As a franchise business, Domino’s Pizza Group is reliant on its franchisees to keep opening new stores. Until recently, it was an arrangement that appeared to work well for both parties. In November 2016 it upped its target for stores in the UK from 1,200 to 1,600 and the following year there were a record 95 openings up and down the country (Dominic Walsh writes).
Since then, things have not quite gone to plan. Admittedly, 95 was a bit of a one-off and this time last year the company predicted the number of openings at between 65 and 75. Even that proved over-ambitious, however, as relations with its franchisees deteriorated and the company ended the year with 58 more stores than it had started with.
At issue is the division of the spoils between the company and its franchisees. With labour and business costs rising, the group’s 67 franchisees have formed an association to represent their interests and demand a bigger slice of the pie and the team spirit that for so long seemed to characterise the relationship appears to have soured, resulting in franchisees taking their foot off the store-opening pedal.
Domino’s, which began in Luton in 1985, holds an exclusive master franchise for the American pizza brand in Britain and until recently had performed strongly. It has also been expanding into territories including Norway, Iceland and Sweden, although so far these have been loss-making.
At last week’s full-year results David Wild, Domino’s chief executive, conceded that there were “commercial tensions” with its UK franchisees and when asked how many stores it would open this year, he made the extraordinary admission: “The truth is, we don’t know.” Analysts immediately slashed their forecasts to only 30 openings.
Mr Wild, 63, nevertheless insisted that he was “very optimistic of finding a solution”, adding: “There’s a growing recognition that the only way for this brand to move forward is to work together.” He argued that despite tough trading conditions, which cut his pay from £1.4 million to £699,000, franchisee profitability per store was only slightly down during the year as like-for-like sales growth and additional support from the group on food costs partially offset inflationary pressures.
His confidence of finding a resolution to the “commercial tensions” appears to have riled franchisees, who are reported by The Sunday Times to have written to the company claiming that talk of a resolution was “extremely misleading” because Mr Wild and the board were “at total odds with the franchisees”. Domino’s hit back in a stock exchange statement yesterday, saying it strongly rejected the allegation that it had misled the City over the issue — it had been “clear and transparent”.
In many ways, the spat is a symptom of a maturing business: as franchisees get larger and more powerful, they feel more able to flex their muscles. According to the Sunday Times Rich List, Surinder Kandola, one of the biggest Domino’s franchisees, has built a personal fortune of £115 million and the majority of franchisees are said to be millionaires. At an investor day in January, David Bauernfeind, 50, Domino’s chief financial officer, claimed that even stores with below-average sales were “worth nearly £1 million against an upfront investment of £300,000”.
Some of the biggest franchisees have diversified, with Mr Kandola backing the UK plan of the Canadian coffee and doughnut chain Tim Hortons. However, even with the current pressures, a Domino’s franchise still generates double the sales per store of a direct pizza delivery competitor and by reining in further openings, franchisees could be shooting themselves in the foot.
ADVICE Avoid
WHY Feud with UK franchisees and “growing pains” overseas will both take time to resolve
Allergy Therapeutics
Disappointing late-stage trial results from Allergy Therapeutics prompted a strong reaction from investors yesterday. Shares in the allergy vaccines company suffered their worst day on the stock market, closing down 6p, or 42 per cent, to 8¼p, after a setback in a long-awaited phase-three results for a birch tree study (Alex Ralph writes).
The sell-off was irritating for shareholders because the stock had halved since it raised £10.6 million from investors in July at 26½p a share. The outcome of the European trial had been delayed by what the company said was the “longer than expected” time needed by its trial service providers.
Allergy is a pharmaceutical company focused on vaccines that treat the causes and symptoms of allergies. It was created in 1999 out of Smithkline Beecham, has about 500 staff and is based in Worthing. It has been quoted on Aim since 2004.
The company is inoculated, to an extent, against the disappointing birch trial by its existing products, which, with third-party treatments, are sold by subsidiaries in nine European countries as well and via distribution agreements in another ten. Germany is its biggest market, accounting for about 61 per cent of annual revenue.
The company generated revenue of £46.7 million in the six months to the end of December, up 10.6 per cent. Excluding research and development costs, operating profit rose 27 per cent to £15.7 million.
The birch trial is one of a number in its pipeline, including vaccines for grass as well as a preclinical study for peanut allergy.
However, the birch trial results have raised questions over how long it will be able to keep its birch vaccines on the market, increased pressure on its other trials and over whether it will need more funds for research and development.
The trial’s results were a nasty surprise because of what the company called the “substantial symptom improvement” in earlier ones. It plans to review the data but Manuel Llobet, 53, its chief executive since 2009, said that the company remained committed to bring the product to market.
ADVICE Hold
WHY Portfolio of marketed products and wider pipeline limit impact from trial setback
