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Domino's international business to drive growth in 2011

Chain also credits new technologies, aggressive pricing for improvement in sales

As Domino’s Pizza celebrated its 50th anniversary, company executives told investors and analysts that international business would provide for much of the system’s growth in the near term.

Officials also said Domino’s domestic system would continue to capitalize on recent traffic gains.

Chief executive Patrick Doyle laid out a long-term guidance of 3-percent to 5-percent same-store sales growth for Domino’s international business. He provided a more modest range of 1 percent to 3 percent for domestic same-store sales growth as Domino’s laps double-digit comps in 2010 that followed the launch of the chain’s reformulated pizza.

Commenting on the brand’s 50th anniversary, Doyle told conference attendees: “Nobody imagined that some day we’d open our 9,000th store as we did back in March, or that 4,000 of those stores would be outside the U.S. Our future will be greatly enhanced by our international business.”

Doyle and chief financial officer Mike Lawton were joined by Domino’s four largest international master franchisees, representing 55 percent of the international system and an aggregate of $3.2 billion in capitalization. Their territories encompass the United Kingdom, India, Mexico, and a combination of Australia and New Zealand as well as several Western European countries.

Domino’s is projecting worldwide unit growth of between 250 and 300 units next year, a majority of which will come from the international businesses represented at the investor meeting.

New technologies drive international profits

Don Meij, chief executive of Australian franchisee Domino’s Pizza Enterprises, said the rollout of the Pulse POS system in Australia and New Zealand has been a “huge competitive advantage” for the master franchisee Down Under. The company also franchises stores in France, Belgium and the Netherlands, for a total of 835 locations.

“The Australian market is more mature, but with significant opportunity for growth, and we have huge potential for growth in Europe,” Meij said. “A big reason for that is our world-class IT capability.”

Domino’s holds 53 percent of the online-ordering market share for the pizza category in Australia, Meij said, adding that his company’s iPhone app was downloaded in Australia as much as Pizza Hut’s version was in the United States during the same time frame. He also said Domino’s e-mail club in Australia of more than 760,000 members has “significantly reduced marketing costs and driven our online business.”

Domino’s Pizza Enterprises is projecting growth of 70 stores next year, with a goal to build the system to 1,600 locations in the next several years. Same-store sales were up 9.4 percent in Australia and New Zealand and 4 percent in Europe year-to-date, Meij said.

Chris Moore, chief executive of Domino’s U.K., said the online-ordering and real-time data-reporting capabilities of the new POS system would be central to the growth of the brand in the United Kingdom.

“We’re about to roll it out in the U.K., which could take between 18 and 24 months to complete,” Moore said. “We live on the edge of a 30-minute business, and having that information in real-time is vital.”

The United Kingdom division has more than 620 stores, all of which are franchised, and has closed only two locations in the past 15 years. Domino’s U.K. has grown at about 55 stores a year over the past few years, with a total build out goal of 1,200 stores. Moore said much of the growth will come from operating cash flow of existing franchisees.

Getting in deeper

The other master franchisees at the conference, Mexican developer Alsea and Indian operator Jubilant Foodworks, are not as close to adopting the new POS system. But they reported that the growth opportunities in their markets lay in newer cities outside major population centers.

Alsea, which opened its 589th Domino’s in Mexico this year, will get the new system next year. But it more recently adopted Domino’s reformulated pizza in October and lowered its prices on the core product, resulting in much higher transactions, said chief financial officer Diego Gaxiola.

“Next year will have great potential for us,” Gaxiola said. “[Mexicans] get together to eat a lot, and we have a growing population.”

“Alsea’s significance can’t be overstated,” Doyle said. “We’re not only the dominant pizza brand in Mexico, but we’re also by far the largest restaurant chain, period. As our partners around the world have grown, Mexico has been a must-visit country to understand how deeply you can penetrate these markets.”

Ajay Kaul, Jubilant’s chief executive, agreed that Domino’s growth in Mexico informed many of the brand’s strategies in India, where Jubilant plans to open 70 stores in fiscal 2011. As he tries to expand Domino’s beyond long-held territories like Mumbai and Delhi, Kaul is optimistic that demographics are on his side.

“India is growing younger as the whole world’s getting older,” Kaul said. “As many as 500 million Indians are below the age of 24, and as much as 65 percent of our population is under 35. There’s also a rising urbanization, and soon 29 percent of the population will be categorized as urban.

“Pizza and pasta account for only 2 percent of the foodservice market in India, which should tell you how underpenetrated the market is and what opportunity there is there,” he added.

Jubilant, which has 339 stores in India across 79 cities, has averaged same-store sales growth of around 18 percent over the past five years. Through the first half of fiscal 2011, same-store sales are up 41 percent.

Domestic stores capitalize on traffic

Doyle admitted that after several years of flat domestic system growth any unit growth in the United States would be “modest.” But he maintained that the key to the domestic business would be to follow through on 2010’s traffic increases generated by the relaunch of its core pizza, which produced same-store sales increases that will make for difficult comparisons.

“We’re not looking at what we’re doing here as anything short-term,” Doyle said. “We’re building up a larger customer base through the first three quarters of this year, and we’re bringing some people back to try Domino’s again. And momentum is a powerful thing: It means our franchisees are doing better, our ad fund is getting larger, and we can drive efficiencies in costs and our distribution systems.”

To get the domestic same-store sales increases between 1 percent and 3 percent over the long term — the company did not release guidance specific to 2011 — Domino’s will continue aggressive pricing like its medium-pizza offer launched with the new pizza as well as carryout specials, which all have put pressure on the average ticket.

“We’ve been running a slightly negative ticket in the U.S., so traffic has been up even more than the same-store sales levels you’ve seen,” Doyle said. “You’ve got to be modest from a pricing standpoint, and our goal is bringing more people into our stores every day.

“The reason why we’re running carryout promotions on national TV now is because they work,” he continued. “Consumers choose their method of getting pizza before they choose the brand they’ll order it from. As we run carryout specials, they’ve had a nominal effect on our delivery business, because these customers are different folks with a different occasion, and it’s been very incremental for us.”

Ann Arbor, Mich.-based Domino’s operates or franchises 9,169 restaurants in the United States and more than 60 countries.

Contact Mark Brandau at [email protected].

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