Financial Information for Business Decisions - Dominos Pizza - Case Study Example

Executive Summary The Domino’s Pizza company’s average yearly growth for the period 2007 is 17%. The year is the least profitable, and it is featured with the lowest growth rate (9.3%). Regardless of the fact that pizza consumption grew, the amount of market players increased as well, which caused the reallocation of the marketing powers. The same should be stated concerning the dividend per share values. The 2011 levels are the lowest. The increase of the franchise sells stimulated the company’s growth (including the dividend per share and system sales). Nevertheless, the decrease in the operational costs lowered the franchise network development rates. The overall 2007-2011 growth is higher in comparison with the growth of other pizza delivery companies, and most researchers emphasize that this growth is caused by the increased demand rates. Domino’s Pizza Business Model Domino’s Pizza is the international company, engaged in the sphere of Pizza delivery, and, in accordance with the marketing studies by Dicke (2011), it is the second pizza delivery company in the world. It operates more than 12,000 shops (including corporate and franchise) in more than 70 countries. In accordance with the Oppenheimer Annual Investment Presentation, the market share in 2012 looks the following as on the diagram. (in Stark, 2012) In general, Domino’s is regarded as one of the most recognizable pizza delivery brands in the world. In accordance with the business review data, it delivers up to 1 million pizzas every day. Therefore, it should be emphasized that the actual difference of the Domino’s business model can be explained by the there three key principles of staying in the head of pizza delivery sphere: 1. The delivery oriented design of the stores and cafes. Therefore, making emphasis on the delivery, the company managed to lower the delivery costs and efficiency. 2. Vertical supply chain 3. Franchising Therefore, Domino’s Pizza has several business development directions, which are intended for creating the operating margin and keeping the prices lower, while the wheat and cheese costs grow. Since this exceeds the analyzed business period, it should be emphasized that the essential change of the business model was performed for the 2006-2007 period. Therefore, while the overall pizza delivery market tended to lower (with the consequent decrease of the labour market, as well as the competition growth), the Domino’s managed to stay among the leaders, and increase its revenue by implementing a comparatively new delivery model, presupposing the every order is delivered within 30 minutes after the order has been processed. The further development model is associated with strengthening the competitive advantage, as well as increasing its franchise network. Considering the fact that the business environment changes have caused the necessity to increase the prices, as well as improve the quality of the final services, Domino’s Pizza has to keep the network growth rates stable, since it is the most reliable way of keeping quality of the services highly competitive. Income Statement Analysis £ 000 2007 2008 2009 2010 2011 Revenue £ 209 863 £ 188 149 £ 155 044 £ 135 977 £ 113 891 cost of sales £ -132 939 £ -117 495 £ -95 597 £ -85 153 £ -70 736 Gross profit £ 76 924 £ 70 654 £ 59 447 £ 50 824 £ 44 155 distribution costs £ -13 026 £ -11 539 £ -9 993 £ -9 185 £ -9 246 administrative costs £ -24 867 £ -23 671 £ -23 949 £ -18 141 £ -16 746 39 031 35 444 25 505 23 498 18 163 share of post tax profits of associates £ 335 £ 219 £ 553 £ 187 £ 158 Operating profit £ 39 366 £ 35 663 £ 26 058 £ 23 685 £ 18 321 Profit before interest and taxation £ 39 366 £ 35 652 £ 41 328 £ 22 527 £ 18 667 Finance income £ 334 £ 196 £ 165 £ 584 £ 528 Finance expense £ -911 £ -644 £ -525 £ -962 £ -619 Profit before taxation £ 38 789 £ 35 204 £ 40 968 £ 22 149 £ 18 576 Taxation £ -12 323 £ -11 139 £ -7 475 £ 6 485 £ -5 337 Profit for the period £ 26 466 £ 24 065 £ 33 493 £ 15 664 £ 13 239 2007 2008 2009 2010 2011 Revenue 209 863 188 149 155 044 135 977 113 891 Revenue growth 14 % 10 % 18 % 14 % 13 % The key factors that stimulated the positive revenue growth of the Domino’s Pizza may be restricted to the effective business modelling, as well as proper investment strategy. Nevertheless, in accordance with the research by Gasparro (2012) it should be emphasized that the actual importance of the proper investment strategy can be explained by the opportunity to draw sufficient attention to the company. Hence, the success of the Domino’s pizza company is the direct result of its franchises. However, the franchises are often regarded as the result of the overall restaurant business growth. The four percent growth was forecasted for the overall industry in 2011 (Hayek and Salem, 2011). However, while the quick service restaurants boom has already passed (Stark, 2012), the quick delivery sphere continues growing. Therefore, the Domino’s pizza, with its competitive advantages, as well as properly arranged business model has an essential growth capacity. Moreover, its advertisement campaign is essentially more effective, in comparison with the ads launched by small chains, and independents. The clear and brief message, given in the ads makes the image of Domino’s more attractive for the target audience. The high quality products may be regarded as one of the key success factors, as regardless of the investment strategy, franchising principles, or advertising, if the final product quality is low, the company is doomed. The combination of the enumerated factors provides the most effective formula for the effective business growth and development. In general, investments, clear message, given through the advertisement, high quality products as well as the effective franchising strategy are the sufficient factors for the balanced business development of the quick deliveries; nevertheless, most small chains neglect the importance of the balance. Revenue Fundamental Analysis The 2007 – 2011 growth of the company is explained by the effective balance of the success factors. However, the fundamental financial principles involve the proper restructuring of the product positioning approach. While numerous pizza cafes compete in the sphere of cooking high quality product, offering dozens of pizza menus, Domino’s became one of the first companies that made an accent on the delivery aspect. Such a shift helped to create the innovative competitive advantage, and the 2007 – 2011 period is featured with the changed accent, made on the delivery time. In accordance with the chief financial officer’s review (2007), it should be emphasized that the high revenues are achieved by implementing effective trade strategy. Therefore: Group turnover, which includes the sales generated by the Group from royalties, fees on new store openings, food sales, finance lease and rental income, as well as the turnover of corporately owned and operated stores, grew by 21.0% to £114.9m (2006: £95.0m). (Domino’s Pizza UK and IRL Annual Report. 2007, p. 16) The Long Term Incentive Plan for increasing the company’s revenue, accepted in 2007, presupposed the 32.7% growth. However, the group operating profit lowered in 2008, and operational costs were not included into the company’s growth strategy. This caused the lower growth rates, while the amount of franchises exceeded the expected number for 2007. The international activity performed by Domino’s is based on the franchise network development. Therefore, it operates up to 4 500 stores globally, that are included into an effective supply chain. The international operational segment generates up to 60% of the company’s revenue. Domestic stores are responsible for 25%, and the rest 15% are generated by the international enterprise activity. Other Features of the Income Statement Considering the fact that pizza, beverages, and French fries are the key products the company offers to its customers, the franchise incomes are regarded as the key revenue source for the Domino’s Pizza. Cash flows from investing activities 2011 2010 2009 2008 2007 Interest received 175 196 165 584 528 Dividends received from associates 70 21 383 82 62 (Increase) / Decrease in loans to franchisees 30 - - - - Receipts from repayment of franchisee finance leases -1 112 2 372 1 993 - - Purchase of property, plant and equipment 2 186 -9 862 -21 150 -10 533 -3 509 Leasing -4 413 - - - - Purchase of other non-current assets -3 171 -1 740 -1 358 -895 -451 Cash proceeds on the disposal of subsidiary undertaking - - 23 31 1118 Considering the essential operating margin drop in 2008, the company performed specific stabilization measures that helped to increase this margin in 2009. In distinction with the other companies (who also suffered the drop), Domino’s Pizza CEO was aimed at long-term development, and the company realized the importance of keeping the experienced personnel, instead of hiring and educating newbies. This helped to cut the HR expenses, and arrange stabilisation team for attracting shareholders. Considering the cash flow analysis, it should be stated that the Domino’s Pizza Company is also engaged in arranging additional business sources. Therefore, Domino’s operate at least 35 enterprises all over the world, which is aimed at several perspectives: 1. Increasing the franchise network 2. Creating effective branding diversification 3. Performing competitive and marketing intelligence on the new markets and territories 4. Improving the company’s overall positive image Additionally, the business model of the company is intended for offering high speed and high quality products and services. The properly arranged business performance is the key factor that helped Domino’s to set the positive financial development trend. Critical Comparison with the Competitors Pizza Hut may be regarded as the key competitor of the Domino’s in the sphere of fast food delivery. In fact, it is often mentioned as the most well known pizza cafe network, nevertheless, in accordance with the Oppenheimer investment conference presentation (in Stark, 2012), Domino’s is the evident market leader (with up to 1900 stores opened for the period 2006 - 2011), while Pizza Hut, and Papa John’s with 1200, and 560 correspondingly. However, Pizza Hut is #1 in accordance with the US revenues, and is considered as the largest pizza delivery network. On the other hand, Domino’s has an essential growth opportunity, and, in distinction with its competitors is aimed at developing its network in China. (________). In accordance with the market development recommendations, the Domino’s should make accent on paying the long-term debt, as well as increasing the shareholders’ investment values. Comparing Pizza Hut and Domino’s Pizza, it should be stated that Pizza Hut is featured with larger investments ($2,974,000 million, and $461,700 million correspondingly). Such investment position became the basis for completely different franchise support principles. In distinction with the Domino’s, Pizza Hut performs cooperative sourcing along with advertisement, business coaching, and steady development strategy. Domino’s, in its turn, makes places essential accent on proper training, and HR strategy. Such an approach helps Domino’s spend less for the network development, while effective training program for the franchise owners may be regarded as one of the key attractive aspects that help to increase the network all over the world. Summary Cash flow analysis, performed for the Domino’s Pizza, revealed the fact that the company’s operating activities reflect the actual situation on the market of pizza delivery. Therefore, while the market experienced an essential drop in 2008, the company experienced the increase in debtors, as well as the drop in the cash generated levels. Hence, the loans to franchises equalled 0, since the company lacked operational margin resources, needed for the effective network development. The fundamental cash flow analysis shows that regardless of the possible cuts and drops, the company managed to preserve the balanced development course for the years 2008-2010, nevertheless, the 2011 was featured with the decrease in receivables, which caused the 22% drop of the operational costs and equivalents. Works Cited Dicke, T. S. 2011. Franchising in America: The Development of a Business Method,. Chapel Hill, NC: University of North Carolina Press. Domino’s Pizza UK and IRL Annual Report. 2007. Kingston, Milton Keynes. Gasparro, A 2012, "Dominos Sticks to Its Ways Abroad". Wall Street Journal 259 (89): B10. Hayek, M., & Salem, R. 2011. A Conversation with the Pizza Princess: Diane Barrentine on Entrepreneurial Leadership. Journal of Applied Management and Entrepreneurship, 16(2), 96 Stark, A. 2012. Pizza Hut, Dominos, and the Public Schools. Policy Review, 59. Read More