A slice of the Domino's action

What can the tenanted pub sector learn from Domino's Pizza's relationship with its franchisees? Andy Emmerson, the company's business development director, talks to The PMA Team.

Andy Emmerson sums up the relationship with Domino's Pizza's 135 franchisees as: "Happy wife, happy life." The company runs 608 outlets entirely through a network of self-employed entrepreneurs.

Recruitment, reward and retention of franchisees is at the heart of the Domino's business model. There is one striking difference, though, between the Domino's model and the tenanted sector. The cost of entry for franchisees is high despite the complete lack of freehold property.

New franchisees need around £250,000 to invest in a first leasehold site, of which around £80,000 at least needs to be cash. Nevertheless, 4,000 would-be franchisees apply each year with around 200 to 300 getting interviews.

Eventually, Domino's appoints around 20 new franchisees each year. What is Domino's looking for in a franchisee? "The ability to manage people," says Emmerson. "High energy levels, an empathy with service, and a certain spark of enthusiasm are also important."

New franchisees have to complete three weeks of store practice with an existing franchisee before getting green-lighted. Above all else in franchisee selection, says Emmerson, the Domino's senior team is asking itself: "Is this someone we want a 10-year relationship with?"

Absolute trust​

Emmerson says that the relationship with franchisees is governed by the over-riding need to maintain absolute trust. "It's all about, do we trust each other? If there is a problem with a business relationship like this it's normally about trust."

Outlets generate average sales per week of £14,000, which produce a profit for franchisee of just over £2,000 a week — around £115,000 per year. The average Domino's franchisee owns 4.5 outlets, producing around £500,000 of income in total, and stays around for well in excess of 10 years. The model provides no economies of scale for multi-site operators from Domino's itself — although there are saving on things like payroll and local marketing in having more than one site.

It does, however, provide considerable cashflow, from which franchisees can open more outlets at no capital cost to Domino's itself.

The company reviews franchisee and company profit & loss accounts each month to ensure that profit division is in line with benchmark targets — two thirds to franchisees, one third to the company.

Emmerson says that Domino's is always mindful of the need for adjustments in profit division where there is a danger of eroding trust.

Property landlords have been much more willing to grant longer rent-free periods of up to nine months to Domino's; the company passes on the savings to franchisees.

A couple of years ago, cheese prices were sky-rocketing. "We decided we'd take the hit on our P&L as it was the right thing to do," says Emmerson. "There are times when we can and should absorb rises."

Maintaining a good relationship​

The business relationship with franchisees is maintained through as many as 10 dinners a year, an annual conference, and daily informal contact between franchisees and Domino's senior management. "Our biggest two franchisees, with more than 50 sites each, are the most challenging and our best franchisees in absolute terms with consistently high standards.

"The more engagement there is between management and franchisees the better. Most of my calls in an average day are from franchisees."

Not surprisingly, Domino's surveys franchisees on an annual basis with the company regarding franchisee profitability as a key performance indicator (KPI). What happens, though, when franchisees want to leave? Does Domino's have a problem, like the pub sector, with people paying excessive premiums?

Apparently not. Sites are sold in a fairly straightforward relationship to annual average sales of £700,000 per site. Confidence in buying sites is helped by the fact that the company's national marketing budget expands each time the store network expands by dint of per site compulsory contributions, pushing sales up further — Domino's sponsored the most recent run of Britain's Got Talent.

Existing sites change hands for around 35% to 40% of £700,000 per annum sales — so about £325,000 to £350,000 per site on average with some selling for as much as £400,000 depending on sales and locations.

"The majority of sites are bought by existing franchisees," he says.

Interestingly enough, Emmerson comes from a pub operator background — he ran pubs for Tetley Pub Company at one stage.

Does he have a view on the pubco and licensee relationship in our sector? "It does seem that the balance between the income of the landlord and licensee has been out of kilter."