How do various risk factors affect Domino’s business?
Domino’s is the largest QSR Pizza chain in the world based on retail sales. The company has been operational for 60 years (founded in 1960) and has grown to become the undisputed industry leader in the QSR pizza sector. The growth of the company has been driven by several factors, primarily because of its product quality, innovation, customer service, and a simplified yet differentiated operating model.
As of 2020, it had 17,644 stores operational worldwide. The company has adopted a strong business model, which is simple and yet efficient. Domino’s business system is run mainly by franchisees. However, the company also owned and operated 363 stores as of 2020. The supply chain operations of Domino’s are the leading source of revenue for the company.
The US QSR pizza segment has grown to $38.2 billion in 2020. Apart from being large and fragmented, it is also the second largest category in the US QSR sector. The US QSR pizza sector mainly includes dine in, carry out and delivery where delivery and carry out are the two largest segments. Domino’s competes in these two segments mainly and is a market leader in delivery. However, its market share in the carry out segment has also grown fast in recent years.
While Domino’s is the industry leader in the QSR Pizza category inside and outside the US, its business also faces various types of risks and challenges worldwide. It competes with several national and international brands in its industry sector. Some of its leading competitors in the US include Pizza Hut, Little Caesar’s and Papa John’s.
We will discuss these risks and challenges in this post as well as the level of impact they can have on Domino’s business growth and profitability. The list runs large since apart from being an international business, Domino’s is also a part of a heavily competitive industry.
While some of these risks are related to the company’s operations and supply chain, the others are technological, economic, and regulatory in nature. Since Domino’s relies on consumer data and analytics in several operational areas, there are cybersecurity and data privacy risks also. At last, there are inherent risks associated with the franchising model.
Business, Operational, Industry and Regulatory Risks Affecting Domino’s Business:
Highly competitive industry sector :
Competition can take a very ugly form even in the QSR sector. The QSR industry sector is also a highly competitive industry sector and there are a large number of players including national, international and various local players in the international markets that compete with Domino’s pizza. Competition is a key challenge and can be a major impediment to faster growth.
Maintaining and growing market share becomes a key challenge for Domino’s in the face of increased competition. The company is also facing higher competition from new sources including supermarkets, as well as, meal kit and food delivery providers.
The food delivery and quick service industries are highly competitive in terms of food quality, customer service, price, image, convenience and concept. The food delivery and quick service restaurant markets are also affected by changes in the following factors:
- international, national, regional or local economic conditions;
- disposable purchasing power;
- marketing, advertising and pricing, including discounting;
- demographic trends; and
- currency fluctuations related to international operations.
Apart from competing for customers, Domino’s competes with the other players in the QSR sector for employees, franchisees, and real estate sites. The supply chain segment of Domino’s, which is its largest segment based on the amount of total net revenues it generates each year, also competes with external suppliers.
The company has set qualification standards for suppliers. However, it needs to supply its franchisees at competitive prices, since they are otherwise free to purchase from external suppliers who match the company’s quality standards.
The competitive pressure in the QSR sector is intense and unless Domino’s continuously focuses on maintaining its competitive position, it will face downward price pressures, lower demand for its products, reduced profit margins, loss of market share and a failure to seize new growth opportunities. All these factors would adversely affect the operating results of the company and can cause the company’s stock prices to decline.
Overall, competition is a leading challenge for the brand and every year it needs to invest considerable resources in marketing and innovation to maintain its competitive edge. The brand also needs to watch the competitors’ strategies and actions since these factors can have a sharp impact on Domino’s sales and market share in the short run.
Since competition comes from diverse sources, and the growth of digital technology has also introduced new competitors in the QSR sector, the company has to be more alert regarding market changes to stay competitive and ahead of the curve.
Competition does not just add to the operating costs of the company but it also affects the business in more ways creating additional pressures like requiring more focus on innovation, creating additional uncertainty, higher pressure on existing marketing and growth channels, reduced marketing ROI, and so on. the list is quite exhaustive and every brand has to look out for how competitors are acting since their actions can have severe adverse impact on businesses.
Impact of the pandemic on the global economy:
The global economy and its condition also have a sharp impact on the QSR industry since the purchasing power of individual consumers also fluctuates with fluctuation in local and global economies. Things can change in the short term with economic changes and since the leading market of the company is the US, changes in the US economy have the sharpest impact on the performance of Domino’s.
The pandemic had a mixed impact on Domino’s business and one thing worth appreciating about domino’s is that its affordable pricing strategy has helped the company weather negative economic situations. However, global pandemics like COVID-19 do not pose just an economic threat, but also put the lives of employees at risk and can hurt physical operations of the company.
The result can be declined sales and revenue. Again, Domino’s investment in digital technology paid off and helped the company ward off the threat from extended shutdowns. Domino’s performed well during the pandemic and it was a result of several factors including the changes the company made to its operating model and how it adopted a new style of operation to suit the market conditions.
The pandemic also posed a threat of supply chain disruption and the company had to adapt additional measures to prevent it from disrupting its supply chain in the US and Canada.
The uncertainty that the pandemic gave rise to also threatened the company’s business operations and operating results. During the pandemic, people’s dependence on digital technology grew and so did Domino’s sales from digital channels.
However, to beat the impact of the pandemic and similar situations, companies need to adopt a simplified business model like Domino’s. Not all QSR brands were as lucky as Domino’s pizza and the ones that were not having the advanced digital capabilities like Domino’s ended up sacrificing sales and revenues.
Domino's survived the impact of the pandemic to a very large extent since while it gave rise to new demand and the company also altered its operating model to cater to the changed market conditions. While a pandemic and the resulting recession creates demand related pressure, it also affects the purchasing power of the customers and in turn affects the level of sales and company's revenue. Government intervention in the US and other factors helped minimize the economic impact of the pandemic to a large extent. Digital innovation also proved favorable for Domino's whose sales could have otherwise suffered.
Changing consumer preferences and perceptions:
There are a large number of factors that affect food service businesses. These factors include changes in consumer preferences and perceptions, global and national economic conditions, pricing, marketing, advertising, deals and discounts as well as changing consumer demographics.
For instance, consumers have grown more and more health-conscious which can make them avoid pizzas. Apart from that, since Domino’s depends mainly on the sales of a single product, if the demand for pizza among consumers decreases, it will lead to a fall in sales and revenue for the brand. Several other businesses in the QSR sector offer a more diversified menu which is good for their operating results.
If Domino’s also sold a broader line of product offerings, it would help the company manage changing consumers’ preferences better. The company has expanded its product line and introduced more chicken products in recent years to cater to popular demand in leading markets like the US. Consumers’ preferences are affected by several factors including health trends and technological changes.technological advancements as well as the introduction of new delivery methods have also affected consumers’ preferences in various markets.
For example, food delivery apps allow customers to access a more diverse menu of food products. They also offer attractive deals and discounts which means increased competition for Domino’s offerings. Domino’s has responded to these changes by introducing several new channels for ordering and delivery. Its app has particularly found heavy popularity in the United States.
Apart from that, the company has kept adding more variety and more attractive options to its menu. Domino's has to carry out regular market and consumer research and analysis to understand the changing preferences of consumers and accordingly respond. Apart from that, the company is also relying on technology to manage consumers’ perception of the brand through marketing campaigns and customer engagement methods.
Consumer preferences do not change overnight but their perception of a brand can definitely and therefore Domino's needs to watch how its franchisees are executing its strategy and how their actions affect the company's reputation. Apart from that, regular and ongoing market research also helps understand the consumers' preferences better. It is an important part of the company's marketing strategy since it helps create suitable marketing and product strategies for individual markets. Moreover, consumer preferences are not even globally and what sells in a particular market may not be successful in all the regions.
Supply chain disruptions and shortages:
Domino’s supply chain is not just a leading business segment or source of revenue for the company but also key to operating its large business successfully. With regards to sourcing raw materials, Domino’s is a highly self-dependent brand to a large extent. It produces several important ingredients in-house.
However, there are certain ingredients that it needs to source from external suppliers. For some necessary ingredients like Pizza cheese and meat toppings, the company depends on a limited number of suppliers or single suppliers.
The company has some alternative sources for supply of these ingredients but still interruptions, shortage or disruptions can affect production and sales negatively.
These shortages can be caused by several factors, including increased demand, capacity constraints, problems in production or distribution, product recalls, financial or other difficulties of suppliers, inclement weather, or other conditions.
When they occur, they affect the availability, quality, and cost of raw materials. In the past, the company has experienced shortages and supply chain disruptions caused by capacity, volume, staffing, operational and COVID-19-related challenges. The situation can again happen in the future. Apart from that, climate and weather-related difficulties can also affect the supply chain operations of the company.
In the case of supply chain operations, the rules are the same for the QSR industry as the other industries. If the raw materials are not available at the appropriate time, the result will be lower production and lower sales. So, smooth supply chain operations are just as critical for QSR businesses as for any automobile or smartphone business. A company needs to ensure that it has a sufficient number of suppliers for each ingredient or its business may suffer due to shortages. Backward integration can benefit a QSR business but gaining a hundred percent self-dependence is often impossible for a QSR business. Domino's has still maintained a strong supply chain and since it produces some critical ingredients in-house, it ensures higher success for the business compared to the rivals who lack the same capabilities.
Increased costs of raw materials and labor:
The increased operating costs of the company can also affect its operating results and profitability negatively. Several factors can drive the operating costs of the company higher including inflation, increased food costs, increased labor and employee health and benefit costs, increased rent costs, and increased energy costs.
Most of the factors that can impact the operating costs of Domino’s are outside the control of the company. In many cases, the company might not be able to pass on the increased costs of raw materials to its customers.
Several factors can cause the prices of important pizza ingredients to fluctuate. Seasonality, weather, demand, and other factors can cause the prices of ingredients like cheese to fluctuate. Cheese is among the most significant costs incurred by the company and accounts for around 25% of the total market basket that the company-owned stores purchase.
The company experienced price volatility related to some important ingredients during the pandemic and the situation could persist even after the pandemic. The company also competes with other QSR brands for sourcing several important ingredients. In case, it is unable to bid competitively and source products according to requirement, it will have a negative impact on production and sales.
If the company seeks additional new suppliers, it might have to agree to less favorable terms and pricing compared to its current arrangements.
Domino's operates 21 regional dough manufacturing and supply chain centers in the U.S., two thin-crust manufacturing facilities and one vegetable processing center in the U.S., and five dough manufacturing and supply chain centers in Canada. The company is also planning to build additional supply chain capacity through continuous investment.
If the company experiences a prolonged disruption at any of these facilities, it can harm the operations of the company-owned and franchised stores throughout the US and Canada. These disruptions caused by technical, operational, or labor difficulties, destruction or damage to the facility, real estate issues, limited capacity, or other reasons, could adversely affect the business and operating results of Domino's pizza.
The labor costs of the company could also increase as the government increases the minimum wages for the industry. There is also strong competition in the industry to attract talented employees and requires the company to pay competitive salaries and benefits to its employees.
An increase in labor costs can also drive the operating costs of the company substantially higher. For any company-owned store, the costs of labor and raw material represent approximately 50 to 60% of its sales.
Success in the QSR industry depends on marketing success:
Branding and marketing in the QSR industry also affect the success of firms to a large extent. Companies need to invest in marketing and customer engagement to find faster growth and sales. Apart from its own website and apps, the company also needs to invest in advertising to grow its business and maintain its competitive position and market share.
The fast-food industry is highly competitive, and in the leading Western markets like the US and Canada, there is intense competition. Ongoing marketing is essential to maintaining sales. As a result, leading QSR brands have to make huge investments in advertising each year to maintain their sales.
QSR companies are growing highly aggressive about maintaining their competitive edge and retaining their market positions. These brands run seasonal marketing campaigns. They also offer deals and discounts aggressively to lure customers away from the competing brands. Domino’s is operating in a highly competitive industry environment, and as a result, it has to maintain a large advertising budget.
In the US, its franchisees must contribute at least 6% of their sales to advertising. However, just advertising and promotions are not sufficient to attract and retain customers. Loyalty programs also play an important role in helping Domino’s retain its customers and drive sales higher.
Domino’s also uses deals and discounts as well as loyalty programs to drive customer retention rates higher. Its Piece of the Pie Rewards program includes free pizza upon the redemption of points as well as members-only exclusive bonuses and discounts.
The company also uses social media channels for marketing and promotions and engaging fans and followers worldwide. With time the use of social media channels and blogs as well as online forums have grown.
These factors also have a significant impact on the brand image of the company. Apart from marketing through social media channels, the company has to also focus on how discussions across these channels affect its business.
Risks related to international business:-
Domino’s has continued to expand globally and operates across 90 countries. Its global operations subject it to a large number of risks, many of which it or its franchisees do not have any control over.
These factors can have a severe negative impact on the company’s operations and its profitability. These factors can be political, economic, or of another type in nature. The leading factors that affect the pizza business internationally include:
• recessionary or expansive trends in international markets;
• changing labor conditions and difficulties in staffing and managing the company’s foreign operations;
• increases in the taxes Domino’s pays in the US and overseas and other changes in applicable tax laws both in the U.S. and globally;
• tariffs and trade barriers;
• legal and regulatory changes, and the burdens and costs of our compliance with a variety of foreign laws;
• fluctuations in inflation rates;
• Fluctuations in exchange rates and the imposition of restrictions on currency conversion or the transfer of funds;
• difficulty in collecting royalties from franchisees and longer payment cycles;
• expropriation of private enterprises;
• the inherent risk of doing business in China resulting from Domino’s equity investment in Dash Brands;
• increases in anti-American sentiment and the identification of the Domino’s Pizza brand as an American brand;
• political and economic instability and uncertainty around the world, including uncertainty arising from the COVID-19 pandemic; and
• other external factors.
Risks related to franchising:
The business of Domino’s globally is carried out mainly through franchisees. However, the business of franchising is inherently risky and includes various types of risks that can affect the company’s business.
The success of the company in that case also depends on the success of the company’s franchisees. Apart from that, if the company depends on franchisees for business success, any adverse actions taken by the franchisees can also harm the company’s business reputation and success. In most cases, having one’s business run by the franchisees also requires surrendering a significant amount of control to the franchisees.
There are also several factors related to franchising that are beyond the control of the business and as a result, many times businesses may face difficult situations since franchisees may not be able to match their standards. The success of a business run by franchisees also depends on the level of alignment between the business and its franchisees. For smoother operations, there needs to be a higher degree of cooperation and alignment between the business and its franchisees. This also makes it easier to execute the strategies formulated by the company at the franchisee level.
However, making this possible can be difficult. Unless there are significant incentives, franchisees may also ignore the company’s rules and standards and start running the business in their own manner. Sometimes, a few large franchisees operate a significant portion of a company’s business, and if their business is affected, it, in turn, affects the brand and its profitability. Overall, franchising is full of risks. A large and dominant player uses its reputation, brand image, and clout to control significant factors which can otherwise hurt its business operations and profitability.
Regulatory and legal risks:
Domino's and its franchisees are subject to extensive government regulations. They are subject to many federal, state, local, and foreign laws and regulations, as well as requirements issued by
other groups, including those relating to:
• the preparation, sale, and labeling of food;
• building and zoning requirements;
• environmental protection;
• labor and employment, including minimum wage, overtime, insurance, discrimination, and other labor requirements;
• working and safety conditions;
• franchise arrangements;
• payment card industry standards and requirements; and
• information privacy and consumer protection.
Domino's is subject to an FTC rule and many state and foreign laws that govern the sale of franchises. These rules regulate the various aspects of the franchisor-franchisee relationship, including termination of the relationship and the refusal to renew the franchise.
If Domino's fails to comply with these laws and regulations in any jurisdiction or fails to obtain the necessary approvals from the government, the result could be a ban or temporary suspension on future franchise sales, fines, or other types of penalties. The government may also require the company to make offers of rescission or restitution, which might hurt the company's business and operating results.
Domino's and its franchisees are also subject to the Fair Labor Standards Act, which with the Family and Medical Leave Act, governs the minimum wages and employee leaves. Changes in tax laws and tax policies can slo affect Domino's financial results negatively. The government and public's focus on environmental issues has also grown and can cause Domino's operating expenses to grow.
There are many laws and regulations including those related to product quality, environment and labor as well as other types of laws that affect Domino's business.