You can read about fortrseeing in their Annual Report. From a podcast interview about Dominos USA
- You’re creating the business once and you’re selling it multiple times. Every Domino’s store has pretty similar order process flow if you consider kind of the way that that eases the operational burden on its employees. So the preparation and cooking process for every menu item, whether that be pizza, pasta, wings, desserts, actually uses the same oven. And based upon different points of entry, all the food products complete their cooking at the same time, and then are ready to be picked up by the delivery person and dispatched to the home. It’s almost like a system engineer’s dream in the way that these businesses that work.
- And then the question is, okay, how are they driving same-store sales to their stores? So for a medium, large, two-topping pizza, they’ve charged $ 7.99 for as long as I can remember. And so as they gain incremental scale, they have the benefit of passing that scale economics onto their customer.
- There is this really interesting kind of feedback loop in their businesses where they invest more in the stores, it drives higher same-store sales. Because they have higher same- store sales, the stores are more profitable. Because some stores are more profitable, the franchisees are willing to open up more stores. And because the franchisees are willing to open up more stores in their designated region, that means that delivery times are going to be lower. And if delivery times are lower, that means that the customers are going to be more satisfied and order more pizza. And on and on and on you go. And they’ve actually formalized that strategy to something called fortressing.
- So for instance, if a franchisee has two stores in a market and that markets starting to show the stores are at capacity, Domino’s will inform that franchisee that they should open up another store in that region. If you consider the flywheel that we just referenced, as stores generate more sales, they can lower their delivery times by opening up an incremental store, which makes the whole region more profitable.
- And then you have the scale benefits of a multi-store system that is ordering higher amounts of goods. And as they’re ordering more cheese, dough, and sauce, they’re getting fixed cost leverage on their stores and the entire system is more profitable.
- The reason we can see that that’s working is the average franchisee in the US has six or seven stores doing about 150,000 in EBITDA per store, or a million dollars in their entire system. Going from a Domino’s employee to a business owner of six to seven stores doing a million dollars, you can appreciate the wealth that’s being created throughout the system.
My comments:
Fortressing is effectively the Scale Economics Shared model popularised by Nicholas Sleep. Google Scale Economics Shared and you’ll know how it works. It is what Costco and Amazon have been doing. In India, I think DMART is also using that model. In a nutshell: As scale or number of customers / users creeps higher the cost per customer goes down and the savings are shared with the customer. As a result, JUBLFOOD has a pricing advantage. They know what each customer individual wants and likes and they can use that data to sell the exact combination of the pizza that will be ordered. Effectively, they own the customer relationship and the value chain for each customer. Hence, if you’re doing a DCF, the terminal value will be far higher or rather there is no need to calculate a terminal value. it is akin to a DTC (Direct to Consumer) business model and these will ALWAYS remain OPTICALLY EXPENSIVE from a traditional valuation perspective. And JUBLFOODS isn’t cheap on any metric. Barring some exogenous events like the one that happened with Maggi noodles a couple of years back or some of the risk factors highlighted by you in your note, dips in JUBLFOOD will be bought and if they aren’t bought, my humble opinion is that it is an opportunity.
Second point on Capital Allocation and here is Buffett “The lack of skill that many CEOs have at capital allocation is no small matter: After ten years on the job, a CEO whose company annually retains earnings equal to 10% of net worth will have been responsible for the deployment of more than 60% of all the capital at work in the business."
I think their capital allocation like investing in BBQ nation recently and buying management control of the Dominos Turkey Franchise has been top class. That doesn’t mean that it will always be that way, but so far there is no need to complain about Capital Allocation. Compare that with ITC, where they are buying shareholder money on low margin businesses.
Hope that helps and sorry for the delayed reply!