People think Domino’s makes money by selling pizza, but 60% of its revenue comes entirely from something else

By | December 21, 2023

friends eat pizza in a home environment

With more than 20,000 locations worldwide, Domino’s Pizza (NYSE:DPZ) is the largest pizza company in the world. How much money do you think you make selling pizza to hungry customers? $1 billion? $5 billion? $10 billion?

What if I told you that Domino’s generated less than $400 million in pizza sales over the last twelve months? This number may sound absurdly low, but it is accurate. Most of the company’s revenue actually comes from something other than selling pizza, and many investors don’t realize how Domino’s business model actually works.

Domino’s Pizza, the supply chain company?

Domino’s has generated $2.7 billion in the past 12 months, according to company filings. supply chain gain. This is no less than 60% of the turnover for this period.

It turns out that Domino’s only owns 1% of the company’s 20,000 locations. The income from the direct sale of pizza to customers is therefore low.

The remaining 99% of Domino’s locations are owned by franchisees – independent third parties. These franchisees have the option to purchase their own supplies, but Domino’s has cleverly found a way to let them choose the supply chain instead.

Domino’s has a fleet of more than 1,000 tractors and trailers that deliver food, supplies and equipment to its company-owned and franchised stores. In the field of food, the company has dozens of facilities where the pizza dough is produced.

Domino’s does make a profit from making these deliveries, but to incentivize its franchisees to buy in, it shares supply chain profits with them – typically about 50% of pre-tax profits, management said.

Thanks to this profit-sharing system, Domino’s has high acceptance among American and Canadian stores. The company supplies more than 7,200 locations and benefits from economies of scale. Furthermore, Domino’s can guarantee the quality and consistency of its food because it all comes from the same place.

Why put so much effort?

It can be difficult to develop any competitive advantage in the restaurant industry, but some chains have found creative ways to do so. McDonald’sfor example, has built a multibillion-dollar real estate empire, charging rent to its franchisees.

Other pizza restaurants may compete on taste, but because of its scale, Domino’s competes very well on price. Additionally, if an operator is looking to franchise a pizza concept, the complete package that Domino’s has to offer is hard to beat.

This is huge for investors. The supply chain business may be low-margin for Domino’s – its supply chain gross margin is just 10% this year – but it allows the company to attract and retain a large number of franchisees.

And that leads to the exciting part: Franchise fees and royalties are almost pure profit for Domino’s.

Franchisees renewed their contracts 99% of the time in 2022 – an excellent retention rate. This suggests the company is offering these operators a lucrative opportunity, and the company hopes this will allow it to open more than 1,100 new franchise locations annually through 2028.

In short, Domino’s will see franchisees’ high-margin fees increase as it adds new units to the system. In turn, management expects operating income to achieve a compound annual growth rate of at least 8% through 2028.

Assuming this growth continues, Domino’s operating profit should be 36% higher in 2028 than in 2023. The company regularly buys back shares and also pays out a growing dividend. Taking all this into account, investors could expect total returns of 50% or more over the next four years.

Such a performance would likely make Domino’s stock a market-beating investment over this period, which is great for shareholders. And that probably wouldn’t be possible without being a supply chain company first and a pizza company second.

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Jon Quast has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Domino’s Pizza. The Motley Fool has a disclosure policy.

People think Domino’s makes money by selling pizza, but 60% of its revenue comes entirely from something else. Originally published by The Motley Fool

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