Domino's Pizza Inc (DPZ)

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Domino’s Pizza, Inc. (DPZ)

2013 Investor Day Conference Call

January 18, 2013, 09:00 am ET


Patrick Doyle - President & CEO

Kevin Vasconi - EVP & Chief Information Officer

Rich Allison - EVP, International

Mike Lawton - EVP & CFO



Patrick Doyle

Good morning everybody. I appreciate you coming in and spending the morning with us to get a kind of an update on Domino’s and the Domino’s story. This has become our tradition really to do this once a year, kind of near the beginning of the year really talk about the business, our views on the business. Many of you here know this story and know Domino’s well and so one of the things that we’ve tried to do is each year to give you a little bit deeper dive on one of the areas of the business. This year it’s really Kevin, is going to be taking you into the digital side and the IT side of Domino’s, a little bit more on what we are doing there and then Rich giving the update on the international side of the business.

And I want to just start out today by giving you a kind of my overall perspective and where I think we are as a brand and kind of how I see, where we are within the overall industry and kind of the 30,000 foot view of Domino’s and our opportunity. I think the headline here kind of says it all. I think as we have changed this brand over the course of last few years and most importantly changed the perception of the brand in the minds of consumers, we are in a position where we really I think are providing leadership to the pizza category to have a real opportunity to continue to lead within the category.

This all started you know well with as in the quality of our food and we are now very proud of everything we sell. I think really the core parts of the menu getting this handmade pan pizza out was one of the last really big gaps that we had on our menu and having an offering there that we were proud of. And we importantly not only are we proud of all the products that we're selling today, but consumers give us credit for that; I mean we get the ratings back from consumers now around taste and quality perception of Domino’s and we do really incredibly -- and we just do incredibly well with consumers and their perceptions of the brand and brand quality.

We continue to have I think incredibly efficient operation which is important for box economics; it's also important particularly as you talk about international where the footprint of our stores relatively fall; real estate is on average, more difficult outside of the US than it is inside the US and the efficiency of our boxes is important and we think it is an important part of that. And those efficient operations are what lead to what has always been the core of our brand equity which is nobody is better at making a hot pizza and getting it to you quickly than Domino’s. And not only as we have rolled out the new pizza’s and talked more about the quality, not only have we not hurt the perceptions around Domino’s ability to deliver quickly to consumers, we actually get more credit for today with consumers than we did two or three years ago. So you know that brand equity around service and around quick delivery and the reliability of the delivery has only gotten better with our customer base over the course of the past few years. All which leads to now just very, very strong brand equity, both within the US and around the world.

So really three headlines, I think for today that I am going to speak to a little bit and then the team is going go into far more depth on this. But the first is a view of the US and the bottomline is US is a share gain. There is a little bit of growth again in the category which is terrific; we didn’t have growth for most of the decade of the Otts from 2000 until late in that decade, this was not a category in US; that was growing; it is now but very modestly. It’s a point or two of growth in the category and at least while the economy is where it is today and the consumer attitudes are still what they are today, I don’t know that I see anything that’s going to dramatically change that. So as we look at the real opportunity for growth for us in US, we think its share gain and I’m going to talk a little about what I think is real advantages here and why I think we can take share in the US.

Second, and clearly Kevin is going to be diving into this a lot more, but technology, we have talked about, we are going to talk about in depth today. It is a very big part of the story for us. We think is a real key to winning and frankly we think plays back very strongly to the share gain in the US. And then finally, international, which does have a lot of growth in the category, but I am referring to it here as a scale gain and I will take into thinking around that little bit more here. But big business, big opportunity, still lots of growth going on and its really a question of do you have the scale, do you have the brand awareness to make that work around the world and how many players actually have that, and we think we are pretty unique in how we’re positioned on this.

So first I am diving back into the US and kind of the share gain. It’s interesting, if you kind of step back a little bit first, this is the single more fragmented industry category within the restaurant industry. So first, taking you through some of the other categories, so this is NPD CREST data and this is the QSR hamburger business in US. So 96% of the hamburger business retail sales in the US are major chains which I think they define as chains of 250 or more stores. So what you see is small chains, independents are a very, very small part of the overall picture in the hamburger industry; that's the most consolidated of the restaurant. So now you start working through others, so you work into QSR Mexican and you’re looking at 82% with major chains and then again kind of an even split between the small chains and the independents doing a little bit better than they did in the hamburger business, but still overwhelmingly about the major chain.

You go into sandwiches. Same story again, again little less for the major chains, a little more for the small chains and the independents, but still overwhelmingly about the major national chains. And then finally you get the pizza and specifically I am calling out pizza delivery here, it looks the same for total, a little bit less, but you are talking about basically 55% of pizza delivery today is in the major chains; if you go to total pizza, that number is more like 40%. So even where we are strongest as a brand and even where the major chains are strong as a brand, this is a category that has not consolidated; it really is not.

So what you see is independents about twice the size in delivery than the small chains; when you get into total pizza, that's a little bit more balanced between the small chains and the independent chains. But what you’ve got is a category that hasn't consolidated very large 35 billion in total pizza, about 30% of that or so in the delivery side of the business; but the real opportunity to take share overtime. And if you look at what’s happened now over the course of the last five years, you see that there has been now some consolidation and this was not happening before; this is an absolutely new phenomenon in the pizza business.

So if you go back 15 years and go from kind of the mid 90s or even the early 90s until kind of you know this starting point in the late 2000s, the answer was the big chains had not taken share from the small chains and from the independents. And now if you look at it over the course of the past five years, we've taken share, so our largest competitors and importantly if you look where its coming from, you know 16.4% with the regional chains in 2007 to ‘14 for, in 2012 and if you run through the math on that they've had a very significant decrease in sales. Now the category has grown a little bit during that time, so would have offset a little bit of that drop, but two points off of a base of 16.4% is a pretty big number.

And so you are starting to see really for the first time in the category this consolidation; clearly, we've done very well you know the starting point in 2007 was a pretty lousy year for Domino’s Pizza in the US, so that may mean that that difference is a little bit bigger than it would have been otherwise because it was a little bit lower base in 2007. But fundamentally, this is something that we haven't seen before in this category. We have not seen consistent share being taken away from the smaller players particularly from the regional chains going to the majors. And as you know well, particularly now the past 18 months or so while we are getting nice growth in our business so are our major competitors, so you know, so are Pizza Hut and so are Papa John’s and it's not because the category is growing at kind of the average rate of the three of us, it's growing a little bit, but the three of us are taking share from these regional chains.

And so the clear question is why and there are lots of reasons, but we think this is an incredibly important one. So again NPD data, this shows what the share is today of online dollars from customers in the US and what you see is number one, we're doing incredibly well. About a third of our business is digital today, but interestingly, it's just a coincidence about a third of all digital dollars being spent in pizza go to Domino’s today. If you add up us and the other majors, which are Papa John’s and Pizza Hut, you are looking at 85% of the online pizza sales today in the US are going to those three chains. The three of us absolutely dominate here. This is a very tough place for those regional chains and the mom-and-pops to play and Kevin is going to be taking you through this; really this is why we think this digital story is so important. We think this is the big lever that has caused share to start shifting from the regional, because they just can’t play well, and effectively and efficiently in this space. The majors are dominating here and this is kind of the way the numbers play out today. So overwhelmingly digital is about the three of us.

So that takes us into the next section of this which is around the technology and why we think that is still key. So interestingly, if you go out and this is again NPD data here and you talk to customers who are going to restaurants and say what is the role of technology in you making your decision about where are you going to eat tonight. And the answer is, 43% of orders customers are saying that they are actually going on to their smartphones to look for something related to the restaurant where they are going to eat tonight. And 38% of them say that actually wind up influencing where they made their decision to give their business tonight.

And when you ask them, where are you going, so what websites are you looking at to get that information? The leading place that they are going today is us. They are going to our own website; so whether that’s about finding out what the menu offerings are, looking at what the prices are, finding the location of the restaurant, they are coming to our site and our competitors, large competitors sites to get information around where they are going and you can see after that then they are going out and as you add up all the numbers they are clearly often going to multiple sites, may be getting reviews, finding out where their friends have been going, whatever it may be, but 38% are checking their smartphone to get some information and the largest source of that information is our own sites.

So we think we have done a great job here. We think we have done a better job than anyone, but the point, I think you really hear me say is this is really about the major players and the benefit that we have, the advantage that we have against the smaller players in the category. But we’ve really led here with our apps and Kevin is going to take you through all this more to Pizza Hero, making your own, the Pizza Tracker which has become a beloved part of the Domino’s brand and been out with Spanish language apps; its an area where we have invested heavily and are going to continue to invest. We think there is real competitive advantage here that is hopefully going to keep this share gain going into the future.

The other thing, it allows us to do a great way to kind of add on to our national windows, to kind of the extend the experience for consumers; again the Pizza Hero having the people design cars, delivering vehicles for us, the Times Square, Billboard, we are putting all of the live unedited reviews up on the Billboard in Times Square kind of as a evidence of the transparency and accountability of the brands. And its also been a way for us to start to leverage this into kind of some unique promotion, Domino’s, The Global Domino’s Day, is something we’ve done one day each over the last two years, where we got this year the majority of the stores around the world to all participate in one promotion on the same day. It’s interesting. If you look at our Facebook page today, we've got 7.5 million fans today. The interesting thing about that is a very large number of those are non-US based.

So, our Facebook page that for a long time we are kind of looking at and thinking well the other markets have their own Facebook pages so this is a kind of our US Facebook page the answer is no, its not. It’s a global communication platform and so we’ve start looking at other ways that we can start to leverage that and thinking about digital a little bit more globally than our mass media which is very much country-by-country.

Domino’s dollars another way of kind of leveraging this platform that we have with the most recent promotion we did for 10 or 12 days where we had the $5 bounce back when people ordering online, a way to give them value, a way to get people to continue to shift towards ordering with us from a digital standpoint. And we’ve got this integration with a single platform and again Kevin is going to be talking about this that allow us to doing things like Tracker that are really unique in the industry.

Finally, I want to talk about the international side of the business and here I'm calling it a scale game and this is really about size and scope of the international business and those players who are really I think in a position to drive real success here long-term. So first of all, 95% of the population of the world is outside of the US and we are as you noted a roughly half of our sales, a little bit over half of our sales now are in international.

So, there is still obviously huge opportunity. Most of the people are here in the US. We've got this very big footprint with terrific success in over 70 countries today. We are today truly a global brand, but this is a scale game and as we look at it there are six public companies that have real scale in international today and one private in Subway but fundamentally these are the brands, these are the companies that have figured this out, that have significant scale that have the resources, have the people, have the footprint, are driving real profits out of their international businesses and basically after these six, it falls off pretty dramatically.

You know, so these are the scale players, these are the folks that I think have a real long-term opportunity with their international businesses. And interestingly, as you look at those six, these are all US based companies, so [quiz], audience participation, the world’s largest restaurant company not based in the US.

Tim Horton’s is top five, bigger than Tim. Jubilant, no. Jubilee, oh Jubilee, okay, yeah no. They are close, yeah they are close. The largest non-US based restaurant company. You've made my point beautifully. Enterprise Inns, they run a few thousand pubs in the UK. They actually don’t run them, it’s an interesting model. They actually own the pubs and then they bring in operators to run them for them but that’s it and if you think about the other largest players.

You know, so Timmy’s, dominant Canadian business, trying to work their way in the US but very limited footprint overall. There is something called [Paris Cafe] based out of Korea or Japan which is clearly where you would headquarter something called the Paris Cafe.

You know, but the real point Telepizza out of Spain. You know, you are looking at businesses outside of the US that are today just not scale in terms of their international footprint. So for whatever reasons, today the global players in the restaurant business are those six companies that I showed you.

There are no big players outside of the US that are expanding out there while you are watching. If you are wondering, when does the big local competition grow up and when do you have big problems in Asia from a new pizza player growing out there. The answer is they are not there. There are single market or two market operators out there but this is a US company based gain today where you got players that are operating in 60, 70, 80, or 100 markets around the world and I think there are parallels prior to my Domino’s days.

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