New markets shake Domino’s

Daniel Lane

Daniel Lane - Fidelity Personal Investing

Profits took a dent at Domino’s in 2018 as it dealt with ‘growing pains’ in new international markets, the company reported this morning.

New markets shake Domino’s

Despite shifting a record 102 million pizzas throughout the year, positive performance across the Group’s main markets was skewed towards the UK and Ireland, with new ventures into the nordics and mainland Europe struggling.

As a result, profits before tax took a 22.2% dive to £61.9 million, down from £79.6 million the previous year. Net debt rose to £203.3 million, up from £89.2 million to the end of December 2017, as the firm’s expansion plans look to take longer to pay for themselves.

Two for Tuesday

The UK and Ireland, which still account for the lion’s share of Domino’s business, saw like-for-like sales rise 4.6% and 4% respectively, which the company expects to continue. In a further move to bolster its offering in its core markets, Domino’s opened a further 59 stores during the year across the British Isles, creating more than 2,000 jobs in the process.

Investors in the casual dining sector might be pleasantly surprised by how sturdy these sales numbers look compared to peers, but will then be frustrated by how heavy expansion plans have weighed on the bottom line.

Given the stability of the UK and Irish markets, the firm’s drop in profits paints an uneasy picture of meaningful losses in Norway, Sweden and Switzerland. However, chief executive David Wild was quick to put the results and future potential growth drivers for the business in perspective, saying:

"2018 was a mixed year. In the UK and Ireland, which account for around 90% of the business, we extended our excellent track record of growth and cash generation, responding well to the very challenging environment for the casual dining market.

“We also continued investing for future growth in digital and by successfully completing our new Supply Chain Centre in Warrington, our most significant investment to date, which supports our target of 1,600 stores in the UK.

"Internationally, we have experienced some growing pains which have hampered our overall financial performance. These are all good markets, with more than 100 million population, good appetites for pizza and little, if any, global brand competition.”

Delivering on consumer tastes

If international markets are to break even and not rely on the UK and Ireland to support their growth this year, the company must address consumer tastes and attitudes to its offering as it begins to build its reputation in mainland Europe.

Investors have long been a fan of the simple business model, requiring a minimal retail footprint and cheap production costs. What’s more, current trends suggest Domino’s is well-placed to benefit from consumer shifts towards vegetarianism, with many of its meat-first fast food peers ill-equipped to adapt. Just ask Greggs how valuable a vegan sausage roll can prove.

More pressing is a growing consumer focus on healthy eating and conscious efforts to limit takeaways of any kind, not just pizza. Throw in the mounting threat posed by Deliveroo, Just Eat, Uber Eats and a range of younger Europe-based disruptors and we might find it takes longer for these new markets to take hold of Europe’s Friday nights in quite the way the company has on British shores.

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