Dominos report

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Dominos report

  1. 1. Integrated Company Analysis Domino’s Pizza Team B6 December 14, 2010“On my honor, I have neither given nor received unauthorized aid in completing this academicwork.” Tai Adkins Vanessa Bailey Ben Schmidt Ankushh Partap Soni Joe Ypma
  2. 2. Domino’s Pizza – Integrated Company AnalysisTeam B6December 14, 2010TABLE OF CONTENTSEXECUTIVE SUMMARY ............................................................................................................. 3BUSINESS SEGMENTS ................................................................................................................ 3ACCOUNTING AND FINANCIAL ANALYSIS .......................................................................... 4 Revenue....................................................................................................................................... 4 Cost of Goods Sold ..................................................................................................................... 5 Financial Ratios........................................................................................................................... 5 Inventory Accounting ................................................................................................................. 6 Allowance for Uncollectible Receivables ................................................................................... 6 Long-lived and Intangible Assets................................................................................................ 6 Capital Structure ......................................................................................................................... 7 DCF Valuation ............................................................................................................................ 8MARKETING ANALYSIS ............................................................................................................ 9 Competitive Analysis ................................................................................................................ 10 Customer Analysis & Market Segmentation............................................................................. 10 Positioning & Marketing Mix ................................................................................................... 10OPPORTUNITIES FOR GROWTH ............................................................................................. 11 Developing a Loyalty Program ................................................................................................. 11 Increased Expansion in China ................................................................................................... 12CONCLUSION ............................................................................................................................. 12 Page 2 of 20
  3. 3. Domino’s Pizza – Integrated Company AnalysisTeam B6December 14, 2010EXECUTIVE SUMMARY Domestically, Domino’s faces highly competitive markets and challenges from PizzaHut, Papa John’s and various local/regional competitors. Internationally, opportunities aboundbut Domino’s faces the challenge of converting customers to its quick-service model. Even withthese challenges, Domino’s has generated fairly consistent Net Operating Income (NOI) over thepast decade. This steady NOI has been necessary to service the high level of debt with whichDomino’s is financed. Domino’s has nearly $1.5 billion in debt on approximately $450 millionof assets. As such, Domino’s carries a negative balance in Retained Earnings and a Stockholders’Deficit. Servicing and paying down its debt will be central to Domino’s again achieving positiveshareholder equity. In the face of its debt, Domino’s has undertaken several initiatives to growNOI, including successfully launching a revamped pizza product and increasing its internationalpresence. To continue growing NOI, we recommend Domino’s consider initiating a loyaltyprogram for its domestic customers and as well as broader expansion into China.BUSINESS SEGMENTS Domino’s business is comprised of three segments: domestic stores, domestic supplychain and international. See Appendix A for a breakdown of revenues by business segment.  Domestic Stores – Domino’s franchises 4,461 stores and owns an additional 466 stores. Domestic stores generated revenues of $493.6 million in FY 2009, which were approximately 35% of total revenues. While domestic franchise fees have been a consistent 11% of total revenues for the past decade, revenues from domestic company- owned stores have been decreasing as a percentage of total revenue, from nearly 30% of total revenue in FY 2002 to about 25% in FY 2009.  Domestic Supply Chain – Domino’s supply chain generated revenues of $763.7 million in FY 2009, which were approximately 54% of total revenues. Domestic supply chain Page 3 of 20
  4. 4. Domino’s Pizza – Integrated Company AnalysisTeam B6December 14, 2010 contains 16 dough manufacturing and food centers, one thin crust manufacturing center and one vegetable-processing center. These facilities manufacture dough and distribute food supplies to all company stores and to 99% of domestic franchised stores.  International – Internationally, Domino’s franchises 4,070 stores in over 60 international markets. Domino’s international supply chain also contains six dough manufacturing and supply centers. Together, the international business for Domino’s generated revenues of $146.7 million in FY 2009, which were approximately 11% of total revenues. As a percentage of total revenue, international revenues have been steadily increasing, from 6% of total revenue in FY 2002 to 11% in FY 2009. The international segment generates an operating margin of 45%-55% versus only 20% for domestic company-owned stores. As of 3Q FY 2010, Domino’s international store count was 46% of its total store count, most of which are operated under master franchise agreements with large companies that own many stores. For example, Higa Industries Co., Ltd., the Japanese master franchisee, operates 179 stores in Japan. See Appendix B for a list of the largest international markets for Domino’s.ACCOUNTING AND FINANCIAL ANALYSISRevenue For the first time since FY 2006, both domestic and international revenues are growingon a year-over-year basis in FY 2010. Management believes some of this growth is a short-termeffect generated by increased marketing and its revamped pizza product, but management alsoexpects some of the growth to be sustaining. Revenues fluctuate from time to time as a result of store count changes. Retail sales fromcompany-owned stores are recognized when items are delivered to or carried out by customers,while revenue from franchisees are determined and paid to Domino’s weekly based on a Page 4 of 20
  5. 5. Domino’s Pizza – Integrated Company AnalysisTeam B6December 14, 2010percentage of retail sales (generally 5.5%). Domino’s will record royalty revenues based on anestimate of the franchisee’s sales when figures are not timely reported by franchisees, and theseestimates are materially consistent with actual amounts.Cost of Goods Sold Domino’s business remains subject to price fluctuations for its commodity ingredients,especially cheese and red hard wheat. While these prices increase the cost of goods sold forDomino’s company-owned stores, Domino’s receives some benefit of higher ingredient prices inthe form of higher revenues for its supply chain operation. Domino’s has a five-year contractwith its largest cheese supplier and does not use derivative instruments to hedge its costs forcommodity ingredients. While prices are not hedged, operating margins have remainedconsistently between 25-27% over the past decade.Financial Ratios As of 3Q 2010, Domino’s held total assets of approximately $426 million againstliabilities of approximately $1.667 billion. Thus, Domino’s carried a stockholder’s deficit of$1.242 billion. This capital structure is quite atypical, not only for its industry but also generally.Domino’s competitor Papa John’s, for example, at the end of its FY 2009 held assets ofapproximately $359 million against liabilities of approximately $212 million for totalstockholders’ equity of approximately $185 million. Domino’s debt-to-assets ratio is 3.47 ascompared to Papa John’s 0.25, and Domino’s debt-to-equity ratio is (1.19) as compared to PapaJohn’s 0.53. The difference in these numbers is primarily due to Domino’s debt. Due to its large stockholders’ deficit and highly leveraged capital structure, Domino’smeasures of profitability can be hard to interpret. On one hand, over the past year Domino’sreturn on equity was (6.6)% as compared to 27.8% for Papa John’s. On the other hand, over thepast year Domino’s had a gross margin of 27.8% versus 27.4% for Papa John’s, and Domino’shad a return on assets of 20.1% as compared to 13.6% for Papa John’s. Further, Domino’s asset Page 5 of 20
  6. 6. Domino’s Pizza – Integrated Company AnalysisTeam B6December 14, 2010turnover ratio of 3.57 compares favorably to 2.76 for Papa John’s. Each of these measuresreflects Domino’s ability to generate high levels of sales from minimal assets. As well, Domino’shas a relatively low level of short-term debt. Domino’s current ratio is 1.65 and it has a workingcapital surplus of $104.1 million. Domino’s is positioned well to cover its short-term obligations.See Appendix C for additional accounting metrics for Domino’s.Inventory Accounting Domino’s uses lower-of-cost-or-market (determined using the FIFO method) to valueinventories, which is common among QSRs. As previously mentioned, Domino’s does notcurrently use derivative instruments to hedge against changes in prices for ingredients.Allowance for Uncollectible Receivables Domino’s estimate for uncollectible receivables is based on historical collectionexperience and a review by aging categories. At the end of its FY 2009, Domino’s allowance foruncollectible accounts receivables stood at approximately $9.2 million, or approximately 10.8%of consolidated gross accounts receivable, a level which management expects to maintain.Long-lived and Intangible Assets Domino’s records at cost its long-lived assets, including PP&E and capitalized software.Domino’s depreciates and amortizes these costs using a straight-line method. For acquisitions offranchisee operations, Domino’s estimates the fair values of the assets and liabilities acquiredbased on a physical inspection of assets, historical experience and other information available.Domino’s goodwill amounts are primarily related to franchise store acquisitions and are notamortized. Domino’s performs impairment tests in Q4 of each fiscal year and did not recognizeany impairment charges for long-lived or intangible assets in FYs 2007, 2008 or 2009. Domino’sreduced its goodwill by approximately $3.1 million in FY 2008 and by $300,000 in FY 2009 dueto the sale of company-owned stores, while it increased goodwill by approximately $200,000 inFY 2009 due to acquisition of stores from franchisees. Page 6 of 20
  7. 7. Domino’s Pizza – Integrated Company AnalysisTeam B6December 14, 2010Capital Structure Domino’s completed an initial public offering of its stock on July 16, 2004, though it soldonly a portion of its company. As of FY 2009, Bain Capital (which purchased 93% of thecompany from founder Tom Monaghan in 1998) remains the largest shareholder of Domino’s. In FY 2007, Domino’s executed a recapitalization of the company, whereby it took onapproximately $1.7 billion in long-term debt and repaid all of its then-existing long-term debt.Domino’s used part of the recapitalization proceeds to pay common shareholders a specialdividend of $13.50 per share. First priority of cash collected is given to repayment of interest onthe long-term debt. Cash is segregated weekly and accounted for as restricted cash. The recapitalization debt was securitized and syndicated after issuance. As well,Domino’s insures all principal and interest obligations under the Class A-2 Notes and VariableFunding Notes. Premium payments on these insurance policies are accounted for as additionalinterest expense. Financing costs associated with the recapitalization have been capitalized andare amortized as interest expense. Since the recapitalization, Domino’s has retired approximately $290 million of long-termdebt while drawing $60 million of its previously untapped Variable Funding Notes. Thus,Domino’s has approximately $1.47 billion of outstanding long-term debt as of 3Q FY 2010.Debt Class Maturity Date Capacity Amount DrawnClass A-2 Fixed Rate Notes April 2012; can extend $1,600,000,000 $1,310,000,000(5.621% interest-only) to April 2014Class A-1 Variable Funding April 2014 $60,000,000 $60,000,000Notes (Comm. Paper + 50 bps)Class M-1 Fixed Rate Notes April 2012; can extend $100,000,000 $100,000,000(7.629% interest-only) to April 2014Total $1,850,000,000 $1,470,000,000 As indicated above, Domino’s can extend the maturity of its Fixed Rate Notes to April2014 if the Company maintains a certain debt service coverage ratio (DSCR). As of 3Q 2010,management indicates that the Company continues to exceed the required DSCR. Management Page 7 of 20
  8. 8. Domino’s Pizza – Integrated Company AnalysisTeam B6December 14, 2010has also indicated that it intends to take advantage of the full extension period, though it willconsider attractive financing options in the interim. A typical DSCR measures the ability of a company’s cash flow to cover all debtpayments. A proxy for the exact ratio can be determined by comparing NOI to debt service. Therelatively steady NOI that Domino’s generates year-over-year makes it possible to take on a highlevel of debt while remaining in compliance with its DSCR. Since the 2007 recapitalization,Domino’s DSCR (i.e., NOI/interest expense) has been:(In $000s) FY 2007 FY 2008 FY 2009 FY 2010 (3Q)NOI 193,910 195,030 189,509 160,314Interest Expense 130,374 114,906 110,945 67,945DSCR 1.49 1.70 1.71 2.36Domino’s has been making a concerted effort to reduce the principal amount of its debt, which inturn reduces interest expense. By reducing interest expense, Domino’s is able to increase itsDSCR for the same level of operating performance and reduce the possibility of triggering adefault in its long-term debt covenants. The Company’s steady performance justifies further refinancing of the debt. We feelDomino’s will likely be able to negotiate some extension of its current loan terms, althoughperhaps at a slightly higher effective interest rate that the Company is currently paying. If not,Domino’s could be forced to file for bankruptcy. We consider bankruptcy unlikely, as it benefitsneither the bondholders nor equity holders so long as operating performance remains steady.DCF Valuation To determine a value for Domino’s, we first calculated Domino’s weighted-average cost-of-capital (WACC). Using weekly returns for DPZ shares from Domino’s IPO in July 2004through present, and using the S&P 500 as a proxy for market returns, we determined Domino’sbeta (β) to be approximately 1.17. We used a risk-free rate of 3.3%, based on the 10-yearTreasury bond yield. We assumed an equity risk premium of 9.2% based on historical averages. Page 8 of 20
  9. 9. Domino’s Pizza – Integrated Company AnalysisTeam B6December 14, 2010Using Domino’s market debt-to-equity ratio of 162% (i.e., debt of approximately $1.5 billion andmarket value of equity of approximately $925 million), we calculated an after-tax adjustedWACC of 7.2%. Using WACC, we built a discounted cash flow model of Domino’s projectedfree cash flow to the firm through 2015 and determined a value for Domino’s of $1.732 billion.See Appendix D for a list of the assumptions used to calculate WACC. Given Domino’s long-term debt of $1.47 billion, equity holders have claim toapproximately $1.732 less 1.47 billion = $262 million of the firm’s value. With a weightedaverage of 60.5 million shares outstanding through 3Q FY 2010, the share price of Domino’sshould be about $4.32 per share. While this is far lower than the $15.40 per share price at whichDomino’s most recently closed, the difference is likely to due to two factors. First, investors maybe expecting another special dividend when Domino’s again restructures its long-term debt in2012 or 2014. Secondly, Domino’s investors are likely expecting growth. If one assumes thatDomino’s free cash flow will grow in the long term rather than remain constant, the terminalvalue component of Domino’s share price increases. A long-term growth rate of 2.5%, forexample, will generate a share price of $15.23 per share, which is about the same price at whichDPZ most recently closed. Achieving 2.5% long-term growth for a company with the maturity ofDomino’s is realistic, so we feel the market is pricing DPZ stock relatively fairly. At the sametime, future long-term growth is vital to justifying the share price at which DPZ is currentlytrading, so Domino’s must continue to seek new ways to achieve this expected growth.MARKETING ANALYSIS Future growth for Domino’s can be optimized with smart marketing decisions. To assessDomino’s marketing efforts, we analyzed Domino’s segmentation and positioning strategies. SeeAppendix E for our SWOT analysis of Domino’s. We also surveyed 221 U.S. adults regardingtheir impression of Domino’s pizza product as well as their views on hypothetical loyalty Page 9 of 20
  10. 10. Domino’s Pizza – Integrated Company AnalysisTeam B6December 14, 2010programs intended to increase trial and repeat purchases. See Appendix F for a summary of oursurvey results.Competitive Analysis Domino’s is the 14th-largest QSR by U.S. revenue, and within the pizza category PizzaHut is #1, Domino’s is #2 and Papa John’s is #3. Beyond that, Domino’s faces competition fromother regional and local competition, both domestically and internationally.Customer Analysis & Market Segmentation Domino’s target market segmentation is the consumer who is looking for inexpensivepizza quickly. Customers are very price sensitive; higher prices have historically led to decreasedsales. Domino’s does not offer dine-in areas at it stores, instead focusing on delivery andcarryout customers. Demographically, Domino’s appears not to have a specific target. Instead, itseems that Domino’s targets markets with the greatest number of people. It follows thatDomino’s has sought to become a leader in online pizza orders, so it can reach the greatestnumber of consumers possible while also improving its ability to meet customer demand.Positioning & Marketing Mix Domino’s has positioned itself well to reach the customer who values quick-servicepizza. Domino’s uses geographic information software to locate its stores in optimal locations.The majority of domestic stores are located in and around highly populated large or mid-sizedcities or near college campuses. In FY 2009, Domino’s posted a 92% on-time delivery rate andhad an average time of 12-15 minutes for pizza order-taking and production. In the past,Domino’s created the 30-minute delivery guarantee and also marketed its use of the HeatWaveinsulated delivery bag to keep delivered pizzas hot. Today, Domino’s has achieved significantonline orders through its website, successfully reaching that growing segment of the market. Domino’s revamped pizza has been very successful and has generated significant salesgrowth since being introduced. Additionally, our survey data showed that poor taste was the Page 10 of 20
  11. 11. Domino’s Pizza – Integrated Company AnalysisTeam B6December 14, 2010leading reason why customers avoid Domino’s. Domino’s has used the new product to addressthis major weakness. Given the positive results, it appears Domino’s has been able to generatetrial purchases from customers who previously had excluded Domino’s from their dining options.OPPORTUNITIES FOR GROWTH Future growth opportunities exist for Domino’s both domestically and internationally.We recommend that Domino’s focus on both of these fronts to grow its business, pay down itslong-term debt and increase value for shareholders. We have two primary recommendations: 1. Develop a loyalty program to drive trial and repeat purchases. 2. Increase expansion in China.Developing a Loyalty Program According to Barclay’s, the average Domino’s customer orders five times per year whilethe average quick-service pizza customer orders an average of 17-18 times per year. This dataindicates that Domino’s is underperforming in driving repeat purchases. A loyalty programwould specifically address this underperformance. In our survey of 221 U.S. adults, we proposed three different hypothetical loyaltyprograms. Each of the three subgroups we analyzed favored a “status program” that would givedifferent benefits that would increase with repeat purchase frequency. Our survey data indicatesthat a status program would increase average order frequency by more than two orders percustomer per year. The infrequent Domino’s consumer subgroup had the strongest response tothe status program, with data indicating that average order frequency would increase by morethan three orders per customer per year. These data suggest that a status loyalty program wouldbe effective in converting casual Domino’s consumers to more loyal Domino’s consumers. Theloyalty program could be coordinated with Domino’s current marketing efforts to promote its Page 11 of 20
  12. 12. Domino’s Pizza – Integrated Company AnalysisTeam B6December 14, 2010revamped pizza. The new, inspired pizza has been effective at getting customers in the door, andour data indicates that a loyalty program could help ensure they keep coming back.Increased Expansion in China Domino’s has added 32% of its 4,027 international franchises within the past five years.Domino’s generally expands to an international market through a master franchisee. Domino’sthree largest master franchisees are in Mexico, United Kingdom and Australia. India is home tothe fourth-largest master franchisee with nearly 300 stores. Noticeably absent on the list oflargest master franchisees is China, where Domino’s currently has only 15 stores. Bycomparison, Pizza Hut has more than 400 stores with intentions for more. On its face, the discrepancy between Pizza Hut’s store count and Domino’s store countseems unjustified. Domino’s should seek a master franchisee that will enable expansion to matchPizza Hut’s presence in China. By again expanding through a master franchisee, Domino’s canrely on the franchisee for market knowledge and for the investment of capital. As such,Domino’s can expand without exhausting its own capital resources, which are needed elsewhere. Domino’s faces potential challenges inherent in the China market. For example, weunderstand that Chinese consumers prefer dine-in restaurant options to delivery-based options.However, Domino’s has evolved in other markets to meet unique consumer preferences, and webelieve whatever changes may be necessary can be delivered in China.CONCLUSION 1.) Domino’s has a steady business, but its debt level makes it riskier than its competitors. 2.) Priced into DPZ stock is a future expectation of sustained long-term growth. 3.) Achieving long-term growth can be most easily achieved by: a. Further generating revenue growth from an already competitive domestic market. b. Increased expansion in China. Page 12 of 20
  13. 13. Domino’s Pizza – Integrated Company AnalysisTeam B6December 14, 2010APPENDICESAPPENDIX A. Sales Revenue by Business Segment. Sales Revenue by Business Segment (In 000s)1,800 1,556.9 1,628.0 1,569.1 1,542.6 1,524.7 1,492.41,600 1,438.0 1,363.2 1,378.61,400 34.6% 1,166.1 34.5% 35.7% 35.2% 33.6% 33.1%1,200 36.4% 37.5% 36.2%1,000 42.8% 800 58.0% 57.5% 56.3% 56.7% 57.1% 57.1% 58.5% 57.1% 56.6% 600 51.8% 400 200 0 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Domestic Distribution Domestic Stores International Historical SegmentsAPPENDIX B. Selected International Markets for Domino’s. Market Number of Stores Mexico 589 United Kingdom 562 Australia 411 South Korea 329 Canada 319 India 296 Japan 179 France 154 Turkey 132 Taiwan 120APPENDIX C. Accounting Metrics.From OneSourceMRQ = Most Recent Quarter (i.e., 3Q 2010)TTM = Trailing Twelve Months (as of December 3, 2010)* = calculated using respective 10-Q data** = Domino’s return on assets includes off-balance sheet assets of $139.7 in operating leaseobligations through 2019 Page 13 of 20
  14. 14. Domino’s Pizza – Integrated Company AnalysisTeam B6December 14, 2010 Yum! Papa Dominos Industry Sector S&P Johns 500 Total Debt to Total 0.45* 0.25* 3.47* Assets Ratio (MRQ) LT Debt/Equity (MRQ) 1.87 0.53 -1.19* 0.84 1.52 0.65 Total Debt/Equity 2.33 0.53 -1.19* 0.96 1.77 0.75 (MRQ)LIQUIDITY METRICS Yum! Papa Dominos Industry Sector S&P Johns 500 Current Ratio (TTM) 0.95 1.04 1.65 1.30 1.07 1.81Working Capital (MRQ) - $3.0M $104.1M $126M* * *PROFITABILITY METRICS Yum! Papa Dominos Industry Sector S&P Johns 500 Gross Profit Margin 47.36% 27.40% 27.77% 38.43% 37.28% 44.70% (TTM) Gross Profit Margin - 5 47.18% 26.58% 26.22% 36.22% 44.15% 44.68% Yr AvgReturn on Equity (TTM) 89.50% 27.82% -6.57%* 39.40% -2.22% 19.43% Return on Equity – 5 Yr 86.42% 32.43% -6.91%* 27.48% 14.52% 20.02% Avg Return on Assets 14.71% 13.61% 20.10% 14.18% 0.40% 8.49% (TTM)** Return on Assets - 5 Yr 14.09% 12.66% 17.32% 10.79% 2.94% 8.46% Avg**Net Profit Margin (TTM) 10.04% 4.92% 5.62% 13.93% 4.85% 13.50% Net Profit Margin - 5 Yr 8.84% 4.57% 5.33% 10.45% 8.61% 12.08% Avg EPS (MRQ) $2.58* $1.82* $1.41* EPS 5 Yr Growth 12.82% 29.03% 11.23% 17.07% 8.69% 10.75%OPERATIONAL EFFICIENCY METRICS Yum! Papa Dominos Industry Sector S&P Johns 500 Receivables Turnover 45.49 47.41 22.09 32.76 18.99 13.24 (TTM) Inventory Turnover 44.28 48.59 43.36 36.64 19.19 14.56 (TTM) Asset Turnover (TTM) 1.47 2.76 3.57 1.21 1 0.93 Days Inventory on Hand 8.70* 13.02* 9.37* (MRQ) Page 14 of 20
  15. 15. Domino’s Pizza – Integrated Company AnalysisTeam B6December 14, 2010APPENDIX D. WACC.WACC Components Capital Structure Components Debt EquityFiscal Long Short 2010-12-10 Risk MarketYear Cost of Weight of Cost of Weight of Term Term Market Free RiskEnded WACC Debt Debt Tax Rate Equity Equity Debt Debt Value Beta Rate Premium 10 Yr US Treasury12/2009 7.2% ## 5.8% 63.4% 41.2% 13.8% 36.6% 1,522 50 910 1.17 3.30% 9.0%APPENDIX E. SWOT Analysis.Strengths: Product:  Newly revamped pizza recipe brought in high growth levels for the first three quarters of 2010.  Strong brand name, #1 pizza delivery company in the U.S. with market share of 18.4%.  Focused menu enables quality consistency and operational efficiency. Total operational process is completed within 12-15 minutes. Price:  Competitively priced product. Place:  With almost 5000 franchises in the U.S., domestic store delivery covers the majority of households. Promotion:  Continuous price promotion such as two 2-topping pizzas for $5.99 each.  Market-leading online ordering and website features.Weaknesses: Product:  Despite aggressive marketing efforts to rebrand Domino’s as a quality, great tasting pizza, survey respondents still said that “does not taste good” and “low quality” were the primary reasons they did not order Domino’s.  Proposition for investors is limited. Can’t promise shareholders that they can guarantee strong returns. Price:  The low price may actually be working against Domino’s efforts to rebrand as a high quality, great tasting pizza company. Place:  Less-than-optimal international presence. Promotion:  Minimal incentive for customer loyalty.Opportunities: Product:  According to survey results, frequent Domino’s pizza Page 15 of 20
  16. 16. Domino’s Pizza – Integrated Company AnalysisTeam B6December 14, 2010 consumers prefer ordering online at a much higher rate than the total respondents, suggesting Domino’s could establish themselves as an industry leader in online ordering.  Ability to increase proportion of total sales placed online from 20% currently. Place:  Domino’s believes it has achieved 50% of its growth potential across its top 10 international markets.Threats: Product:  With obesity rates on the rise, health is becoming an increasing concern in the U.S. One slice of Domino’s new pizza contains as much as two-thirds of a days maximum recommended amount of saturated fat.  Prices in commodities such as cheese increasing.  Minimum wage increases. Place:  Supply chain not positioned to address potential sustainability regulations. Promotion:  Challenging to continue meeting customer expectations that have now been inflated by new, higher-quality product.APPENDIX F. Survey Results.We administered a survey to determine consumer perceptions of a loyalty program. Behavioraland demographic data were collected. The total number of survey respondents was 221. For thepurpose of comparison, we divided the groups into several subgroups as defined below. Subgroup Order Frequency Sample SizeFrequent Pizza Consumer Orders pizza 7 times or more per yr 170Frequent Domino’s Consumer Orders Domino’s 7 times or more per yr 23Infrequent Domino’s Consumer Orders Domino’s 1-6 times per year 76There are certain limitations of our survey data that derive from our market research capabilities.Our sample is neither as large nor as random as we would have liked. We solicited surveyresponses by emailing friends and family, posting the survey on Facebook, and encouragingothers to propagate this distribution. This population is not representative of the typicalDomino’s market, which is much more diverse. More thorough market research should beconducted if Domino’s would like to gain more confidence in these results.How often do people order pizza and how often do they choose Domino’s? Page 16 of 20
  17. 17. Domino’s Pizza – Integrated Company AnalysisTeam B6December 14, 2010 Purchase Frequency 140 120 100 80 60 All Pizza 40 Dominos 20 0 Less than 1-3 Times 4-6 Times 7-11 Once a 2-3 Times Once a Once a a Year a Year Times a Month a Month Week or Year Year moreWhen comparing the purchase frequency rates of Domino’s compared to the frequency rates ofall pizza brands there was a notable contrast between the two groups. While the largest group ofrespondents indicated that they ordered pizza once a month, the vast majority of those orderswere not going to Domino’s, which had a “less than once a year” purchase frequency rate formost respondents.To what pizza brands are consumers most loyal? Pizza Hut Brand of Loyalty (All) 9% Dominos Papa Johns 6% 10% Not Loyal 22% Other Local 42% Other Chain 11%Despite it’s ranking as #1 in pizza delivery in the U.S. and #2 in overall sales in the QSR pizzacategory, only 6% of survey respondents said they were most loyal to Domino’s pizza, placing itbehind top competitors Pizza Hut and Papa John’s. The largest group of respondents, 42%,seemed to feel most loyalty towards local brands. Page 17 of 20
  18. 18. Domino’s Pizza – Integrated Company AnalysisTeam B6December 14, 2010Why not Domino’s? Why not Dominos? 50% 40% 30% 20% 10% 0% No Store Expensive Does not Takes too Unhealthy No Dine- Low Poor Nearby Taste Long In Option Quality Customer Good ServiceDespite it’s aggressive, “Oh Yes We Did” marketing campaign aimed toward rebrandingDomino’s as a tasty, high quality pizza, survey respondents still rank “does not taste good” and“low quality” as the primary reasons they do not order Domino’s pizza. This suggests that eventhough Domino’s had positive results from their widely promoted recipe change, there is still along way to go in convincing consumers that they are in fact making better pizza.What loyalty program will drive the best results?Dominos Points-based Loyalty Program:Earn 1 point for every $5 you spend at Dominos. Collect 25 points and receive a Large 3-topping pizza for free!Dominos Punch Card Loyalty Program:Earn 1 punch for every Large Pizza you purchase at Dominos. Collect 15 punches and receive aLarge 3-topping pizza for free!Dominos Frequent Customer Recognition Loyalty Program:Establish your rank by becoming a frequent Dominos customer.Platinum Rank: Purchase* Dominos at least 40 times during one year. Platinum Prize: Receive Silver and Gold Prizes and Receive a free order of bread sticks with every Dominos purchase* for one year.Gold Rank: Purchase* Dominos at least 25 times during one year. Gold Prize: Receive Silver Prize and Receive a free 2-Liter with every Dominos purchase* for one year.Silver Rank: Purchase* Dominos at least 10 times during one year. Silver Prize: Receive 10% off all Dominos orders* for one year.*Minimum $10 bill total per purchase Page 18 of 20
  19. 19. Domino’s Pizza – Integrated Company AnalysisTeam B6December 14, 2010 Average Order Frequency Increase per Customer per Year (All Consumers) 5.00 4.00 3.00 2.00 1.00 0.00 Points Program Punch Program Status ProgramWhen asked how many more times per year they would order Domino’s pizza given severaldifferent loyalty program methods, the “status program” had the strongest increase overall. Theaverage increase in order frequency per year was 2.07 per person. Average Order Frequency Increase per Customer per Year (Infrequent Dominos Consumers) 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Points Program Punch Program Status ProgramInterestingly, when we only looked at how the infrequent Domino’s consumers would respond tothe loyalty programs, their average order frequency increase per year was 3.13, much higher thanthe overall average.How are consumers ordering? Page 19 of 20
  20. 20. Domino’s Pizza – Integrated Company AnalysisTeam B6December 14, 2010 Method of Purchase (All Consumers) Walk-in Order 11% Order Online 26% Order by Phone 63%The majority of total respondents still order pizza the old fashioned way: over the phone. Method of Purchase (Frequent Dominos Consumers) Walk-in Order 9% Order by Phone Order Online 43% 48%Frequent Domino’s consumers prefer to order online. Domino’s current online ordering system isfun and easy to use making the ordering process painless. This is a possible opportunity ofDomino’s to maintain its status as an industry leader in the future as more and more pizza ordersbegin to be placed online. Page 20 of 20

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