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

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.

Scott, can you provide a short introduction to your background, please.

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.

Can you compare the master franchise business versus the US independent franchise model?

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.

How would you describe the master franchisee and franchisor relationship?

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.

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.

How did the US franchisor allow such a concentration of franchisees in the UK? Did they have a say in that?

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.

What led to such a concentration of franchisees with those two or three guys?

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?

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.

I think two or three of them own half the system sales.

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.

In your experience, when do you typically see tensions arise between a concentrated franchisee base and the franchisor?

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.

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.

In the last decade, what’s led to some of the tensions we've seen in the UK with the franchisees?

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?