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Want to grow your brand? Improve franchisee profits

As brands face franchisee unrest, Domino’s provides a reminder of why it’s been successful, says RB’s The Bottom Line.
Photograph courtesy of Domino's

the bottom line

For two decades, Domino’s Pizza remained relatively steady at about 5,000 U.S. units. The lack of growth continued in 2011, even though the chain’s same-store sales jumped almost 10% after the chain reconfigured its pizza recipe.

“We closed more stores than we opened,” CEO Ritch Allison said Thursday. “It takes time for franchisees to gain confidence in the brand and begin to invest again.”

Indeed, operators would open more units the next year. And in the years after that. Domino’s has grown by more than 800 locations since 2011—16% growth for what is now a 5,700-unit domestic concept.

It doesn’t take much to understand why operators were so easy to grow. The company’s same-store sales have averaged 7.4% since 2010. And profits have soared. Average store earnings before interest, taxes, depreciation and amortization has doubled since 2010, from $67,000 to $136,000.

This is an important lesson given the current environment. Franchisee profitability is the single most important predictor of a system’s ultimate success.

Systems where franchisees are profitable are far more likely to grow than those that aren’t. Operators are reluctant to add locations when they don’t feel there’s enough return to warrant the investment, after all. No amount of development agreement enforcement will change that.

Profitability is a major consideration in the current environment, where systems like Subway, Jack in the Box and McDonald’s have faced unprecedented uprisings in their franchisee base.

Subway operators screamed about a $4.99 footlong offer. Jack in the Box operators took the unusual step of calling for a new CEO. McDonald’s franchisees created the first association in the system’s history.

To be sure, many industry executives say they are concerned about operator profitability, and McDonald’s considers that metric when rating its district managers.

But franchisors have been pushing more discounting over the past year, though traffic is not growing and labor costs are rising. They’ve also been pushing remodels and other capital spending initiatives.

We use Domino’s as an example of what systems can do when their operators are more profitable for one reason: Domino’s actually reports these numbers.

Few publicly traded systems report franchisee cash flow metrics—even though all of them should be doing this immediately.

(Side note to the franchisor, consultant or attorney tempted to email me with the statement, “We’re not allowed to do that!” or “We’ll get sued if we do that!” First: Yes, you are. Second: You’ll get sued anyway, so you might as well do the right thing.)

“I wouldn’t put a nickel of my own money into a business if I didn’t know what the unit-level economics are,” Allison said.

The profitability growth at Domino’s has not only generated unit growth. Operators also remodeled nearly all of their restaurants in just five years—remodels that have likely contributed to an increase in carryout orders that further improved sales and profitability.

“The thing that matters most to franchisees are unit-level economics,” Allison said. “We put our franchisee profitability at the center of every decision we make.”

The company also says that it is “transparent” with its franchisees and will have a “good, open, honest dialogue about the decisions we’re making around the brand and the investments we’re asking them to make.”

“When we ask them to do things, we tell them it’s in the best interest of the brand, but for them as franchisees also,” Allison said.

To be sure, Domino’s is planning to add 2,000 units in the U.S., a plan that will test its unit-level economics over time by potentially cannibalizing existing locations. But it’s a plan that is far more likely now thanks to that profitability.

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