Integrated Company Analysis

Domino’s Pizza

Team B6
December 14, 2010

“On my honor, I have neither given nor received unauthorized aid in completing this academic
work.”

Tai Adkins

Vanessa Bailey

Ben Schmidt

Ankushh Partap Soni

Joe Ypma
Domino’s Pizza – Integrated Company Analysis
Team B6
December 14, 2010

TABLE OF CONTENTS
EXECUTIVE SUMMARY ............................................................................................................. 3
BUSINESS SEGMENTS ................................................................................................................ 3
ACCOUNTING AND FINANCIAL ANALYSIS .......................................................................... 4
Revenue....................................................................................................................................... 4
Cost of Goods Sold ..................................................................................................................... 5
Financial Ratios........................................................................................................................... 5
Inventory Accounting ................................................................................................................. 6
Allowance for Uncollectible Receivables ................................................................................... 6
Long-lived and Intangible Assets................................................................................................ 6
Capital Structure ......................................................................................................................... 7
DCF Valuation ............................................................................................................................ 8
MARKETING ANALYSIS ............................................................................................................ 9
Competitive Analysis ................................................................................................................ 10
Customer Analysis & Market Segmentation............................................................................. 10
Positioning & Marketing Mix ................................................................................................... 10
OPPORTUNITIES FOR GROWTH ............................................................................................. 11
Developing a Loyalty Program ................................................................................................. 11
Increased Expansion in China ................................................................................................... 12
CONCLUSION ............................................................................................................................. 12

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EXECUTIVE SUMMARY

Domestically, Domino’s faces highly competitive markets and challenges from Pizza

Hut, Papa John’s and various local/regional competitors. Internationally, opportunities abound

but Domino’s faces the challenge of converting customers to its quick-service model. Even with

these challenges, Domino’s has generated fairly consistent Net Operating Income (NOI) over the

past decade. This steady NOI has been necessary to service the high level of debt with which

Domino’s is financed. Domino’s has nearly $1.5 billion in debt on approximately $450 million

of assets. As such, Domino’s carries a negative balance in Retained Earnings and a Stockholders’

Deficit. Servicing and paying down its debt will be central to Domino’s again achieving positive

shareholder equity. In the face of its debt, Domino’s has undertaken several initiatives to grow

NOI, including successfully launching a revamped pizza product and increasing its international

presence. To continue growing NOI, we recommend Domino’s consider initiating a loyalty

program for its domestic customers and as well as broader expansion into China.

BUSINESS SEGMENTS

Domino’s business is comprised of three segments: domestic stores, domestic supply

chain and international. See Appendix A for a breakdown of revenues by business segment.

 Domestic Stores – Domino’s franchises 4,461 stores and owns an additional 466 stores.

Domestic stores generated revenues of $493.6 million in FY 2009, which were

approximately 35% of total revenues. While domestic franchise fees have been a

consistent 11% of total revenues for the past decade, revenues from domestic company-

owned stores have been decreasing as a percentage of total revenue, from nearly 30% of

total revenue in FY 2002 to about 25% in FY 2009.

 Domestic Supply Chain – Domino’s supply chain generated revenues of $763.7 million in

FY 2009, which were approximately 54% of total revenues. Domestic supply chain

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contains 16 dough manufacturing and food centers, one thin crust manufacturing center

and one vegetable-processing center. These facilities manufacture dough and distribute

food supplies to all company stores and to 99% of domestic franchised stores.

 International – Internationally, Domino’s franchises 4,070 stores in over 60 international

markets. Domino’s international supply chain also contains six dough manufacturing and

supply centers. Together, the international business for Domino’s generated revenues of

$146.7 million in FY 2009, which were approximately 11% of total revenues. As a

percentage of total revenue, international revenues have been steadily increasing, from

6% of total revenue in FY 2002 to 11% in FY 2009. The international segment generates

an operating margin of 45%-55% versus only 20% for domestic company-owned stores.

As of 3Q FY 2010, Domino’s international store count was 46% of its total store count,

most of which are operated under master franchise agreements with large companies that

own many stores. For example, Higa Industries Co., Ltd., the Japanese master

franchisee, operates 179 stores in Japan. See Appendix B for a list of the largest

international markets for Domino’s.

ACCOUNTING AND FINANCIAL ANALYSIS

Revenue

For the first time since FY 2006, both domestic and international revenues are growing

on a year-over-year basis in FY 2010. Management believes some of this growth is a short-term

effect generated by increased marketing and its revamped pizza product, but management also

expects some of the growth to be sustaining.

Revenues fluctuate from time to time as a result of store count changes. Retail sales from

company-owned stores are recognized when items are delivered to or carried out by customers,

while revenue from franchisees are determined and paid to Domino’s weekly based on a

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percentage of retail sales (generally 5.5%). Domino’s will record royalty revenues based on an

estimate of the franchisee’s sales when figures are not timely reported by franchisees, and these

estimates are materially consistent with actual amounts.

Cost of Goods Sold

Domino’s business remains subject to price fluctuations for its commodity ingredients,

especially cheese and red hard wheat. While these prices increase the cost of goods sold for

Domino’s company-owned stores, Domino’s receives some benefit of higher ingredient prices in

the form of higher revenues for its supply chain operation. Domino’s has a five-year contract

with its largest cheese supplier and does not use derivative instruments to hedge its costs for

commodity ingredients. While prices are not hedged, operating margins have remained

consistently between 25-27% over the past decade.

Financial Ratios

As of 3Q 2010, Domino’s held total assets of approximately $426 million against

liabilities of approximately $1.667 billion. Thus, Domino’s carried a stockholder’s deficit of

$1.242 billion. This capital structure is quite atypical, not only for its industry but also generally.

Domino’s competitor Papa John’s, for example, at the end of its FY 2009 held assets of

approximately $359 million against liabilities of approximately $212 million for total

stockholders’ equity of approximately $185 million. Domino’s debt-to-assets ratio is 3.47 as

compared to Papa John’s 0.25, and Domino’s debt-to-equity ratio is (1.19) as compared to Papa

John’s 0.53. The difference in these numbers is primarily due to Domino’s debt.

Due to its large stockholders’ deficit and highly leveraged capital structure, Domino’s

measures of profitability can be hard to interpret. On one hand, over the past year Domino’s

return on equity was (6.6)% as compared to 27.8% for Papa John’s. On the other hand, over the

past year Domino’s had a gross margin of 27.8% versus 27.4% for Papa John’s, and Domino’s

had a return on assets of 20.1% as compared to 13.6% for Papa John’s. Further, Domino’s asset

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turnover ratio of 3.57 compares favorably to 2.76 for Papa John’s. Each of these measures

reflects Domino’s ability to generate high levels of sales from minimal assets. As well, Domino’s

has a relatively low level of short-term debt. Domino’s current ratio is 1.65 and it has a working

capital surplus of $104.1 million. Domino’s is positioned well to cover its short-term obligations.

See Appendix C for additional accounting metrics for Domino’s.

Inventory Accounting

Domino’s uses lower-of-cost-or-market (determined using the FIFO method) to value

inventories, which is common among QSRs. As previously mentioned, Domino’s does not

currently use derivative instruments to hedge against changes in prices for ingredients.

Allowance for Uncollectible Receivables

Domino’s estimate for uncollectible receivables is based on historical collection

experience and a review by aging categories. At the end of its FY 2009, Domino’s allowance for

uncollectible accounts receivables stood at approximately $9.2 million, or approximately 10.8%

of consolidated gross accounts receivable, a level which management expects to maintain.

Long-lived and Intangible Assets

Domino’s records at cost its long-lived assets, including PP&E and capitalized software.

Domino’s depreciates and amortizes these costs using a straight-line method. For acquisitions of

franchisee operations, Domino’s estimates the fair values of the assets and liabilities acquired

based on a physical inspection of assets, historical experience and other information available.

Domino’s goodwill amounts are primarily related to franchise store acquisitions and are not

amortized. Domino’s performs impairment tests in Q4 of each fiscal year and did not recognize

any impairment charges for long-lived or intangible assets in FYs 2007, 2008 or 2009. Domino’s

reduced its goodwill by approximately $3.1 million in FY 2008 and by $300,000 in FY 2009 due

to the sale of company-owned stores, while it increased goodwill by approximately $200,000 in

FY 2009 due to acquisition of stores from franchisees.

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Capital Structure

Domino’s completed an initial public offering of its stock on July 16, 2004, though it sold

only a portion of its company. As of FY 2009, Bain Capital (which purchased 93% of the

company from founder Tom Monaghan in 1998) remains the largest shareholder of Domino’s.

In FY 2007, Domino’s executed a recapitalization of the company, whereby it took on

approximately $1.7 billion in long-term debt and repaid all of its then-existing long-term debt.

Domino’s used part of the recapitalization proceeds to pay common shareholders a special

dividend of $13.50 per share. First priority of cash collected is given to repayment of interest on

the long-term debt. Cash is segregated weekly and accounted for as restricted cash.

The recapitalization debt was securitized and syndicated after issuance. As well,

Domino’s insures all principal and interest obligations under the Class A-2 Notes and Variable

Funding Notes. Premium payments on these insurance policies are accounted for as additional

interest expense. Financing costs associated with the recapitalization have been capitalized and

are amortized as interest expense.

Since the recapitalization, Domino’s has retired approximately $290 million of long-term

debt while drawing $60 million of its previously untapped Variable Funding Notes. Thus,

Domino’s has approximately $1.47 billion of outstanding long-term debt as of 3Q FY 2010.

Debt Class Maturity Date Capacity Amount Drawn

Class A-2 Fixed Rate Notes April 2012; can extend $1,600,000,000 $1,310,000,000
(5.621% interest-only) to April 2014
Class A-1 Variable Funding April 2014 $60,000,000 $60,000,000
Notes (Comm. Paper + 50 bps)
Class M-1 Fixed Rate Notes April 2012; can extend $100,000,000 $100,000,000
(7.629% interest-only) to April 2014
Total $1,850,000,000 $1,470,000,000

As indicated above, Domino’s can extend the maturity of its Fixed Rate Notes to April

2014 if the Company maintains a certain debt service coverage ratio (DSCR). As of 3Q 2010,

management indicates that the Company continues to exceed the required DSCR. Management

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has also indicated that it intends to take advantage of the full extension period, though it will

consider attractive financing options in the interim.

A typical DSCR measures the ability of a company’s cash flow to cover all debt

payments. A proxy for the exact ratio can be determined by comparing NOI to debt service. The

relatively steady NOI that Domino’s generates year-over-year makes it possible to take on a high

level of debt while remaining in compliance with its DSCR. Since the 2007 recapitalization,

Domino’s DSCR (i.e., NOI/interest expense) has been:

(In $000s) FY 2007 FY 2008 FY 2009 FY 2010 (3Q)

NOI 193,910 195,030 189,509 160,314
Interest Expense 130,374 114,906 110,945 67,945
DSCR 1.49 1.70 1.71 2.36

Domino’s has been making a concerted effort to reduce the principal amount of its debt, which in

turn reduces interest expense. By reducing interest expense, Domino’s is able to increase its

DSCR for the same level of operating performance and reduce the possibility of triggering a

default in its long-term debt covenants.

The Company’s steady performance justifies further refinancing of the debt. We feel

Domino’s will likely be able to negotiate some extension of its current loan terms, although

perhaps at a slightly higher effective interest rate that the Company is currently paying. If not,

Domino’s could be forced to file for bankruptcy. We consider bankruptcy unlikely, as it benefits

neither the bondholders nor equity holders so long as operating performance remains steady.

DCF Valuation

To determine a value for Domino’s, we first calculated Domino’s weighted-average cost-

of-capital (WACC). Using weekly returns for DPZ shares from Domino’s IPO in July 2004

through present, and using the S&P 500 as a proxy for market returns, we determined Domino’s

beta (β) to be approximately 1.17. We used a risk-free rate of 3.3%, based on the 10-year

Treasury bond yield. We assumed an equity risk premium of 9.2% based on historical averages.

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Using Domino’s market debt-to-equity ratio of 162% (i.e., debt of approximately $1.5 billion and

market value of equity of approximately $925 million), we calculated an after-tax adjusted

WACC of 7.2%. Using WACC, we built a discounted cash flow model of Domino’s projected

free cash flow to the firm through 2015 and determined a value for Domino’s of $1.732 billion.

See Appendix D for a list of the assumptions used to calculate WACC.

Given Domino’s long-term debt of $1.47 billion, equity holders have claim to

approximately $1.732 less 1.47 billion = $262 million of the firm’s value. With a weighted

average of 60.5 million shares outstanding through 3Q FY 2010, the share price of Domino’s

should be about $4.32 per share. While this is far lower than the $15.40 per share price at which

Domino’s most recently closed, the difference is likely to due to two factors. First, investors may

be expecting another special dividend when Domino’s again restructures its long-term debt in

2012 or 2014. Secondly, Domino’s investors are likely expecting growth. If one assumes that

Domino’s free cash flow will grow in the long term rather than remain constant, the terminal

value component of Domino’s share price increases. A long-term growth rate of 2.5%, for

example, will generate a share price of $15.23 per share, which is about the same price at which

DPZ most recently closed. Achieving 2.5% long-term growth for a company with the maturity of

Domino’s is realistic, so we feel the market is pricing DPZ stock relatively fairly. At the same

time, future long-term growth is vital to justifying the share price at which DPZ is currently

trading, so Domino’s must continue to seek new ways to achieve this expected growth.

MARKETING ANALYSIS

Future growth for Domino’s can be optimized with smart marketing decisions. To assess

Domino’s marketing efforts, we analyzed Domino’s segmentation and positioning strategies. See

Appendix E for our SWOT analysis of Domino’s. We also surveyed 221 U.S. adults regarding

their impression of Domino’s pizza product as well as their views on hypothetical loyalty

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programs intended to increase trial and repeat purchases. See Appendix F for a summary of our

survey results.

Competitive Analysis

Domino’s is the 14th-largest QSR by U.S. revenue, and within the pizza category Pizza

Hut is #1, Domino’s is #2 and Papa John’s is #3. Beyond that, Domino’s faces competition from

other regional and local competition, both domestically and internationally.

Customer Analysis & Market Segmentation

Domino’s target market segmentation is the consumer who is looking for inexpensive

pizza quickly. Customers are very price sensitive; higher prices have historically led to decreased

sales. Domino’s does not offer dine-in areas at it stores, instead focusing on delivery and

carryout customers. Demographically, Domino’s appears not to have a specific target. Instead, it

seems that Domino’s targets markets with the greatest number of people. It follows that

Domino’s has sought to become a leader in online pizza orders, so it can reach the greatest

number of consumers possible while also improving its ability to meet customer demand.

Positioning & Marketing Mix

Domino’s has positioned itself well to reach the customer who values quick-service

pizza. Domino’s uses geographic information software to locate its stores in optimal locations.

The majority of domestic stores are located in and around highly populated large or mid-sized

cities or near college campuses. In FY 2009, Domino’s posted a 92% on-time delivery rate and

had an average time of 12-15 minutes for pizza order-taking and production. In the past,

Domino’s created the 30-minute delivery guarantee and also marketed its use of the HeatWave

insulated delivery bag to keep delivered pizzas hot. Today, Domino’s has achieved significant

online orders through its website, successfully reaching that growing segment of the market.

Domino’s revamped pizza has been very successful and has generated significant sales

growth since being introduced. Additionally, our survey data showed that poor taste was the

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leading reason why customers avoid Domino’s. Domino’s has used the new product to address

this major weakness. Given the positive results, it appears Domino’s has been able to generate

trial purchases from customers who previously had excluded Domino’s from their dining options.

OPPORTUNITIES FOR GROWTH

Future growth opportunities exist for Domino’s both domestically and internationally.

We recommend that Domino’s focus on both of these fronts to grow its business, pay down its

long-term debt and increase value for shareholders. We have two primary recommendations:

1. Develop a loyalty program to drive trial and repeat purchases.

2. Increase expansion in China.

Developing a Loyalty Program

According to Barclay’s, the average Domino’s customer orders five times per year while

the average quick-service pizza customer orders an average of 17-18 times per year. This data

indicates that Domino’s is underperforming in driving repeat purchases. A loyalty program

would specifically address this underperformance.

In our survey of 221 U.S. adults, we proposed three different hypothetical loyalty

programs. Each of the three subgroups we analyzed favored a “status program” that would give

different benefits that would increase with repeat purchase frequency. Our survey data indicates

that a status program would increase average order frequency by more than two orders per

customer per year. The infrequent Domino’s consumer subgroup had the strongest response to

the status program, with data indicating that average order frequency would increase by more

than three orders per customer per year. These data suggest that a status loyalty program would

be effective in converting casual Domino’s consumers to more loyal Domino’s consumers. The

loyalty program could be coordinated with Domino’s current marketing efforts to promote its

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revamped pizza. The new, inspired pizza has been effective at getting customers in the door, and

our data indicates that a loyalty program could help ensure they keep coming back.

Increased Expansion in China

Domino’s has added 32% of its 4,027 international franchises within the past five years.

Domino’s generally expands to an international market through a master franchisee. Domino’s

three largest master franchisees are in Mexico, United Kingdom and Australia. India is home to

the fourth-largest master franchisee with nearly 300 stores. Noticeably absent on the list of

largest master franchisees is China, where Domino’s currently has only 15 stores. By

comparison, Pizza Hut has more than 400 stores with intentions for more.

On its face, the discrepancy between Pizza Hut’s store count and Domino’s store count

seems unjustified. Domino’s should seek a master franchisee that will enable expansion to match

Pizza Hut’s presence in China. By again expanding through a master franchisee, Domino’s can

rely on the franchisee for market knowledge and for the investment of capital. As such,

Domino’s can expand without exhausting its own capital resources, which are needed elsewhere.

Domino’s faces potential challenges inherent in the China market. For example, we

understand that Chinese consumers prefer dine-in restaurant options to delivery-based options.

However, Domino’s has evolved in other markets to meet unique consumer preferences, and we

believe whatever changes may be necessary can be delivered in China.

CONCLUSION

1.) Domino’s has a steady business, but its debt level makes it riskier than its competitors.

2.) Priced into DPZ stock is a future expectation of sustained long-term growth.

3.) Achieving long-term growth can be most easily achieved by:

a. Further generating revenue growth from an already competitive domestic market.

b. Increased expansion in China.

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APPENDICES

APPENDIX A. Sales Revenue by Business Segment.

Sales Revenue by Business Segment (In 000s)

1,800
1,556.9 1,628.0 1,569.1
1,542.6 1,524.7 1,492.4
1,600 1,438.0
1,363.2 1,378.6
1,400 34.6%
1,166.1 34.5% 35.7% 35.2%
33.6% 33.1%
1,200 36.4% 37.5% 36.2%

1,000 42.8%

800 58.0% 57.5%

56.3% 56.7% 57.1% 57.1%
58.5% 57.1%
56.6%
600
51.8%
400
200
0
Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09
Domestic Distribution Domestic Stores International Historical Segments

APPENDIX B. Selected International Markets for Domino’s.

Market Number of Stores

Mexico 589
United Kingdom 562
Australia 411
South Korea 329
Canada 319
India 296
Japan 179
France 154
Turkey 132
Taiwan 120

APPENDIX C. Accounting Metrics.

From OneSource
MRQ = Most Recent Quarter (i.e., 3Q 2010)
TTM = Trailing Twelve Months (as of December 3, 2010)
* = calculated using respective 10-Q data
** = Domino’s return on assets includes off-balance sheet assets of $139.7 in operating lease
obligations through 2019

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Yum! Papa Dominos Industry Sector S&P

Johns 500
Total Debt to Total 0.45* 0.25* 3.47*
Assets Ratio (MRQ)
LT Debt/Equity (MRQ) 1.87 0.53 -1.19* 0.84 1.52 0.65
Total Debt/Equity 2.33 0.53 -1.19* 0.96 1.77 0.75
(MRQ)

LIQUIDITY METRICS
Yum! Papa Dominos Industry Sector S&P
Johns 500
Current Ratio (TTM) 0.95 1.04 1.65 1.30 1.07 1.81
Working Capital (MRQ) - $3.0M $104.1M
$126M* * *

PROFITABILITY METRICS
Yum! Papa Dominos Industry Sector S&P
Johns 500
Gross Profit Margin 47.36% 27.40% 27.77% 38.43% 37.28% 44.70%
(TTM)
Gross Profit Margin - 5 47.18% 26.58% 26.22% 36.22% 44.15% 44.68%
Yr Avg
Return on Equity (TTM) 89.50% 27.82% -6.57%* 39.40% -2.22% 19.43%
Return on Equity – 5 Yr 86.42% 32.43% -6.91%* 27.48% 14.52% 20.02%
Avg
Return on Assets 14.71% 13.61% 20.10% 14.18% 0.40% 8.49%
(TTM)**
Return on Assets - 5 Yr 14.09% 12.66% 17.32% 10.79% 2.94% 8.46%
Avg**
Net Profit Margin (TTM) 10.04% 4.92% 5.62% 13.93% 4.85% 13.50%
Net Profit Margin - 5 Yr 8.84% 4.57% 5.33% 10.45% 8.61% 12.08%
Avg
EPS (MRQ) $2.58* $1.82* $1.41*
EPS 5 Yr Growth 12.82% 29.03% 11.23% 17.07% 8.69% 10.75%

OPERATIONAL EFFICIENCY METRICS

Yum! Papa Dominos Industry Sector S&P
Johns 500
Receivables Turnover 45.49 47.41 22.09 32.76 18.99 13.24
(TTM)
Inventory Turnover 44.28 48.59 43.36 36.64 19.19 14.56
(TTM)
Asset Turnover (TTM) 1.47 2.76 3.57 1.21 1 0.93
Days Inventory on Hand 8.70* 13.02* 9.37*
(MRQ)

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APPENDIX D. WACC.

WACC Components Capital Structure Components

Debt Equity
Fiscal Long Short 2010-12-10 Risk Market
Year Cost of Weight of Cost of Weight of Term Term Market Free Risk
Ended WACC Debt Debt Tax Rate Equity Equity Debt Debt Value Beta Rate Premium
10 Yr US Treasury
12/2009 7.2% ## 5.8% 63.4% 41.2% 13.8% 36.6% 1,522 50 910 1.17 3.30% 9.0%

APPENDIX E. SWOT Analysis.

Strengths: Product:
 Newly revamped pizza recipe brought in high growth levels for
the first three quarters of 2010.
 Strong brand name, #1 pizza delivery company in the U.S. with
market share of 18.4%.
 Focused menu enables quality consistency and operational
efficiency. Total operational process is completed within 12-15
minutes.
Price:
 Competitively priced product.
Place:
 With almost 5000 franchises in the U.S., domestic store
delivery covers the majority of households.
Promotion:
 Continuous price promotion such as two 2-topping pizzas for
$5.99 each.
 Market-leading online ordering and website features.
Weaknesses: Product:
 Despite aggressive marketing efforts to rebrand Domino’s as a
quality, great tasting pizza, survey respondents still said that
“does not taste good” and “low quality” were the primary
reasons they did not order Domino’s.
 Proposition for investors is limited. Can’t promise shareholders
that they can guarantee strong returns.
Price:
 The low price may actually be working against Domino’s
efforts to rebrand as a high quality, great tasting pizza
company.
Place:
 Less-than-optimal international presence.
Promotion:
 Minimal incentive for customer loyalty.
Opportunities: Product:
 According to survey results, frequent Domino’s pizza

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consumers prefer ordering online at a much higher rate than the

total respondents, suggesting Domino’s could establish
themselves as an industry leader in online ordering.
 Ability to increase proportion of total sales placed online from
20% currently.
Place:
 Domino’s believes it has achieved 50% of its growth potential
across its top 10 international markets.
Threats: Product:
 With obesity rates on the rise, health is becoming an increasing
concern in the U.S. One slice of Domino’s new pizza contains
as much as two-thirds of a days maximum recommended
amount of saturated fat.
 Prices in commodities such as cheese increasing.
 Minimum wage increases.
Place:
 Supply chain not positioned to address potential sustainability
regulations.
Promotion:
 Challenging to continue meeting customer expectations that
have now been inflated by new, higher-quality product.

APPENDIX F. Survey Results.

We administered a survey to determine consumer perceptions of a loyalty program. Behavioral

and demographic data were collected. The total number of survey respondents was 221. For the
purpose of comparison, we divided the groups into several subgroups as defined below.

Subgroup Order Frequency Sample Size

Frequent Pizza Consumer Orders pizza 7 times or more per yr 170
Frequent Domino’s Consumer Orders Domino’s 7 times or more per yr 23
Infrequent Domino’s Consumer Orders Domino’s 1-6 times per year 76

There are certain limitations of our survey data that derive from our market research capabilities.
Our sample is neither as large nor as random as we would have liked. We solicited survey
responses by emailing friends and family, posting the survey on Facebook, and encouraging
others to propagate this distribution. This population is not representative of the typical
Domino’s market, which is much more diverse. More thorough market research should be
conducted if Domino’s would like to gain more confidence in these results.

How often do people order pizza and how often do they choose Domino’s?

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Purchase Frequency
140
120
100
80
60 All Pizza
40 Domino's
20
0
Less than 1-3 Times 4-6 Times 7-11 Once a 2-3 Times Once a
Once a a Year a Year Times a Month a Month Week or
Year Year more

When comparing the purchase frequency rates of Domino’s compared to the frequency rates of
all pizza brands there was a notable contrast between the two groups. While the largest group of
respondents indicated that they ordered pizza once a month, the vast majority of those orders
were not going to Domino’s, which had a “less than once a year” purchase frequency rate for
most respondents.

To what pizza brands are consumers most loyal?

Pizza Hut Brand of Loyalty (All)

9% Domino's
Papa John's 6%
10%

Not Loyal
22%
Other Local
42%
Other Chain
11%

Despite it’s ranking as #1 in pizza delivery in the U.S. and #2 in overall sales in the QSR pizza
category, only 6% of survey respondents said they were most loyal to Domino’s pizza, placing it
behind top competitors Pizza Hut and Papa John’s. The largest group of respondents, 42%,
seemed to feel most loyalty towards local brands.

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Domino’s Pizza – Integrated Company Analysis
Team B6
December 14, 2010

Why not Domino’s?

Why not Domino's?

50%
40%
30%
20%
10%
0%
No Store Expensive Does not Takes too Unhealthy No Dine- Low Poor
Nearby Taste Long In Option Quality Customer
Good Service

Despite it’s aggressive, “Oh Yes We Did” marketing campaign aimed toward rebranding
Domino’s as a tasty, high quality pizza, survey respondents still rank “does not taste good” and
“low quality” as the primary reasons they do not order Domino’s pizza. This suggests that even
though Domino’s had positive results from their widely promoted recipe change, there is still a
long way to go in convincing consumers that they are in fact making better pizza.

What loyalty program will drive the best results?

Domino's Points-based Loyalty Program:

Earn 1 point for every $5 you spend at Domino's. Collect 25 points and receive a Large 3-
topping pizza for free!

Domino's Punch Card Loyalty Program:

Earn 1 punch for every Large Pizza you purchase at Domino's. Collect 15 punches and receive a
Large 3-topping pizza for free!

Domino's Frequent Customer Recognition Loyalty Program:

Establish your rank by becoming a frequent Domino's customer.

Platinum Rank: Purchase* Domino's at least 40 times during one year.

Platinum Prize: Receive Silver and Gold Prizes and Receive a free order of bread sticks
with every Domino's purchase* for one year.
Gold Rank: Purchase* Domino's at least 25 times during one year.
Gold Prize: Receive Silver Prize and Receive a free 2-Liter with every Domino's
purchase* for one year.
Silver Rank: Purchase* Domino's at least 10 times during one year.
Silver Prize: Receive 10% off all Domino's orders* for one year.

*Minimum $10 bill total per purchase

Page 18 of 20
Domino’s Pizza – Integrated Company Analysis
Team B6
December 14, 2010

Average Order Frequency Increase per Customer per Year

(All Consumers)
5.00

4.00

3.00

2.00

1.00

0.00
Points Program Punch Program Status Program

When asked how many more times per year they would order Domino’s pizza given several
different loyalty program methods, the “status program” had the strongest increase overall. The
average increase in order frequency per year was 2.07 per person.

Average Order Frequency Increase per Customer per Year

(Infrequent Domino's Consumers)
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Points Program Punch Program Status Program

Interestingly, when we only looked at how the infrequent Domino’s consumers would respond to
the loyalty programs, their average order frequency increase per year was 3.13, much higher than
the overall average.

How are consumers ordering?

Page 19 of 20
Domino’s Pizza – Integrated Company Analysis
Team B6
December 14, 2010

Method of Purchase (All Consumers)

Walk-in Order
11%

Order
Online
26% Order by
Phone
63%

The majority of total respondents still order pizza the old fashioned way: over the phone.

Method of Purchase (Frequent Domino's Consumers)

Walk-in Order
9%

Order by
Phone
Order Online 43%
48%

Frequent Domino’s consumers prefer to order online. Domino’s current online ordering system is
fun and easy to use making the ordering process painless. This is a possible opportunity of
Domino’s to maintain its status as an industry leader in the future as more and more pizza orders
begin to be placed online.

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