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Domino's costly growth

The pizza company has entered into a joint venture with its largest London franchisee in an effort to expand across the capital
August 16, 2017

Londoners will soon see more Domino’s Pizza (DOM) locations around the capital. The pizza company has entered into a partnership with its largest franchisee in London to help it open more locations around the city. Domino’s will pay £24m for a 75 per cent stake in a newly formed company, whose assets will be made up of the 25 existing stores already run by the franchisee.

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Domino’s may be a leading pizza brand in the UK, but competition is getting fierce from other delivery companies such as Just Eat (JU) and Deliveroo, along with local privately owned pizza companies. In July the company announced UK like-for-like revenue growth had slowed to just 2.4 per cent during the first six months compared with 13 per cent during the same period in 2016.

The results also included warnings from management that wage growth, economic uncertainty, a weaker exchange rate and rising cost inflation could lead to reduced consumer confidence, as households feel a squeeze on disposable income. Analysts at UBS have echoed these concerns, asserting that Domino’s market position is becoming increasingly challenged by a combination of growing competition and UK consumer weakness.

The agreement to partner with its London franchisee is meant to support Domino’s UK expansion. At last year’s capital markets day management called London an underrepresented market and said that it aims to open 125 new stores in the capital. London can be an expensive place to open up new locations so the backing of Domino's will offer the franchisee the financial backing to be able to expand.

Analysts at Peel Hunt said that this particular franchisee has only opened 10 stores in the same number of years, with the deal allowing Domino’s to “inject some capital into it”. Corporate store ownership also allows the company to test new products and promotions. At 65 times the average store's weekly sales, analysts at Peel Hunt estimate that Domino’s paid around the same that franchisees usually pay when they sell a store.  

This partnership will operate under a similar model as with the rest of Domino's franchisee relationships, with Domino's receiving a royalty fee of 5.5 per cent of a store's weekly revenue. The difference here is that Domino's will take in all the profits from the joint venture and then return a quarter to the franchisee. The company also makes its money through supply chain provision to its franchisees.