Domino's Pizza: The European Dream: Investor Day, 2021
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- By Alex Lu
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- Date posted:
- 21 October 2021, 9:30 AM
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- The overriding message from Domino's Pizza (ASX:DMP) European Investor Day was that the company is locked in a relentless pursuit of growth. Its long-term milestones for store numbers look more like a staging post than a point at which it expects to reach capacity limitations. The density of stores in Europe is a fraction of that in DMP’s home market of Australia.
- M&A is being actively considered as a means to compound its strong organic rollout trajectory. DMP says it has the capacity, the capital and the ambition to bring new markets into its portfolio. This business has a long way to run.
15 years of DMP in Europe
It is 15 years since 2006, when DMP first entered the European market. Today it operates 1,303 stores across six countries: France, Germany, the Netherlands, Belgium, Denmark and Luxembourg. DMP has 1.8x more stores in these European markets than it has in Australia, but the combined population is 7.1x larger.
DMP has taken the number 1 position in the pizza category of each of its key European markets. Applying its HVM (high volume mentality) approach, delivery times have been consistently reduced and can be less than half that of many of its peers.
National tastes can vary significantly, which means the menus look quite different between different markets. Consumer appetite for pizza is a unifying factor, however. Who knew, for example, that, after the USA, the second highest consumption of pizza per capita in the world is in France?
A significant opportunity in existing markets
DMP’s long-term (2033) milestone is to increase the size of its network in its current European markets by 134% to 3,050. Even at this number, it would still have 7% fewer stores than if it had the same store density as Domino’s currently has in the UK and 42% fewer stores than if it had the same density as in Australia.
In our opinion, DMP regards its 2033 milestone as exactly that: a marker along the road and not its ultimate target for these countries.
The CEOs of all key markets have ambitious plans to build out their store networks, but the opportunity may be most compelling in Germany. DMP currently has 4.5 stores for every million people in Germany, 4x fewer than DMP’s 19.1 stores per million people in the Netherlands.
DMP sees itself on track to execute its organic store rollout plans this year despite the lead times associated with council approval. Its peak period for store rollout is in December and June. Markets are subject to different levels of COVID-19 restriction.
Adding new markets seems likely
Group CEO Don Meij attended the Investor Day in person in Europe as part of a trip around the world, which he confirmed was arranged expressly for the purpose of seeking and discussing potential M&A opportunities in Europe and elsewhere.
DMP said it has the capacity, the capital and the ambition to execute M&A to assist in its pursuit of growth. In our opinion, we may not have to wait too long.
The constant supply chain battle
Inflation in the price of soft commodities is coming and DMP expects to be affected by this in the first half of 2022. It has good visibility over prices because of its long-term supplier relationships.
Supply chain inflation is nothing new, and while this particular round seems worse than usual, DMP believes it has strategies in place to drive store efficiencies and supply chain efficiencies that will allow it to mitigate some of the increases.
Decisions on retail pricing are left up to the store managers, other than during national promotions, and this is another lever than can be pulled.
Getting the right people
Getting hold of quality labour is an issue everywhere, but DMP sees itself as well placed compared to its competitors.
This is partly due to DMP’s brand equity, but also because its use of electric bikes (and generally shorter delivery distances) means it can appeal to a broader range of potential delivery drivers. Labour constraints are not disrupting its business in Europe (or elsewhere).
We have updated our model to moderate our growth assumptions in Japan (no change to European assumptions).
Our EBITDA estimate falls by 2.8% to $486m in FY22 and 3.6% to $553m in FY23, bringing us closer in line with consensus.
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