Domino’s is the leader in the global QSR pizza market. It was founded in 1960. The United States is the leading market of Domino’s followed by Canada. However, Domino’s operates its business across over 90 markets. The company has adopted a franchising business model. Apart from its 363 company-owned and operated stores in 2020, the rest of Domino’s stores of a total of 17,644 were operated by Domino’s franchisees. The company has experienced faster growth in recent years driven by a higher focus on digitization. In 2020, it achieved more than half of its sales through digital channels.
Domino’s experienced solid growth in sales during the pandemic. The reason behind the growth in sales during the crisis was that Domino’s was quick to respond to the changed situation by making changes to its operating model. Apart from that, the resilience of its business model and supply chain also helped the company survive the crisis. Domino’s has nearly transformed its entire business in a decade. Its digital transformation has been discussed and appreciated widely.
In this post, we will discuss the business model of Domino’s and how it has evolved starting with a brief history of the business and its business strategy. Apart from that, we will also discuss its business strategy and how it has enabled faster growth for the business and the company’s leading source of revenue.
Domino’s started in 1960 when Tom Monaghan and his brother, James together purchased “DomiNick’s,” a pizza store in Ypsilanti, Michigan. However, the next year, James sold his half of the business to Tom for a Volkswagen Beetle. In 1965, Tom, who was now the sole owner, renamed it Domino’s pizza. In 1967, the first Domino’s franchise store opened in Ypsilanti, Michigan. Domino’s pizza signed its 1000th franchise in 1990. It launched its website in 1996. In the same year, the company also achieved record sales of $2.8 billion system-wide.
The company rolled out online and mobile ordering in 2007. Domino’s launched its iPhone app in 2011 and the next year, the Android app. By 2018, the number of Domino’s stores had reached above 15,000. In 2020, the number of Domino’s stores has reached 17,644.
Domino’s has its headquarters in Ann Arbor, Michigan, United States. The net revenue of the company in 2020 reached $4.1 billion compared to $3.6 billion in 2019. The largest market of Domino’s based on net sales and number of stores is the United States.
How does Domino’s generate its revenue?
Domino’s is mainly a franchising business which means it does not operate the entire business itself but instead relies on a large number of franchises to operate its stores worldwide. Domino’s also owns and operates a small number of stores. However, the main purpose of operating these stores is not to generate revenue. Instead, it allows the company to carry out experiments. These stores work as test sites that the company uses for technological innovation and promotions as well as operational improvements. These stores are also useful for training prospective franchisees and employees. If the tests are successful, the company implements the strategies and innovations systemwide.
Around 98% of the company’s stores are operated by franchisees. It might make you think that the royalties or fees the company collects from them is the largest source of revenue for the company. However, that’s not true. The company’s largest source of income is the supply chain. Domino’s operates a large supply chain to cater to the needs of the US and Canada-based franchisees. The foods and vegetables it sells to its franchisees in the two markets is the largest source of income for the company. The royalties and fees the company collects from its franchisees (Including domestic and international franchisees) are the second-largest source of income for the brand. Apart from the royalties and fees, the franchisees also pay small technology fees to the company.
Business Segments of Domino’s: Sources of Income
Domino’s has divided its business into three main operating segments: Domino’s US, Domino’s international and supply chain. Domino’s supply chain is also a separate business segment and the leading source of revenue for the company. As already discussed, Domino’s operates only a small number of stores and the franchisees operate the rest of the stores in the US as well as overseas markets.
According to its 2020 Annual report,
“Domino’s generates revenues and earnings by charging royalties and fees to our independent franchisees. We also generate revenues and earnings by selling food, equipment and supplies to franchisees primarily in the U.S. and Canada, and by operating a number of Company-owned stores in the U.S. Franchisees profit by selling pizza and other complementary items to their local customers. In our international markets, we generally grant geographical rights to the Domino’s Pizza brand to master franchisees. These master franchisees are charged with developing their geographical area, and they can profit by sub-franchising and selling food and equipment to those sub-franchisees, as well as by running pizza stores directly. Everyone in the system can benefit, including the end consumer, who can feed their family conveniently and economically.”Domino’s Annual report, 2020.
The three business segments of Domino’s are:
- Domino’s US
- Domino’s International
- Supply Chain
Domino’s United States:
The US segment of Domino’s business includes both its franchised stores and company-owned and operated stores. The total number of Domino’s stores in the US in 2020 was 6,355. The company operated 363 stores and the number of stores run by the franchisees was 5,992. The franchised stores constituted around 94% of the total Domino’s stores in the US.
The company charges royalties and fees from the franchisees.
The US stores segment of Domino’s is the second-largest segment of the company based on the net revenue it generates. In 2020, it accounted for 35% of the company’s next revenue. Overall, this segment generated, $1.45 billion in net revenue in 2020. The company continuously evaluates its mix of company-owned and franchised restaurants to achieve the best balance.
The United States is the largest market for Domino’s and accounts for the largest part of its revenue. Its large network of franchised stores (included 5,992 stores in 2020) is operated by 762 independent franchisees. As of the beginning of 2021, the average number of restaurants operated by franchisees was 7 and the average time for which each franchisee had been a part of Domino’s system was 18 years. 19 of the US franchisees of Domino’s operated more than 50 stores and the largest franchisee of Domino’s in the US operated 178 stores. There were 228 franchisees of Domino’s operating one store each.
About Domino’s US franchising system:
Domino’s applies rigorous standards to its US franchisees to ensure quality and customer service. The company requires its franchisees to manage one store for at least one year and graduate from the Domino’s franchise management school program before they can franchise. In this way, the company is able to watch and verify the operational and financial performance of a prospective franchisee before entering a long term agreement.
Nearly all of the existing franchisees of the company in the US started their careers as delivery partners or in other in-store positions. This has helped them gain familiarity with the business and its operations. The company also applies some controls over its US franchisees who cannot get involved in other businesses. This allows them to focus their attention on the business solely.
Domino’s has applied unique standards to its operating model. However, it has resulted in higher efficiency and a highly resilient business model. It also allows the company to filer qualified and focussed franchisees to operate the company’s stores in the United States.
Domino’s has formed regional franchise teams to maintain productive relationships with its franchisees. It regularly distributes materials to help its franchisees comply with the company’s standards.
About US franchise agreements:
The company enters into long-term agreements with its franchisees. As a part of the agreement, a franchisee is allowed to operate a store in a particular location for a term of ten years. The franchisee also has the ability to renew the agreement for a term of extra ten years. The franchise agreement renewal rate in 2020 was around 99%, which shows a very high degree of satisfaction among the franchisees in the United States. The standard franchise agreement assigns an exclusive area of primary responsibility to each store. The franchised stores are required to pay a 5.5% royalty on sales, apart from certain technology-related fees. Sometimes, Domino’s can offer certain incentives to particular stores and lower the royalty rate for them.
Domino’s also runs national marketing campaigns with contributions from the franchised stores. The company has established a not-for-profit advertising subsidiary called Domino’s National Advertising Fund Inc. (“DNAF”) for this purpose. The company utilizes these funds to purchase media for advertising, and also to support market research, field communications, public relations, commercial production, talent payments, and other activities to promote Domino’s brand. The stores also spend on local store level advertising and promotions.
If a franchise fails to make the required payments, or to adhere to the franchise agreement or the company policies and standards, the company holds the right to terminate the franchise agreement.
The US segment of Domino’s operations generates revenue from the following sources:
- US company-owned stores.
- US franchise royalties and fees.
- US franchisee advertising.
Domino’s US segment performance in 2020 :
|US company owned stores||$453.6||$485.6|
|US franchise royalties and fees||$428.5||$503.2|
|US franchisee advertising||$390.8||$462.2|
Royalties and fees were the largest source of income for the US segment followed by the company owned stores in 2020. The company generated a total $1.45 billion revenue from the US segment. There was a net increase of around $179 million in the company’s revenue from the United States segment. The table below shows the break up net revenue of the company’s US segment for 2019 and 2020.
Revenues from the US company-owned stores increased by $32 million or 7.1% in 2020 compared to the previous year. The increase in revenue was mainly driven by the same-store sales growth and an increase of $10.6 million in the 53rd week. Company-owned same-store sales increased by 11% in 2020.
US Franchise Royalty and Fees:
Revenue from the US franchise royalties and fees increased by 17.4% in 2020 or by $74.7 million. The increase was mainly driven by higher same store sales.
US franchise advertising:
Domino’s revenues from U.S. franchise advertising increased $71.4 million, or 18.3%, in 2020, due primarily to higher same store sales and an increase in the average number of U.S. franchised stores open during the year resulting from net store growth, as well as an estimated $10.4 million impact of the 53rd week.
Supply chain segment of Domino’s:
The supply chain segment of Domino’s is the largest segment of the company which accounted for 59% of the company’s revenues in 2020. It generated $2.42 billion in the form of net revenues in 2020. The company operated 21 regional dough manufacturing and supply chain centers, two thin-crust manufacturing facilities, and one vegetable processing center in the United States. The company also operates five dough manufacturing and supply chain centers in the United States. The supply chain segment has a fleet of 900 leased tractors and trailers.
The dough manufacturing and supply chain centers of the company apart from manufacturing sites also act as storage sites. The materials that Domino’s sources from external suppliers are stored at these centers before benign delivered to the stores. Domino’s regularly supplies more than 6,800 stores with various foods and supplies.
Supply chain segment performance in 2020:
The supply chain segment of Domino’s experienced a growth of around 14.8% in 2020 compared to the previous year. The net revenues from this segment jumped by $311.8 million compared to the previous year. As the franchise retail sales in 2020 grew, so did the orders from the franchised stress resulting in higher supply chain revenue for Domino’s. APart from that pr[ice increases also drove higher revenue for the supply chain segment in 2020 by around $42.5 million.
International Franchise segment of Domino’s:
Based on net revenues generated each year, this is the smallest segment of Domino’s. It generated $249.8 million in net revenues in 2020 or 6% of the net consolidated revenues of the company. At the beginning fo 2021, the company had 11,289 franchised stores operating internationally.
The international franchise segment of the company includes a large network of franchised stores across more than 90 international markets. The royalty payments from these stores are the main source of income for Domino’s international franchise segment. The international franchisees also pay small technology fees to the company.
The basic standard operating model of dominos is the same worldwide. However, some changes might be implemented by the franchisees on a regional basis. The international franchisees adapt the basic standard operating model to cater to the regional eating habits and consumer preferences. The majority of Domino’s international stores are currently operated under the master franchise agreement. Master franchise companies operate the Domino’s stores in seven out of 10 of its largest international markets. For example, it is Jubilant Food companies in India and Dash Brands in China.
The master franchisees hold the franchise and distribution rights for the entire markets or countries. In some select markets, the company also franchises directly to individual store operators. The prospective master franchisees must have the local market knowledge to establish and develop Domino’s stores, and the ability to identify and access targeted real estate sites, as well as expertise in local laws, customs, culture, and consumer behavior. Apart from that, the company seeks candidates who have access to sufficient capital to meet the growth and development targets of the company.
Domino’s stores in the international markets are operated by master franchisees who sub-franchise and also hold the supply chain rights in their respective markets. Master franchisee agreements are generally formed for ten years and the master franchisees can renew them for additional terms. These agreements generally include growth clauses requiring franchisees to open a minimum number of stores within a specified period. The master franchisee must pay a one-time initial franchising fee and an additional franchisee fee with the opening of each new store.
The master franchisee is also required to pay an ongoing royalty fee, which was approximately 2.9% in 2020. The company has also formed agreements with some of its international franchisees related to technology fees.
International franchisee segment performance in 2020:
In 2020, the revenues from international franchisee operations increased by 3.6% or $8.8 million. The net revenue from the international franchise segment increases to $249.8 million in 2020 from $241 million in 2019. The increase was mainly driven by an increase in same-store sales.
Statistical measures the company uses to measure performance:
Domino’s uses two leading statistical measures mainly to measure sales performance. They include global retail sales growth and same store sales growth.
Global retail sales growth:
Global retail sales growth is a common statistical measure that is used industry-wide in the QSR industry. It refers to the total worldwide sales at the company-owned and franchised stores. This statistical measure helps understand business trends by comparing industry-wide global retail sales, and to track the business performance of domino’s pizza compared to rivals. Global retail sales growth, excluding foreign currency impact, is calculated as the change of international local currency global retail sales against the comparable period of the prior year. In 2020, the company experienced a global retail sales growth rate of 13.2%. The retail sales growth rate of the US stores was 17.6% and that of the international stores was 8.8%.
Same store sales growth:
Another important statistical measure that Domino’s uses to measure same-store sales performance in the same-store sales growth. It is a commonly used statistical measure of sales performance across the entire QSR industry. To measure same-store sales growth, the company includes only those stores that also had stores in the comparable weeks of the past year. Changes in international same-store sales are reported on a constant dollar basis which reflects changes in international local currency sales. In 2020, the same-store sales growth rate of Domino’s improved compared to the previous year. While it was only 1.9% in 2019, the same-store sales growth rate improved to 4.4% in 2020.
Store growth activity:
Store growth activity is also a statistically significant measure used across the QSR industry to measure performance. Growth in the number of stores also signifies growth in the QSR industry. In 2020, Domino’s experienced healthy store growth activity. Compared to the previous year, the number of stores at the end of 2020 was 624 higher. While the company opened 958 new stores, it closed 334 stores.
Five Operational Performance Objectives
Running an organization successfully requires having a well-defined set of performance objectives. There are five basic types of operational performance objectives that apply to nearly every business operation : cost, dependability, flexibility, quality, and speed. Each of these objectives has both internal and external implications for business operations. However, their internal implications have a definite impact on cost.
The first leading operational performance objective is quality which in general implies to perform consistently as per your customers’ expectations. Quality impacts several things including the level of customers satisfaction, brand image, success of your marketing strategy and has a very important role in terms of customer experience.
For different industries, quality can acquire different meanings For example, its implications can be different for the product industries and different for services. Apart from that, the quality standards that apply in the automobile industry, do not necessarily apply in the automobile or technology sector. In this way, there can be different meanings of quality in different industry settings or environments.
For example, in some industries like the hospitality industry, the level of staff friendliness is a leading parameter to define the overall quality of services, in the others the efficiency of products is the most important parameter to measure quality. The durability of a product may be the leading trait that customers are looking for in one case and in the other, it might be the degree of accessibility. Quality has various dimensions and one or the other grows prominent in different industry settings. Irrespective of everything else, customers across the world appreciate quality and it has a definite impact on the level of customer satisfaction across all the industries. Therefore, quality acn have a direct and significant influence on brand image and overall organizational performance. In the end, quality has a significant impact on your results.
Quality is related to a company’s image and it can bolster brand image as well as make several more things easier for a company including customer acquisition, retention and growth. In the context of the QSR industry, quality denotes several things and not just food quality, accessibility, store environment, staff friendliness, timeliness of delivery, organizational culture and several more factors also affect customers’ perception of the business and overall quality.
Considering the case of Domino’s quality implies food quality, customer service and overall customer experience. It is critical to note that customer experience in the QSR industry is affected by several factors including technology, marketing, store environment, merchandise, food quality, and customer service. Quality is one of the core drivers of Domino’s competitive edge in the US market and overseas.
Domino’s sells to customers in the US as well as overseas in more than 90 markets overall. It offers its customers in all its markets an omnichannel shopping experience. They can order using the app, dine in or take away from their nearest Domino’s store. While the brand is famous for its product quality (including the crust, cheese and toppings of its pizza products), in the case of the QSR brands, prices are also an important determinant of overall quality. If QSR brands price their products too low, they might end up being considered as selling inferior quality products and if they primec them too high, they may end up losing their customer friendly image. For food retailers, product and prices can be seen as two important aspects of quality.
So, for a large QSR brand like Domino’s there are several factors that together define quality. However, whether in an online or physical environment, price is an important factor affecting quality for food brands. It has a major impact on their brand image and customer experience. The QSR industry is marked by heavy price competition, which has continued to intensify with time. Companies are investing in managing those aspects of their business operations that can help them reduce their costs.
Domino’s is a popular brand and much of its popularity also rests on its pricing of its products. It has also helped the company manage higher popularity, maintain higher demand and grow its sales worldwide. A competitive pricing strategy in the QSR industry generally results in higher customer loyalty. Apart from its product quality, the pricing strategy of the company has also helped Dominos become the largest QSR pizza brand in the US and abroad.
However, managing competitive prices in the QSR industry also requires a higher focus on operational efficiency and reducing costs. Domino’s has invested in building unique supply chain capabilities that help it maintain product quality and control costs systemwide. In the future also, the company plans to continue to grow its investment in managing its supply chain since this will help keep prices under control and deliver superior quality to its customers worldwide. Domino’s has a diverse menu that includes a large variety of pizza and complementary fast food products. Managing a strong supply chain has also helped the company maintain lower prices and pass on the benefits to its consumers. However, Domino’s has also maintained a superior focus on customer experience. It is recognized for its customer service and unique organizational culture.
So, in terms of quality, the company has managed its focus on every aspect of its business operations that are related to quality. This has helped the company maintain. superior operational performance and grow its brand image stronger.
Speed has also become an integral part of business operations and requires intense focus by businesses in almost all industries including the QSR industry. The industry has evolved very fast in recent years and companies need to be fast in all aspects including supply chain, production, marketing, customer service, and customer engagement.
Even in the QSR industry, the companies need to focus on bringing speed in all aspects of business and every stage of their value chain. Sometimes speed becomes just as important as the other factors including price and quality.
In the QSR industry, long waiting times will result in lower customer retention rates, poor brand image, and lower sales. For managing speed in the industry, a firm needs to establish an efficient supply chain, innovative and fast sales channels like apps that are easy to access, fast, and deliver superior performance and provide a superior customer experience.
Domino’s has invested in digital technology to speed up things in its system from ordering to payment and delivery. Apart from that, its supply chain is also highly digital which makes product sourcing easier and delivery to the stores faster.
In India, the entire business model of Domino’s was built around speed. the company promised delivery to your doorstep within 30 minutes to gain market share and build a strong presence in the Indian market.
Speed can add enormous value in the QSR industry and to find growth a business must invest in areas that can help improve the speed at which things move inside the system. Employee training is also a critical enabler of speed in the QSR industry and employees must be trained to provide faster service and be more friendly to customers.
The use of digital channels for sales and delivery by Domino’s has helped , the brand bring higher efficiency and agility to its business operations. With more agile supply chain and store operations, the company is able to serve its customers more satisfactorily.
Across the entire retail industry including food and other sectors a s well as e-commerce, speed has become critical. It is an important source of competitive advantage for the companies operating in the retail sector. If Domino’s is more famous compared to the other pizza brands, then it is also due to the efficiency and agility of its business system. Things happen faster inside the Domino’s stores. From ordering to the table or the customer’s doorstep things have acquired much more sped than e ever before at Domino’s.
Reliability or dependability is also a critical sign of a company’s market position and strong brand image. If brands rely on one brand more than the others, it can be a critical source of competitive edge for the brand. Brands try to build trust among their customers using various methods.
Quality is one of the most essential elements required to building trust among the customers. Apart from that, company culture, brand image, marketing, and other factors also affect how much the customers’ trust a brand.
In any industry, you will find that the brands that the customers rely on the most are ahead of all the others in the industry sector. In several sectors, dependability mainly depends on the quality of products, but in many others, it is the other aspects of business also like marketing, customer service, and prompt delivery that affect dependability. For example, in the case of Domino’s product quality and customer service are the central drivers of dependability for the business but other factors too like the level of digitalization, marketing, and pricing strategies are also related to dependability. Good product quality and the right pricing strategy have helped the brand earn stronger word of mouth across various markets. Stronger word of mouth leads to higher dependability and is a sign of stronger brand equity.
Most businesses that want to be successful need to ask themselves the question that why the customers would depend on it. If the business wants that more and more customers depend on it, it will focus on understanding their needs and preferences and try to serve them better. If customers rely on domino’s it is mainly because it understands the needs and preferences of the consumers better than its rivals and has also succeeded in responding to changing consumer preferences better.
Operational flexibility is also a key factor related to operational performance and has a significant impact on the performance of businesses overall. In general, flexibility means the ability of a business to adapt its operating model to the situation. It implies the ability to change what, how and when operations do as per the situation. It includes products/services mix flexibility, volume flexibility and delivery flexibility.
Product/services mix flexibility means the ability to introduce new/customized products according to the needs of the customers or the ability to widen the product/services mix as per the need. Volume flexibility means the ability to increase or decrease the production volume according to the need. At different times, the same business may need to vary the output level as per demand. similarly, delivery flexibility means the ability to change delivery times according to the need. operational flexibility is also a sign of efficiency and in most cases, higher flexibility denotes superior performance. Supply chain flexibility is often critical to operating successfully across several industry sectors. Moreover, the meaning of flexibility may differ by industry environment. In a health care environment, the ability to introduce new treatments or widen the range of treatments available can be the main sign of flexibility. However, flexibility can. acquire an altogether different meaning in the automobile industry.
In the QSR industry, flexibility includes all three: product/services mix flexibility, volume flexibility, and delivery flexibility. Demand in the QSR sector can grow seasonally or when the company is running a specific market campaign which leads to a surge in demand. Accordingly, the company may need to grow the production level, or increase the number of operating stores to accommodate the extra demand. In this regard, Domino’s is a highly flexible company. Apart from its ability to grow its output or reduce it according to seasonal variations in demand, the company can also quickly open new stores in various markets. It can also introduce new products faster according to changing customer preferences and needs in various markets. Apart from that, it is also highly flexible in terms of delivery to its customers in various markets. Overall, the company is a leader in terms of operational flexibility and has experienced growth in take-away in 2020. the company is already a leader in pizza delivery.
Costs in the context of five operational performance objectives denote the operating costs and expenses incurred by companies as a part of their operations. For most companies, their main objective is to increase their profitability by controlling their operating expenses. The proportion of various costs including fixed and variable costs from one industry to another can often vary. In one industry, the costs of staffing may constitute the largest costs, but in the other industry, the costs of raw material may constitute the largest operating expenses. This is the case in most industries and companies.
Firms can keep the prices of their products or services for their customers lower if their operating expenses are low. All the firms in the industry do not compete on the basis of prices. For example, while Walmart competes with the other retail firms on the basis of prices, Apple does not. Some firms compete on the basis of prices, others on the basis of quality or a large product range, or even in terms of the performance and durability of their products. Some companies focus on marketing and promotions more than others to maintain their competitive position in the market.
However, every firm is interested in reducing its operating costs and even the firms that do not compete on the basis of prices want to bring their operating costs under control. If a company can bring its operating expenses under control, that can help the company grow its profitability. Every penny that a company saves adds to its profits. Companies that save more can pass the benefits to the customers by keeping prices lower for the customers.
For example, Walmart manages to source products at lower prices and in turn passes this benefit to its customers. Domino’s also manages a large part of its supply chain which helps it keep its own and its franchises’ operating expenses lower. around 98% of the company’s business is operated by the franchises from which the company charges royalties and fees. This also helps the company reduce its operating expenses since the company does not have to worry about the operating expenses of thousands of its stores that are operated by its franchisees.
A few last words about Domino’s Business Model:
One of the leading strengths of Domino’s is its highly resilient business model. The company has established a simple but straightforward business model. It serves good quality food at affordable prices to its customers worldwide. Apart from that, it maintains an intense focus on customer service to attract and engage customers.
The company has also been investing in technological innovation to achieve superior results. The resilience of its business model and supply chain was proved during the pandemic. Despite the difficult situation, the company managed to improve sales and gain superior results with some changes to its operating model to suit the changed conditions.
Domino’s was already a leader in the QSR delivery sector and now it is experiencing increased demand in the takeaway segment also. Technology has proved to be a leading differentiator for the company helping it get ahead of its rivals in the QSR pizza sector.
Domino’s does not rely solely on the franchisees for income. While its system is managed mainly by the franchisees, the company generates a significant part of its revenue from the supply chain business which caters to the franchised businesses in the United States and Canada. Its international segment accounts for only a small part of its revenue.
However, the company is a globally recognized brand and its investment in marketing has also paid off in recent years. Compared to a decade ago, Domino’s has changed a lot. Its business model has evolved a lot in these years and the company’s culture and business model have played a central role in its success and growth. The company plans to invest more in strengthening its supply chain to make the resilience of its business model grow.
The QSR industry is highly competitive and the industry environment is full of challenges. Domino’s is currently dominating the QSR pizza sector but its rivals including Pizza hut also enjoy a significant competitive edge. Technology, food and service quality and marketing will remain the major factors that will help the company overcome the competitive pressure and find faster growth.
Domino’s has maintained strong relationships with its franchisees in the US and Canada as well as other overseas markets. While its business model has proved highly profitable for its franchisees, its focus on maintaining strong relationships with its franchising partners has also helped it grow their satisfaction from the brand.