Domino’s Pizza (DOM) is a business that should be doing quite well right now. Covid-19 has changed consumers’ behaviour – perhaps permanently – and has seen takeaway outlets thrive in recent months as restaurants have suffered. Yet Domino’s in the UK was struggling to grow its profits before the lockdowns kicked in. This is because its franchised business model looks broken and there is no guarantee that it can be fixed.
There are good reasons why investors tend to like franchised businesses. The royalty stream that comes from them does not have a lot of costs attached. This makes for predictable cash flows that are very profitable and contribute to high returns on money invested. If you can combine this with an ability to sell more products from each store and add more stores as well then there are all the right ingredients for a very successful long-term investment.
Up until a few years ago this was the bull case for owning shares in Domino’s Pizza UK. However, the company has hit a brick wall in terms of profit growth and the reason for this is mainly down to its business model.