Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:00:02} Scott, can you provide a short introduction to your background, please.

{audio:0:00:04} My name is Scott McLeod. I've been a 40-year restauranteur. I've worked with a number of different brands over the decades. I spent over 30 years with Domino’s Pizza in the US and the UK. My most recent position was for Wingstop, a growing company here in the US and is in the UK. I oversaw the franchising and corporate models for the US. I retired a couple of years ago; I've been consulting and overseeing a couple of trusts, and I'm on a couple of boards.

{audio:0:00:40} Can you compare the master franchise business versus the US independent franchise model?

{audio:0:00:56} To the public eye, there's not a lot of difference. The variant operates pretty universally. Domino’s has a delivery and carryout business model. There are different menu structures in different countries based on taste profiles, but at the end of the day, as far as the public eye is concerned, Domino’s is a large franchise-type business model. In the US, the parent company owns all the contracts with franchisees throughout the country. It's individual contracts on an individual store basis. As far as the UK is concerned and in many other foreign countries, the US will secure a master franchise. This entity will develop the model within their countries, within the parameters of the master franchise agreement. It's up to that entity to own their stores and develop their stores or sub-franchise. In the case of the UK, there are some corporately owned stores now, but it’s almost exclusively a sub-franchise model. Again from the public’s perception, there's no difference. From the parent company's position, Domino's in the US, they will deal with the master franchise. That master franchise is going to have its own responsibility for its sub-franchisees within the marketplace.

{audio:0:02:56} How would you describe the master franchisee and franchisor relationship?

{audio:0:03:04} There will be good periods for the franchisees and the franchisors. There's some documented history here for the last few years with the UK. With the master franchise entity, DPG, and the franchisees, again in the UK, a huge percentage of stores are owned by just a few franchisees, which is different from in the US. No franchisee owns more than 3% or 4% of the entire enterprise in the US, but three or four franchisees own around 50% of the model in the UK. So it's critically important that the franchisor and those franchisees see eye to eye.

{audio:0:03:45} From time to time, there will be issues and problems. The franchisees in the UK are great businesspeople. They're great operators, smart, think long-term, and are willing to invest in the model, but they also have huge enterprise ownership. They're going to want to see things done the way they prefer because they share ownership; they'll want to see things done the way they feel is best for their models. With any publicly traded company, which DPG is, you sometimes struggle because you have to please a franchise body and public shareholders, and at the same time, you're trying to do what's right for the business long term. When there is a disconnect – and sometimes there’s going to be – it takes time to work it out. The good news is the franchisees are smart, they’re intelligent, they’re not going to shoot themselves in the foot. There may be some short-term tactics that are used, you’ll get their concerns resolved, but they're going to continue to operate the brand at an extremely high level. Whatever issues they may or may not have over time, it's just how you do it and what the compromises are. It will work out.

{audio:0:05:15} How did the US franchisor allow such a concentration of franchisees in the UK? Did they have a say in that?

{audio:0:05:26} It's up to the master franchisee. There will be strategy sessions with the Domino's parent company, and they'll work closely with the master franchisee, but that's part of the deal. The master franchisee has the right to develop in their country, as long as they adhere to their contract with the US. They've got to be smart about their own development. The parent company is going to hold the franchisees accountable for their deliverables, for their contractual components. At the end of the day, as long as they’re doing that, then we can't interfere with how they go about doing their business. There will be times when the US, the parent company, will get involved if there are issues or problems within the network of that franchise system and try to assist. Still, in the end, it's the master franchisee's responsibility to work out issues.

{audio:0:06:25} What led to such a concentration of franchisees with those two or three guys?

{audio:0:06:33} I guess the best analogy is, if you’ve got a stallion, you ride it. These franchisees are that good, and they're really smart, they’re well-funded, they've proven they can run the brand and their stores with long-term strategic growth and real estate development. A large part of the reason Domino’s has been so successful in the UK is because of the franchisees that they’re working with. When you have such talented individuals who are willing to go at a breakneck speed and do it well, why would you not?

{audio:0:07:16} There are plusses and minuses to this thing; there always are. Nothing is a perfect model, and nothing is exactly right across the board every time, but it’s one of the big reasons the company developed. They had a great brand to develop that goes hand in hand with their skillset, and they also have a model that sells itself if it's done right, and they recognize that. But I think it's just one of those things when you look over time at the evolution of a brand. You have a chance to have really strong players that are willing to do exactly what you want them to do. Next thing you know, you've got giant players in your business model that control a lot of the enterprise. And they’re going to have voices.

{audio:0:07:59} I think two or three of them own half the system sales.

{audio:0:08:03} And they're going to have opinions. They're going to be looking as much for their interest as the company's interest, and hopefully, both sides will understand that and work through whatever issues they have.

{audio:0:09:16} In your experience, when do you typically see tensions arise between a concentrated franchisee base and the franchisor?

{audio:0:09:27} It could be for different reasons. Sometimes it can be personality. Sometimes it could be specific things that you're asking the franchisees to do such as development, growth, incentives and that they are not providing the nature of those incentives to do the things the company wants. It could be on pricing strategies, marketing positioning, and it could be on a variety of things. It's usually not a single thing. It's usually a combination of multiple elements that cause friction or disagreements. It's hard to isolate it sometimes. Sometimes it's the thing that's underneath the thing that you're talking about. That's part of the game, and traditionally you can work through it. Sometimes it takes longer, and sometimes it's very quick.

{audio:0:10:15} Sometimes things never get resolved after something happened 10 years ago, and it pops back up again, and someone says, I remember when you said this 10 years ago. You're dealing with humans; you're dealing with good people who, in their minds, are doing what they think is right and what’s best, on both sides. That’s ultimately where you’ve got to resolve to compromise. You’ve got to kick in and say, all right, what are we doing? How are we hurting our business model long-term, and what can we do differently? There isn't one thing. Everybody wants it to be one thing because you can fix one thing. Typically, you focus on one or two things, but it’s usually more of a portfolio of elements you've got to deal with.

{audio:0:11:03} In the last decade, what’s led to some of the tensions we've seen in the UK with the franchisees?

{audio:0:11:09} It has to do with the business development, the profitability, and the sharing of profitability within the model and how profitable the parent company is versus the franchise model. There are elements of how you share the wealth and when you have franchisees that own 40% or 50% of a portfolio, they're going to look at the portfolio wealth and say, are we getting our fair share. The parent company has got to look at both the success of their franchisees and the success of their brand because they have shareholders. How you distribute and how the contracts are written are elements to point at and say, are we giving the franchisees a fair shake. Where is the gap between those two discussions and how do you compromise against those where you’re not hurting one body and helping another? That’s probably the longest element of the tension. As the brand develops and grows and splits stores and goes through the fortressing strategy, what is the franchisee’s responsibility and what is their risk, as they’re helping the brand, and themselves, grow and develop?

{audio:0:12:23} The franchisees typically grow with the brand, but at some point, you ask, are we growing at a commensurate rate to the company's investment and risk. There are arguments to be made on both sides of that, there always are, but math is math at the end of the day. If you can work through the model and show how the franchised body is benefitting and how the company is benefitting and compromising where it can, it will work out. Maybe it takes a few years to work out issues, but ultimately you're talking about very smart people on both sides of the fence.

{audio:0:13:07} Can it take that long to solve?

{audio:0:13:09} Sometimes, but I think you can focus on the fact that the brand continues to thrive. They continue to operate at a very high level, and that shows the quality of the people involved in the process, even though there are some disagreements. Unfortunately, some of it's more public than you ever want them to be because you like to keep these things in-house as much as possible. Sometimes you work out some issues that you don't hear about, and sometimes other issues stay on the table for longer than you want. But has the brand continued to move forward? Are they still doing the things they need to do overall to secure their place in the market? And as long as that happens, you can work through these issues, and if it takes time, it takes time.

{audio:0:13:57} How do these franchisees think in the UK? Let's say I'm one of these large franchisees who runs 20% of the system sales. What am I worried about?

{audio:0:14:27} You have to realize that there are external pressures in a business model. Living wages are going up, prices of goods are going up, the impact of Brexit and what it does to different supply chains. The business gets a lot of external pressure that has nothing to do with the parent company or the franchisees; it's just the nature of the beast. As those things happen, it puts pressure on the bottom line. When you go through a period where there weren’t as many pressures, the economy was really strong, wages were low and it was easy, you made really good money. Then as those external pressures start coming in, you start looking at every aspect of the business. How much does it cost to operate a single unit versus the investment and what's the ROI on that? What does the company want you to do and what is the company doing to help you develop and grow that model?

{audio:0:15:22} You're going to focus on those things, and they will be points of discussion. If you see a percentage from one year to the next of 2% to 3%, you're wondering if it's going to come back and how it's going to come back. What am I doing? How will I invest in the brand versus what the company will help me grow and develop? Long term, you still want to be the strongest in the market. You want to be number one. These franchisees know that they want to be the number one brand by a lot, they do. But they will be looking at percentages on the bottom line and think about how the pain is being shared. From the parent company, you look at it and say, is it a successful model, are we getting a great return? If you can invest X and get Y, why would you not want to do it? Sometimes that's the subtle difference in a conversation. They're seeing it from one number that's dropped by 2% or 3% over the years, and the company is saying, but you've still got a fabulously successful model, and we need to continue to grow it and that little gap there is the part you got to work through.

{audio:0:16:32} Does the UK master franchise model lead to an increased margin in the pricing ingredients because they have to pay that royalty rate up to the parent franchisor?

{audio:0:16:52} The parent franchisor in the US, that's fixed. The food supplies and how you operate the business within your own four walls has nothing to do with the parent. With the parent company, you have a set fee and there are some elements of that in the contract, but the parent company will not send over more expenses to the master franchise. They've got an agreement that's pretty set. As far as the master franchise goes, they have their own cost pressures, building their new supply chains, staffing and personnel, the cost of their operations and the public's expectations.

{audio:0:17:38} We want to see growth and dividends, and the share price needs to go up. That's the pressure the company has to deal with, their own cost and success in the public's eye; that's business. For the franchisee's side, their business is their four walls. You see that in every franchise business model that's in a publicly traded environment. But even if it wasn't publicly traded, the parent company will want to improve its profitability. It's how you do that. Is it organic or reaction to external pressures that you've got to deal with? Whatever it is, you want to make sure that you're continuing to have a successful business going forward.

{audio:0:21:25} Let's discuss the US. How do you look at managing the health of the franchisee network with the independent franchise model in the US?

{audio:0:21:58} So far as the US goes, you've got a very spread-out franchise model. It's grown; the franchisees and their portfolios have grown. There have been fewer franchisees operating in the US now than there have been for many decades. They're concentrating more on bigger, more powerful, more self-sustaining franchisees. People have proved they can do it well; they can develop their infrastructures and they've shown they can run the brand well. That being said, the largest franchisee has a very small percentage of the business model, which requires the US to have a larger reach regarding how they connect with their franchisees and what KPIs and tools the franchisees have, so they can be self-sustaining.

{audio:0:22:41} As opposed to a franchisee having their own development team and their own marketing team and things that you may see with larger franchises, they depend on the company to generate a lot of that work for them or help them. To that point, the brand has developed a lot of things. There's a blueprint for profitability. There's a standardized P&L system that they use and they can do peer studies on how they compare financially with other franchisees of similar size and similar volumes. The customer data is phenomenal in the US. What's the frequency of customers, what their order habits are, the price points they're comfortable at, etc.

{audio:0:23:26} They can share this data with the franchisees on an individual basis and cross-reference to the markets, to the country and provide education to help these franchises be self-sustaining. In the US, Domino's has become very systematic in how they approach the business. So that even though a franchisee may have one store or a hundred stores, you’re still working with a gigantically simple system where you can share data and information and they can resource and compare themselves against people in the same bucket. That helps develop the franchisees here.

{audio:0:24:03} How important is it to train your employees, like the delivery drivers, to become franchisees?

{audio:0:24:12} That is critical. In the systems within Domino’s, there is a lot more in learning the management system today than ever before such as computer-based training courses, video training and so on. They’re using the technology to help provide these systems. But I will say this, the Domino’s system has been roughly the same, tech notwithstanding, for 50 years. It hasn't changed a lot and it's pretty straightforward. Get the pizzas in the oven quick, get them out the door as fast as you can and make your areas tight so the drivers can be safe and get there quickly. If you do those things, the model works pretty well. A fair price and great service will work just about every time.

{audio:0:24:56} Within the system, you provide training to ensure you're getting all the boxes checked on what people need to do but it's more the KPI management. Here are our goals as far as customer service goes. Here are your delivery times, here is customer satisfaction. You build those and you measure them. You hold franchisees accountable to this, and you say if you want to grow and you want to build out your brand, you've got to achieve these numbers. You've got to hit these things. We'll provide you the tools and the understanding to do it, but your execution will provide your long-term success and help you grow and build stores and become more profitable. The system breeds its success when you do it like that. To that point, within the crew, the cream is going to rise to the top. If someone starts as a driver who is highly motivated, highly intelligent and driven, next thing you know, they've become a system manager, a manager and they've become a franchisee and the gain just keeps growing.

{audio:0:25:52} Do you have a set target rate of how many franchisees need to be employees or former employees versus people coming from outside?

{audio:0:26:00} In the US, just about every franchisee comes from the store operations. There are a few exceptions. That's one thing the system has been set up to do for decades which is, to become a franchisee, you have had to have managed or supervised Domino's locations in your background, otherwise, you don't qualify. A few external people were brought in in unique situations, but the model has largely been on people that came up in the system. They know the system, they understand the culture, they understand what it's about. That's a big key to Domino's success. You could argue that we lose something in the process, that we're not going out and getting these big business minds, the people who have owned and operated several different brands and who understand the business. There's a lot of learning on the job with Domino’s franchisees. They have to learn and improve their knowledge as they go forward, but again the cream rises to the top if you do it the right way. You have people who are bred in the system who understand the system and know how to execute the system. The advantages typically outweigh the advantages of going external.

{audio:0:27:06} Do you think it’s becoming less attractive to become a franchisee in the US?

{audio:0:27:13} I wouldn't think so. The model's been hugely successful. Obviously, labor is hard to come by and costs are going up; it's scary when you look at all the potential costs.

{audio:0:27:25} How can you attract a delivery driver from the likes of Uber or Lyft?

{audio:0:27:32} That’s a great question. I think that’s one of the big challenges going on in the entire model. There’s more competition for a delivery driver than there’s ever been before. Historically, there were only a very few companies that did delivery on any kind of scale. You've got to find someone with a good driving record, who is over a certain age, who is willing to use their vehicle for work – and the wear and tear that comes with that – and who will work hours in the business that are unattractive to a lot of people. You're out there delivering pizzas at 10 P.M. when everybody else is having fun. By definition, you're dealing with a limited pool by finding a driver that checks all the boxes.

{audio:0:28:22} Then, all of a sudden, here comes these national competitors on a huge scale that offer a guy sitting in a coffee shop a ring on his phone, and he can go pick up something and deliver it; there's some competition there. However, you're paid all the time within Domino's and you get an hourly wage whether you're delivering or not. You're working within an integrated network and there are no third-party communications. Everything happens in-house. The whole system is designed around your success. You can deliver quickly and efficiently and are guaranteed pay and income without losing anything you might get from an Uber or some other concept. You are tracking people who want to be integrated into a system and can rise within that system.

{audio:0:29:10} The thing is, it's very hard to rise up within the company as a DoorDash driver. I'm not saying you can't, but you're not integrated into the system. Within Domino’s, you could develop an entire career if you wanted to. I started as a driver, and many people in the company did. They deliver pizzas, they come into the brand and next thing you know, they've got a career. That's one of the things that Domino’s offers that a lot of these other concepts don't. It's a tradeoff. There's more competition, and it's tougher to get drivers; you have some advantages on both sides. But the integration on Domino’s and the team element of Domino’s is the biggest attraction that I think a lot of the drivers see and experience.

{audio:0:29:51} When managing the franchisee network in the UK and the US, will you look at different KPIs because of the different network structures?

{audio:0:30:01} Not significantly, no. The model has pretty much proven itself. You're targeting synched delivery, obviously, and that's one of the big elements. We want to make sure the deliveries are set up so that you can execute against a timed expectation of how quickly you can deliver the average pizza safely. That's never something that we can ignore as a brand. That's why you want tight delivery areas and you want controlled elements. You want to perform very, very quickly inside the store, so the drivers aren't pressured out on the road. Fast on your feet, not on the street, is the thing we used to say.

{audio:0:30:41} The short of it is we know that the sub-30-minute delivery is a great target if you can do it safely and within controls. The more you perform against that number, the percentage of time that you can deliver, the higher the satisfaction of customers. The one thing you ask for is this, whenever somebody calls up and orders from you, they're hungry now. They're not hungry in 30 minutes or an hour. They're hungry at that moment. When people are hungry and they want food, the sooner you can scratch that itch for them, the more successful you're going to be. That's what Domino’s has always been excellent at doing.

{audio:0:31:20} To your point, the KPIs in the UK and the US are very similar. The system's expectation was designed around how you perform against those numbers, the percentage of time you deliver less than 30 minutes, your overall average delivery time. Those numbers are beaten into the system. Everybody knows what your targets are and that's part of the success of the brand.

{audio:0:31:45} Also, in the UK, as you said, you have more professional managers that are so good at operating the stores, where in the US, it seems like you may need to work with the independent ones more.

{audio:0:31:59} I don't know about that on the operational level. The franchisees in the UK are brilliant businesspeople on the whole, and the US guys are talented people in their own right. Over the past 10 to 15 years, Domino's has concentrated on the cream of the crop of the franchised body in the US. We have really strong operators. Operations is the focal point from the beginning and whether you bring the people in externally or through the system, that's part of the thing. The vast majority of the franchisees have been within the system for 25 to 30 years in the UK. These are guys that were operating the local coffee shop and today they have Domino's stores. They're very similar in terms of their background, they built their empires from one or two store starts and there's not that much difference in the franchise. The only difference is that there are fewer in the UK relative to the store count than in the US. That's the biggest difference overall.

{audio:0:33:07} How would you compare the US and Domino's franchisee network versus other brands. What makes Domino’s unique?

{audio:0:33:21} There are many different models out there, but I believe what makes Domino’s unique is what we talked about before. The franchisees came up within the system, so you have that connection no matter your other disconnects or connections. Very few models are internally bred where the franchisees come in and have worked in the system before they were franchisees. That doesn't mean other models can't be successful; I'm simply saying the vast majority of the franchisees were in store slinging pizzas for somebody else for a long time. When they become franchisees, they know the system and know the culture.

{audio:0:34:05} Brands that go external, you're bringing in lawyers, doctors, whomever it might be that are looking for that thing to do. Previous business owners of other common concepts and they come in they’ve got to look at the system. It's all new to them. A lot of common talking points and terminology are used in the brand. You say a phrase or a word or some acronyms and they look at you like you got three heads. They have no idea what you're talking about. Domino’s doesn't have that problem. They've got people that know the lingo, know the language, know how it's done. That's the huge advantage that Domino’s has in that regard.

{audio:0:34:49} What do you think is the most misunderstood point about the fortressing strategy, conceptually?

{audio:0:34:57} There are two elements to it. When you're building a store within a store within a store in a trade area, are you cannibalizing your business, or are you growing your business incrementally? The second part of it would be the nature of the carryout customer versus the delivery customer. Many people will look at those as being the same customer, that a person who was a delivery customer will convert to being a carryout customer if you build the store too close to them, or vice versa.

{audio:0:35:34} A lot of the data shows that the carryout customer and the delivery customer are two different customers as a whole. Some people will do both, and I'm not trying to say there isn't any overlap. I'll be a delivery customer today and a carryout customer tomorrow based upon my needs, but customers are typically broken into two groups as the mindset goes. There are people who want you to do all the work for them because they're tired and want to sit at home. They'll pay a little bit more so they can just relax. They've had a hard day at work, and they just want to not cook and they want you to do all the work for them, which is great. But others want to control the process, they want to be the hero when they walk in the door with the pizza and the kids come running up to them and say daddy or mommy thank you. They want to know when they’re going to get their food and how they're going to get it and then come home with it, or it’s convenient for them, or that’s just the way they think.

{audio:0:36:26} Part of the fortressing strategy is yes, you should secure your real estate, get more signs compared to your competitors, so you're more top of mind. Your incremental growth is going to be better. Your service metrics are going to improve because you're not delivering as far. You have tighter delivery areas which means you're going to build more satisfaction because the pizzas are getting there five minutes quicker. All these things build upon each other, but it's also reaching the carryout customer because carryout customers, traditionally, will not drive 10 miles to pick up a pizza. They want it to be as close to home as it can be. So when a sign pops up of a brand that you appreciate and it’s closer to you than before, you now become a more frequent customer to them. Whereas you might have ordered once every two or three months because they’re out of sight out of mind, now they’re right down the road you become a once a month customer. When that happens, frequency increases, the model grows and you put a lot of pressure on your competitors because you're performing at every level.

{audio:0:37:28} When it comes to fortressing, if you’re the investor, you're the franchisee, you're looking at it and saying, okay I'm going to go take an area that I'm making X from, if I build this, what's my multiple. Am I growing my business, or am I just splitting the volume between them and having two sets of fixed costs? That’s what the model has to prove every time as you build the second unit split territories, that you’re incrementally growing overall success for your business, but maybe not on a percentage basis. You could look at it and say, I was making 15% before, and now I've got two units making 13%. Well 15% to 13% doesn't look good, but when we're talking about that much more volume, you're taking more to the bank. You can grow without any point in diminishing returns. But the point where you start hurting yourself, and you're truly not making more money to absorb the more fixed cost, that's what the brand has to always got to prove that we're not getting to that point.

{audio:0:38:24} It makes great logical sense if you can reduce frequency times, higher frequency volume, higher volume, tech market share, and everyone can win. What makes the franchisee a bit hesitant about fortressing, or what part is difficult to understand sometimes?

{audio:0:38:49} It’s the unknown. When you pop in a unit, you just don't know until the doors are open. There's no such thing as 100% success. We all know that. Sometimes it doesn't work.

{audio:0:39:06} Who knows? It could be a variety of things. It's just the nature of your customer base. It's how you operate the business on a day in and day out basis. Did you pick the right location that brings you top of mind? Several factors can go into it. If you knew with 100% success everything that it would do, it wouldn't be business.

{audio:0:39:28} It wouldn't be any fun, that's for sure.

{audio:0:39:29} Yes, where's the fun in that? Where's the fun in being secure in every decision you make? But I think that's part of it. You have to show data, and you have to prove that historically this is a good risk. Yes, it's a risk; nobody will ever say it's not a risk, and if anybody does, they're misrepresenting the reality of the world. That's not what the brand does. They sit there and say, look, we know these things. If you build this real estate and take the risk, you will see more concentration of your delivery areas and a higher frequency of customer satisfaction; you're going to drive more carryout business. You're going to see this. That's what the data shows. The data doesn't show it 100% of the time, and we're not saying it's going to be 100% of the time, but where's the logic against it? How is this not a good risk?

{audio:0:40:23} Let's say I'm a franchisee in the US or the UK, you come to me about this new store. What do you show me?

{audio:0:40:37} You overlay a lot of data. You look at, historically, what other markets have done. You go to success stories of franchisees who bought into the model and how their success has been. You look at the dynamics of that demographic. You look at the address counts and the frequency rates and compare that to the rest of the business model within your market or the brand as a whole. You look at the percentage of time that your delivery drivers are over 35 minutes in making a delivery. You pick data that says you're underperforming against the model in this or this area in your current situation. You say if we build this unit, we split the area, we carve out 20%. Hopefully, we're reaching new customers. You might grow your overall territory reach where you weren't delivering to a certain number of addresses in one area, or you weren't getting the carryout percentage you should get because you're not reaching enough customers in the local. If you overlay all these data points, you can show those things frequently to the franchisees and build a business case for them and say, we know this is where you're underperforming versus the successful model. By doing this, you can now hit these ratios.

{audio:0:42:01} Let's go back to hiring delivery drivers. Suppose I can take a driver from 2.1 deliveries per hour to 3.1 deliveries per hour because of the size of the area. In that case, I need fewer drivers on an hourly basis to handle the same amount of business because they’re only going four minutes away versus 15 minutes away. I get more efficiency. The customer gains because they're getting better service and the driver gains because he's able to turn more deliveries in an hour, which means more money for the driver in terms of tips and mileage and everything else.

{audio:0:42:34} Do you help me finance it?

{audio:0:42:39} It’s not free; the company can look at incentive packages to help manage the risk and there are different things that the companies will do over time. They'll do that based on several factors such as how the growth is going, how aggressive they want to build out the marketplace and the return of these fortress stores. The more success that franchisees have building stores, the more eager they will be to do it. You don't need to incentivize common sense. But the company, depending on how aggressive they want to be, can offer different incentive packages to franchisees to achieve growth.

{audio:0:43:18} Given the backdrop of Uber and DoorDash increasing competitiveness, does the franchisor have to be more aggressive in incentivizing franchisees to increase stores?

{audio:0:43:35} That’s a fair point. The last couple of years with COVID has created a new world. I don’t know how much is real and how much is a byproduct of the COVID-induced paranoia that people are sitting at home and now delivery becomes the sexiest thing on the planet. The different companies that are providing delivery today are benefitting from that. But so are Domino’s and other concepts that offer delivery. I will say that when you look at the execution and menu variety that Domino’s can provide, those are things Domino's has to look at. How do we create a bit more variety in our menu so when a customer is thinking I'm looking for chicken today versus pizza, can you satisfy that need and do it better than the other concepts can, whether you be DoorDash or Uber or whoever might be your direct competitors? If I can get the products I want or have enough menu variety that I don't break the brand's operations to have selection for a family, how do I compete against those? That's what you focus on; outperforming them from a delivery execution standpoint, providing a variety of products, and providing value. Then whatever world you're in, you may have a short-term impact from new competitors, but as long as you stick to your model, you should sustain yourself very well. Domino’s has sustained itself extraordinarily well throughout this whole thing.

{audio:0:45:12} If I put myself in the franchisee's shoes, pre-COVID or even five years ago, Domino’s was pretty much the only one who could deliver sustainably within 30-40 minutes. Now Uber, Just Eat, and DoorDash are competing, at least in delivery times, on a very wide selection, so do you think the competitive landscape has completely changed? They might change the willingness of franchisees to be fortressing and opening up new stores.

{audio:0:45:50} It’s a possibility. I'm not going to say that if you have lower returns, you do not have the same growth model that you had before. You're experiencing increasing costs because it costs more to have a driver today than it did yesterday. It costs more to have any employee today, but drivers in particular because there's so much competition. Yes, there could be a negative impact on the enthusiasm for franchisees to grow and develop. That's what the brand has got to do. They've got to understand that and work with it. Will there be incentives? Will they continue to drop the model, provide the brand presence so that they continue to shout louder that we’re better than everybody else, and the customers buy into it?

{audio:0:46:34} If you don't do those things and start seeing diminishing returns, the franchisees will naturally become more paranoid about growth and development and splitting territories. But that's evolution. Successful brands prove that they can evolve; you have to look at the nature of the brand you're working with. Have they got a track record of saying yes, it's a challenge; I may take a punch in the nose here but I'm going to come back, and we're going to win when it's all said and done. That's what you're hoping your franchisees do. They buy into the brand. They buy into the success and the longevity and the adaptability. Domino’s has been extremely good at adapting. They're a very adaptive brand and they've got a lot of confidence from the consumer base.

{audio:0:47:29} Regarding carryout, the carryout business in the UK seems to be far lower than in the US. It’s 20% to 30% in the UK, whereas it’s up to 50% in the US. Why is that?

{audio:0:47:44} There are a lot of reasons. One is that Domino’s in the US has been driving carryout longer. It's been an integrated part of their marketing strategy for much longer. There are carryout and delivery specials 100% of the time.

{audio:0:47:57} Do you mean discounts on the delivery menu?

{audio:0:47:59} Come pick up a large, three-topping pizza for $7.99. Domino’s has been doing that for 12 years.

{audio:0:48:06} Doesn’t the UK do that often?

{audio:0:48:08} They did some offers here and there and a lot of the franchisees will do their own offers on a local basis. But there's a big difference between concentrated strategy on a national basis and local strategies. They can be effective in individual markets.

{audio:0:48:23} That comes from the master franchisor, I guess.

{audio:0:48:25} Yes, but there's also the flexibility that the franchisees want to have to be able to do their own marketing. They want to have the adaptability in their own areas to do what they think is best. There's a lot of logic there; I'm not saying that's a bad thing, but in the US, what happened years ago was the franchisees contributing more to the national funds voluntarily. That was something that changed in their contracts. So the national marketing is 90% of the marketing in Domino’s in the US, and in the UK, the percentage is different.

{audio:0:49:00} The percentage goes to the company, and the lower percentage goes to the brand versus in the US. The US has just congregated their marketing dollars and done that national platform.

{audio:0:49:09} Is that back to the concentration of the franchisee network?

{audio:0:49:14} It’s more of a strategic thing from the companies; it’s different everywhere. We keep talking about the UK and the US. There are a hundred other companies that have their little differences and models. I'm just talking about how the US has done it differently. In this case, they've concentrated their advertising on a national platform. To that point, they're very dedicated to, here's our delivery special, here's our carryout special, and they've been doing that for 12 plus years. That's one element. The other element is accessibility. It is hard to find parking in the UK, so if somebody's going to get out their door and drive down the street to pick up a pizza, where do they park?

{audio:0:49:53} It's weird because you're kind of closer in the UK to the store, but you're further.

{audio:0:50:00} You are, you are physically closer, but you have to think about, what if it rains, instance. I could be 500 yards away from the Domino’s store in the UK but do I want to get out in the rain?

{audio:0:50:14} So weather and parking are limiting the carryout business.

{audio:0:50:18} I believe that the carryout business in the UK has been growing and it will continue to grow. It's something that will develop and be more successful. In my opinion, I think that part of the model will continue to grow. But the US has been strategically focused on carryout business in concert with delivery business over time. It's a little bit different in geographic accessibility. We're so much more spread out here and less concentrated. If you're having trouble finding parking for the vast majority of stores in the US, then you're not looking. Of course, big cities like New York have as many problems as in the UK, but I'm talking as a whole.

{audio:0:51:17} For example, Australia heavily focuses on carryout as their business model, more so than they do delivery. They still do great with delivery, but it was a very heavy carryout model in Australia because of the nature of that market, the realities of geography, and marketing strategy. The bottom line of it is, I don’t see any reason why I can't grow because there are a group of customers that want to control the process. If you tap into that customer base, then you've got a wonderful shot.

{audio:0:51:54} How can franchisees drive more carryout?

{audio:0:51:59} Performance and execution; when people show up, how quick is that process? When people show up and they're waiting 10 minutes in your lobby, that's not a great experience. Once they get home with it, what's the quality of the product, how hot is it out of the oven? They're taking it home, it’s not in a hot bag. You can hand them a great pizza and if they're 20 miles from home and it’s been sitting on the car seat, when they start eating, it's going to be cold. That's not the best experience. You've got to factor all those things in. How do you execute and how do the customers do it? What's the value proposition? Are you competitive? It boils down to how you execute the order in terms of quality, service, value and friendliness when the customer walks through the door.

{audio:0:53:04} I guess they're more profitable as well for the franchisees. There's a lot of incentive to make it work.

{audio:0:53:09} It's more profitable because of their mentality. If you get $24 for delivery and $12 to $14 for carryout pizza, you could argue that you make more money on the $24 despite the delivery cost. Sometimes you can do the math and you can show that delivery may be more profitable than carryout on an order by order basis. But that’s not the point of the carryout. I'm not converting that $24 customer to a $14 customer; I'm getting a new customer giving me $14 for that pickup and I'm still keeping my $24 delivery customer.

{audio:0:54:00} Are the carryout customers that different?

{audio:0:54:17} Were speaking broadly here. Individuals might decide at an individual time. They sit there and say, I'm going to order from Domino’s. I planned on delivery but wait, there's this great carryout special, so I'm going to do that. That happens, but typically, people don’t make their order without having in mind what they want to do. They are planning on staying home to get pizzas delivered, or they're planning to pick something up. Traditionally they've already made up their mind which one they're going to do and then execute the order. Then you have to execute against that expectation. You also get different buying habits. People maybe just walking by on their way home thinking, what are we going to do for dinner tonight.

{audio:0:55:00} There is data that from 4:30 to 5:00 in the evening, nobody knows what they're having for dinner. They haven't figured it out yet. Some homes are brilliant at it, but a lot of people might be going, I think I'm hungry, what are we doing for dinner tonight, and you start coming up with ideas. That's where impulse buying becomes critical. That's where your presence, whether it be a sign on the street or an ad that you see or a text that comes in and says, hey, we've got an offer for you, can take that unknown dinner process and make it into a known dinner process. The more presence you have and the more you hit on multiple levels, that breeds success in a brand. I can deliver, you can pick it up. You don't want to get out of your car? We can bring it to your car. You don't want to leave the house? We can bring it to your door. How do you want it? We'll take care of that.

{audio:0:55:56} Do you think Domino’s would ever be on any of the aggregators in the US?

{audio:0:56:04} Ever is a big word. I don't think that's what Domino’s wants to do. I think they will lose part of the integrity of the system. With the integration that Domino’s has and the customer experience, that's one of the big things that is a disadvantage to the aggregators. They don't own the experience all the way through. I'll order from the Chinese place, and the aggregators send the delivery, and the food shows up at the door, and it's a bad experience, whatever it is. The product's not right. The product is cold, the driver is rude, whatever it might be; who does the customer blame, and how does that get resolved? You're dealing with multiple parties there and there's a lot of confusion.

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

Differences between the US and UK franchise network

Competitive pressures for Domino’s in US and UK

Differences in advertising budgets across regions

How to balance franchisor and franchisee requirements at scale

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

inpractise.com/articles/dominos-pizza-managing-the-us-and-uk-franchise-network

Why is this interview interesting?

Executive Bio

Scott McLeod

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

Interview Transcript

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Domino's Pizza: Managing the US and UK Franchise Network(July 2, 2021)

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