Domino’s Pizza, recognized globally for its pizzas, operates over 20,000 outlets worldwide. Yet, contrary to what many might assume, pizza sales don’t account for the majority of its revenue. So, where does the bulk of its income originate?
In the past 12 months, Domino’s earned less than $400 million from pizza sales, a surprisingly modest figure. Surprisingly, pizza sales constitute a relatively small part of its total revenue. A substantial portion, nearly 60%, arises from an unexpected source.
The pizza giant’s filing indicates a staggering $2.7 billion in revenue from its supply chain operations, contributing to a significant 60% of its total revenue in the given period.
Interestingly, Domino’s owns a mere 1% of its vast network of 20,000 outlets. The direct sale of pizzas to customers thus generates a fraction of its revenue.
The remaining 99% of Domino’s outlets are independently owned by franchisees. While these franchisees can procure their supplies independently, Domino’s has successfully persuaded them to opt for its supply chain.
The company manages a fleet of over 1,000 delivery vehicles, ensuring a steady stream of food, supplies, and equipment to both its company-owned and franchised stores. Notably, Domino’s operates numerous facilities dedicated to producing pizza dough.
Although Domino’s profits from supplying these essentials, it ingeniously shares a significant portion of these profits with its franchisees, generally around 50% of pre-tax profits, as confirmed by management.
This profit-sharing mechanism has driven high adoption rates among over 7,200 US and Canadian locations. Notably, this centralized sourcing ensures consistent quality across outlets.
This intricate strategy underscores Domino’s effort to secure a competitive edge in the fiercely competitive restaurant industry. While other chains may focus on taste, Domino’s, leveraging its extensive scale, excels in competitive pricing.
Despite the low-margin nature of its supply chain business, Domino’s leverages this model to retain a substantial number of franchisees, a key driver behind its impressive growth trajectory.
Moreover, franchise fees and royalties constitute almost pure profit for Domino’s. The remarkable 99% contract renewal rate among franchisees in 2022 signifies the appealing prospects Domino’s offers, setting the stage for the company to add over 1,100 new franchised locations annually until 2028.
This growth trajectory suggests a promising outlook for Domino’s operating profit, with expectations of an 8% compound annual growth rate through 2028. These ambitious projections, coupled with share buybacks and dividend growth, paint an optimistic future for investors, projecting a potential 50% or more total return over the next four years.
This strategic shift towards a supply chain-centric model, ahead of its pizza business, positions Domino’s for substantial growth and sets the stage for a potentially remarkable investment performance in the coming years.
