If you think of Domino's (DPZ) as a pizza-delivery chain, you're only partly right.
What you might not know is that the corporation's real money comes from selling dough and toppings to franchises, not from delivering pizza to your doorstep. Every year, in fact, more than half of Domino's revenue results from supplying ingredients and goods to its stores, 97% of which are operated by its franchisees.
This leads to a fairly remarkable set of facts about Domino’s business:
- Fueling its own franchisees with dough, peppers, mushrooms, sausage, equipment and store supplies is now worth over $1 billion annually to revenue.
- Every year, Domino's is producing more than 300 million pounds of dough at its plants.
- How much dough is that? It's equivalent to about 860,000 pounds a day, or right around the maximum allowed takeoff weight of a loaded Boeing 747-400 Freighter.
Said another way, it would be more accurate to describe Domino's as a seller of pizza ingredients vs. the pies themselves. Sure, it gets some sales from stores it owns, but those only make up about 19% of its entire annual revenue.
It's an unusual arrangement nowadays in the restaurant industry to see a publicly traded corporate parent selling food to its franchisees and then recording those sales as revenue. Pizza Hut parent Yum Brands doesn't do it, and neither do McDonald's (MCD), Burger King (BKW) and other well-known restaurant operators. For them, revenue is determined by royalties they receive on their franchise license agreements and rents, along with the sales from the stores they still own.
[Related: What It Takes to Start a Fast-Food Franchise]
But it does happen in a few cases. Domino's competitor and third-largest pizza store Papa John's (PZZA) owns a network of production and distribution centers that ship pizza dough and other foods to its units, and, though it's tiny in comparison, Pizza Inn (PZZI) does the same thing. Outside of pizza, doughnut seller Krispy Kreme (KKD) is one of the few companies that counts supply-chain revenue as part of its sales.
Domino's, the Ann Arbor, Mich.-based Noid-fighting chain, owns 388 of its stores, while the rest, nearly 9,900 more locations worldwide, are owned by franchisees. (By total store count, it's No. 2 behind Yum Brands' (YUM) Pizza Hut subsidiary). For the stores Domino's runs, revenue last year came to $323.7 million. Revenue it records from franchise fees totaled $195 million, and international operations accounted for another $217.6 million. But it was U.S. supply chain revenue that outpaced the other segments combined, reaching $942.2 million, or 56% of the $1.68 billion total sales. If you add to this the international supply chain revenue – part of overall revenue from international operations -- sales directly attributable to the company's act of putting stuff in stores reached $1.04 billion.
Source: Domino's. $ in millions.
On average, we estimate that the price of a Domino's pizza you would buy at your local store is about $12.45. The store itself, which had to purchase the ingredients to make the pizza, probably spent around $3.35 on the dough and toppings. (More on how we got to this later.)
That doesn't mean a shop clears $9 on every pizza it sells, and understand that these calculations aren't from accountants – it's a back-of-the-envelope estimate. Labor and building expenses, insurance costs, the franchise fees paid to the corporate office and a mandatory advertising contribution eat up a huge portion of every sale.
We have clues from the company as to just how much. Last year, food expenses at corporate stores were 27.1% of sales, rent and utility costs were 9.5%, labor costs 28.4% and insurance outlays 3.1%. Right there, you've got 68.1% of sales going back out the door to pay for something. If you're a franchise owner and your costs mirror those levels, once you've set aside royalties and ad contributions nearly 80% of your revenue is gone. For the company itself, after factoring in all its spending and taxes, it had earnings of $112.4 million last year, equating to 6.7 cents of profit on every dollar it initially brought in.
All of Domino's company-owned stores and more than 99% of the American franchise locations get their food and supplies from the corporate supply chain mechanism, which includes several large regional dough plants, a vegetable-processing facility -- and even a plant devoted solely to producing thin-crust dough. None of this comes for free, of course, since a significant portion of what Domino's sells must first be purchased, then processed and finally shipped. Last year, the cost to run the U.S. supply chain totaled $843.3 million.
We've estimated that a single Domino's franchise spends about $210,000 a year for food and supplies, as detailed in the chart at the bottom of the article, which also explains how we arrived at the ingredient costs for a single pizza. There is a nice offset the company provides franchisees, however: Profit-sharing. Buy your food in-house, and you get a cut of the pretax profits from the regional supply center that gets you your goods.
And as promised, our cost breakdown is below. Click on the list for a larger view.
- Professional Services
- Consumer Discretionary