up costs that will, ultimately, affect the payback.

{audio:0:57:34} In answer to your question, probably the two biggest areas would be that initial investment cost of a new store and, if you have got a high labor rate, as well, that will throw off your economics a little bit. The good news is, overall, if you go around the world, it’s somewhat balanced. If you look at the overall system, it’s pretty well in line. The goal is to have a payback within three years.

Domino's Pizza: 5,000+ Store Opportunity in China

Chinese consumer perception trends for pizza delivery and dine-in

Why Domino’s will never let an aggregator deliver directly to a customer

The power of fortressing stores in the Domino’s system and short-term issues with franchisees

How Domino’s works with aggregators in China

Why India has the best store unit economics globally

Secret to Domino’s competitive advantage and why it can be replicated in China

Domino's Pizza: 5,000+ Store Opportunity in China

Former Vice President at Domino's

inpractise.com/articles/dominos-pizza-china

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Steven Pizziol

Former Vice President at Domino's

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Domino's Pizza: 5,000+ Store Opportunity in China(November 11, 2020)

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