Domino's Pizza Enterprises Limited (DMP) Earnings Call Transcript & Summary

[Foreign Language]

Growing up in this region of the world, I always was envious of markets like Japan because of just the potential scale. When you grow up in Australia, 25 million people, here's a market that's 5x bigger than that. Big bet because the -- somebody said to me once an adviser, said, look, you shouldn't really bet more than your 10% of the value of your company in the early years of the company because it's just too big a risk. And here, we were we're betting something more than 25%, something that actually could increase our profits by 50%, could, but could also be a big drag on the business if we got it wrong. And so after all of the business planning and the due diligence, the Chairman made it very clear to me at the time, he said, Don, these moments that you're asking the Board and shareholders to being -- proving is that these are career defining moves. In other words, it can make you, but it can also break you. Very, very clear when somebody says that, that's maybe a constructive way of reminding you, but making sure that I was really aware of the size and the scale of the decision that was being made.

[Foreign Language]

The first year was definitely an extraordinary year, and we can't take full credit for that. And the previous management had already geared themselves up that they were going to television in and around that. And we supported that business plan. So it looks great that our scorecard says, we took our own way and strike a double-digit sales. But we were aware that that was happening. And then we supported it even more. So we did even more because we got that growth and reinvested that growth and did more television and began the journey. And in those -- that first phase when we still had a partner. The investment was still around getting more of our managers into the franchise system, opening stores to build scale, working on menus, trying to build our television presence. But we're still missing another element of our high-volume mentality, and we weren't able to implement that until we acquired a 100% in the business, and that was to roll OneDigital in. And then it went to another level again. In every business, you've got to get everybody in the same place. And if you do have elements of your team, whether it be executives or partners or franchisees and so on, if you're not aligned, then it's friction, right? It's tension. And when you've got an exit point with a partner that's got a short-term horizon and you're playing the long game, well, there's a short-term long-going partnership, it's not as effective as it can be. But there's no regrets there. Because, in the end, without that partnership, we wouldn't have got into Japan. So it was -- the fact that we formed that partnership was a way of creating more value to price it better for the group that we were entering into the previous owners. So knowing the long vision, this was a stepping stone to the long vision.

I guess when I was first approached to be Japan CEO after being in the Middle East for so long, I think the first thought was, how big could this business be? I started putting together the numbers on. If we have this amount of stores with this many orders, what does that look like for the business? And just started teasing that out. And I presented this on a very simple scale, simple graph. And you started looking at it going, my god, this business could make a hell of a lot of money. And that got me excited, I think, firstly. And it was interesting when I presented that people were scratching their heads thinking, oh, yes, that's going to be -- that could be our future.

One of the hardest things to illustrate in a due diligence process and right into a business plan is actually the quality of the people because it's a judgment. It's -- how do you measure that? You showed tenure, but does that -- can you mean that they've all been asleep at the wheel? And it's a sleepy business? Or is it real tenure that you think you can engage? And so the Board has to trust the experience of management to say, this is one of the biggest assets in the business. This -- to be able to buy a business where you would walk around and ask for managers how long you've been the business, and they'd say, oh, 8 years. And then the supervisor say, no matter how long have you actually worked at Domino's? Oh, 12 years, 15 years, 20 years. I mean it's extraordinary tenure. The leadership of the business 30 years, 25 years, this sort of stuff from. They were there from the beginning, and we're still there and immense amount of experience to unleash. And so this is a people business. Domino's brand has brought alive through people and execution. But at the same time, you're also very aware that you don't want to be naive. The Japanese consumer does eat a lot less pizza.

One of the brands we looked at a lot was McDonald's and they're the -- by far and away, the dominant #1 brand in QSR and it's bread, it's meat and it's cheese. So you got of question whether is it pizza that Japanese people don't need? Or is there something wrong with our value proposition? So the starting point is really just to jump in and understand what the barriers are to pizza consumption.

The traditional way of eating food is bento box style, it's beef bowl, it's soba noodles. So one of the things we've been doing is building pizza as an occasion. We're teaching people about the joy of pizza. We're showing them that it can be delivered. We are made for delivery. Bento boxes, soba noodles, beef balls, they're not made for delivery. They're made to be consumed at on-premise most of the time. What pizza is, is a way for Japanese people to enjoy this in the parks, the various parks around Tokyo, Osaka and Nagoya, Fukuoka, Hakata. It's a way for them to bring our great products into their homes and share with their families.

The way a pizza market and Domino's was built in the first couple of decades in Japan was all around a special occasion. And that's things like Christmas or the Golden Week holidays or a birthday occasion with friends and family, where you are with a larger group and you're trying to feed a number of people.

There are some structural differences in that business. It grew up as a delivery business in the times when Tokyo was spinning set of numbers for what it cost to rent a store. So delivery business was born in the garages of Japan literally. They were under buildings in the back streets. But they lay the opportunity, things have changed. Deflation had kicked in over the years. And you could see that now rents were cheaper than in Brisbane on the High Street. .

Pizza was just -- especially the price was one of the biggest barriers. It was just too expensive. And you couldn't buy a meal for yourself either, it's only suitable for 4 or 5 people.

In the Domino's culture, and that's really what we bring to Japan, we bring a Domino's. It's not a Western culture. It's nothing like that. It's the Domino's culture. The DPE way to the business. And that's high volume mentality, that's 310. That's all the things that make us who we are. So really excited about that. And by the way, we keep going back to that as a reference point to think about, well, why was it possible back then to think that big? Why should we not be thinking that big now? I think this goes back to my first investor half yearly announcement where I just come into the business, and I have to answer why Christmas didn't work. And of course, it wasn't innately my fault, but I did feel the burden or responsibility. And it actually was exactly the right thing that could happen to me because I came in having to answer all the questions of why is this business only making some money at a few special occasions a year. And that didn't sit well. And I often say to my team and to investors and to whoever is that, I really like my sleep at night. And I never slept easy knowing that we're only going to make money once a year or twice a year in certain points, Golden Week is another one. So that started the investigation.

With that in mind, that's why we have our barbell execution. So always multiple layers of the brand running and one is geared towards continuing to meet the needs for those special occasion consumers. So whether it's large premium-topped pizzas, like our New Yorkers or seasonal menus, it just keeps the specialness, the aura around pizza and that occasion. And then the other side of the barbell is our value and accessibility. So the new layers like half price carryout as well as the no minimum delivery.

We started a lot of testing. We started testing around single-use. This meal is a task user, which is 40% of our customer base in Japan is general. They became our focus and that became one part of the barbell strategy.

We're investigating changing our buy one get one carryout deal from day 1 in the market. And that's because we knew that it had heated ceiling. It's been running, I think, for 4 or 5 years at the time, but we weren't seeing any carryout growth coming from it. So it was this kind of tricky part to the brand where it was a significant portion of our sales and orders, yet it wasn't delivering any growth for the business and it comes back to -- but it creates growth value but it also creates a lot of barriers for consumers because I'm forced into a 2- pizza occasion any time I want to come. Once we have identified these big barriers, it became quite clear what we needed to change. We actually looked at quite a number of different parts to replace a buy one get one following models like we have in Australia or in the U.S. with single low pizza price points or mix and match offers. But none of those really resonated with the consumer in Japan. And Eventually, we identified half price carryout with the benefits from one pizza or as many as you like and any size you like as well as the best layer to proceed with. And that's where a little bit of difference between Japan and other markets comes in that. The heartland of our consumer is still at that special occasion and special occasion wants more premium pizzas. So a really low single price point like a value range doesn't work for that market, but a half price is really effective because it allows the consumer to choose any pizza they like whether it's from our basic range all the way up to our premium toppings. OneDigital was in the middle of its rollout. So we were still running dual systems, the legacy platform as we were working our way through the OneDigital implementation. So huge benefit to Japan getting aligned to the rest of DP and the OneDigital platforms.

OneDigital was such a groundbreaking way of looking at the business. It was probably the first time we've really truly leveraged our platform across the business. And by the way, that was the start of many other discussions around how do we leverage properly across the 10 markets that we have around the world.

Certainly, all the data that, that provides to us huge learnings come from that. Our ability to expand the customer experience through unique services that OneDigital has like the feature ordering screen to allowing us to deliver much faster as well as new customer experiences like on-time cooking which just weren't available with the legacy technology.

All in all, it was really about the customer at OneDigital. It's about how do we get a very easy way for orders to come into our funnel, enjoy our brand, give what they need through easy payment and through an easy ordering experience. And that's really what OneDigital did for us. What's changing in Japan is that we've committed to franchising. And we've started that engine some years ago. The benefit all those years going forward is that those franchisees can now see the size of the opportunity. And they're starting to now open new stores within the areas that they're interested in the opening. And I think that's incredibly important.

The entrepreneurial spirit, the model that we have, which we call the path to excellence from team member all the way to multiunit owner. We had all these people that were already well through the path to excellence. They just needed a little bit of a bet, where they could scrape together something like AUD 20,000, AUD 30,000, AUD 50,000 equivalent in yen, we would lend them the rest. And then with the track record, they could go to the bank and then they could be financed by a bank and then maybe look at doing a second one, a third one and so on. And it worked.

But what we've got now is 2 engines started. We've got corporate growing. We've got franchise growing and growing organically now. And I think that's the difference. If I was speaking to you 4 years ago, I would have said we're going through corporate. And that would have been it. Now I'm talking about 2 big engines and 2 big engines that are only -- they might be V8s. We're on -- we've got 1 of the 6 cylinder, but we've only got 1 at 2, and 1 is growing very, very fast, and that's our franchising network.

[Foreign Language]

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I guess we often get asked about how do we grow? What's the profile of growth for the business? We've got corporate stores, we've got franchise stores. How do we think about -- what does that look like in the future? Are you going to be 70% franchise? Are you going to be 70% corporate? Well, the truth of that is that we don't think about the business that way at all. We actually think about the business a little bit differently. We think about, well, how can we create areas that we can grow the business sensibly in each one of the prefectures. We look at the store unit economics to make sure that those are sound first. Once we get those sound, we can actually grow very easily in each one. And it actually doesn't matter which engine you roll with. That said, we will keep growing corporate. And sometimes you want to pioneer certain prefectures. And you want to do that because you -- when there's new towns that we haven't been into that could fit 5, 6 stores into, you want to create a presence in there that becomes the training hub for that particular township. And that's important because it's very hard to relocate a manager, for say, Tokyo 700 kilometers somewhere else, here's your new home. We'd rather breed that town or incubate that town, local people who understand the communities that they live in, who want to give back to those communities as well.

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We're a business that builds confidence through removing bottlenecks in our business. And that's part of the high-volume culture that we have. It's actually the fundamental thing that we think about is how do we make it so easy not only for the customer, but how do we remove every bottleneck we have within the business? And how do we challenge the old paradigms in the business? And that's something that struck me as quite interesting because I actually physically never worked in a model that had things like commissary dough. I don't know, always been in the Australian business. Although with international exposure, I did understand the commissary model, but you got me thinking about, well, how do I challenge that? And why does that have to be the capacity constraint for growth in the business? And that's exactly what happened. And I started looking at -- well, we're 1,000 stores, what does it take to get to 1,000 stores? And one of the things that came up was while we have to build more commissaries. And when you look at the commissary structure and you go, well, that costs X amount of dollars and you start looking at for business sense, you go, well, what's the return on investment on that particular structure in the business? And you go, well, that's X amount of years. And yes, well, on, where are we -- what are we in the business of? We're in the business is selling dough or we in the business of making pizzas and delighting customers? And that's what started this curiosity with, well, why do we need that? Why can't we go out and find a model that delivers or has all those things, we might go in the back of the stores in Australia and Germany and New Zealand. Why can't we do that? And that was fundamentally the first thing that we started challenging. Because population in every country, you have this distance, and it's always like you lose, it costs a lot of money to get out to the far reaches. And an example of that is Hakata. Hakata was raised by a whole investor team that came over and visited Japan. And said, hey, we've looked at the map, you're not in Hakata, you should go and do that. And at the time, I explain, bought to do that, it's going to cost us X amount of dollars. We're going to have a return on investment of 5 years to 7 years to 10 years based on linear assumptions and we can't get there. So we're going to leave that. We're going to focus on where we have good overhead structures and we get the efficiency out of that. Then we went away and we thought about it all. And we thought, well, look, there's a couple of things going against us. This -- the supply chain model is too expensive for these far reaching stores. That's primarily driven by the dough model. That has to get trays of dough out to these areas, then get back and pick up these trays of dough and take them back to a facility to get washed. And then -- so we started looking at that like, well, okay, we should -- let's try back a house. But then at the same time, let's also harmonize our freight. So let's use our size and scale in the prefectures that we've already got a critical mass to harmonize that, to give us a competitive advantage, to grow the models in those prefectures. And that's precisely what happened. And that then, when you looked at that, that opened up Hakata. All of a sudden, you've got 5 million people that are captive pizza eaters. Pizza Hut's, our biggest competitor there, 40, 50 stores, I think it more now. And we thought now we've got an access point. But now we've got a model that actually makes sense that doesn't drag our profitability down, doesn't drag their profitability down, and we can price the way we want to and price with some sort of differentiator in the marketplace. So that was really the catalyst. The byproduct of that is that you actually opened up all the other prefectures. And back then, we were, what? 23 prefectures. Now we're 47 prefectures and now #1 in 23 prefectures. That's the difference. We've got full access to everywhere, and that's what gives us the confidence to go -- or 2,000 stores makes sense to us now. We've got the right model. We've got access to the franchisees and we've got access through the supply chain to get there. Of course, we've had to open up distribution centers, but that's okay, you're not opening up. That's a third party, not opening up our own facilities to make dough. Transporting water and flour and air essentially around long distances, it doesn't make any sense to any business. And by the way, we've got more things that were actually challenging in this area. And we -- these old paradigms or these old pillars in that business. There's a few more that are fundamental that we're going to be challenging over the next 2 to 3 years, and they're already work in progress right now.

So as we execute fortressing strategy and opening more stores across the market, one of the big benefits, particularly for marketing is that the size of the NAF grows. And why that's really important is that, it allows us to really compete with share of voice for, I guess, the bigger players in the market. Already, it allows us to have a dominant share of voice when it comes to pizza advertising. But as our strategy is around capturing more share of everyday occasions. It means that we're going up against the likes of McDonald's and KFC and other local brands. So greater share of voice on TV and digital media is critical to getting our message out and winning those customers. It also allows us to more effectively support a multilayered strategy. So going back to the barbell strategy, really important that we retain those special occasions, and we have always on promotions to do that. And then on the other side, it's our barrier removal initiatives. So whether it's great value for money or new products to unlock those new occasions that we're going after. And without more stores and a big enough, that would be really difficult to do.

[Foreign Language]

Yes. So one of the most exciting things of where we are now is we're just on -- to another level of the launch pad. We're opening our 900 store right now, 1,000 stores is imminent. So we're going to a new place in what we think is a new tipping point. We can't be pure in that, but that's what we think we're going to hit. I don't want to overpromise, but that's our view. And this market has now shown the rest of the world that it's not only going to be DPEs in the near horizon, the biggest business by store count and most likely earnings to match that. But it's going to be one of the biggest Domino's markets in the world. And it should be.

So why I look to the future for Japan? Well, firstly, I think we've made some big progress in the last 18 months. A lot of the pillars that we've introduced like half price carryout or no minimum delivery or even the delivery buy one, get one. These are layers that will endure and will continue to take us forward. But the real focus is on building out customer lifetime value. And what that means is we don't just look at the value of an individual transaction. We really focus on the value of individual customers and how we can grow that over time. So obviously, it starts with attracting a new customer, but then how do we get each of our existing customers to spend more with us on an annual basis as well as doing a better job of retaining customers and making sure that the leaky bucket is not so leaky.

It's one of the biggest economies in the world. And so what a privilege to be able to operate. And it's not just about how big is the pizza market today. It's what's our share of stomach in 10 years from now that we've done this in other markets. The Dutch didn't eat a lot of pizza. And today, it's a Domino's experience more than it's a pizza experience because Domino's creates extraordinary value with our product, our service and our image. And that's what we're going to do in a place like Japan is that we think we're going to continue to create consumption, by default we'll be the core of our menu in pizza. But we're doing that through our value model of just service you can't get from any other concept. A delivery image you can't get from any other business. And therefore, at the product that now starts to find more and more solutions, whether you're a single, a double, a family, a sporting event or whatever. That Domino's creates it's extraordinary value and it therefore gets known as, I'm having Domino's. It doesn't necessarily mean that I'm having pizza, even though pizza is probably the core. It's just -- it's a solution in my life. It's a really valuable solution to my meal occasion, and I call that a Domino's experience. And at our best, that's what we do. And we've done that in a number of our markets now, and I have no doubt we'll execute against that in Japan.

[Foreign Language]

And that's how we grow. We grow through connection that pizza brings with each -- every time we sell a pizza, we think about, well, how many people are going to eat this. And I think that's really a nice way of looking at it because pizza does bring people really close. It is a sharing food, especially in Japan. And I get a lot of -- big source of pride for that in us is we see the moments on social media. We see what we're creating and how people are enjoying these products.

I'm endlessly proud about team at DPJ, that the leadership there continues. When we set a goal in the business, they always go out there and beat it. They're the ones who hold the records. They challenge all of us. And we've never opened this many stores. We've never had these sort of delivery times. Every single week, 18,000 stores worldwide, you can bet 25 in the top 50, all come out of Japan, and it will be one of the best in nations for the total average delivery. Pushing the envelope with the deep-pit model, the cleanness and hygiene of their operation, their store image, the uniform image, the bike image. I mean, it's the cleanest delivery fleet anywhere in the world. It's just pride that comes with that, the product innovations that they continue to push into new spaces to create a Domino's experience. They are a flag. DPJ is a flag bearer for all of us. And I get inspiration constantly from new benchmarks that are being set. And therefore, why can't we do it in other places in the world if we can do it in Japan. The irony of that is many people thought that would be the hardest place to do it. But Team DPJ has got such a strong leadership all the way through the organization, an extraordinary team with long tenure. And therefore, the execution ability is second to none.

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