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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Domino’s Pizza – Integrated Company Analysis Team B6 December 14, 2010 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 companyowned 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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Domino’s Pizza – Integrated Company Analysis Team B6 December 14, 2010 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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Domino’s Pizza – Integrated Company Analysis Team B6 December 14, 2010 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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Domino’s Pizza – Integrated Company Analysis Team B6 December 14, 2010 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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Domino’s Pizza – Integrated Company Analysis Team B6 December 14, 2010 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 Class A-2 Fixed Rate Notes (5.621% interest-only) Class A-1 Variable Funding Notes (Comm. Paper + 50 bps) Class M-1 Fixed Rate Notes (7.629% interest-only) Total Maturity Date April 2012; can extend to April 2014 April 2014 April 2012; can extend to April 2014 Capacity $1,600,000,000 $60,000,000 $100,000,000 $1,850,000,000 Amount Drawn $1,310,000,000 $60,000,000 $100,000,000 $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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Domino’s Pizza – Integrated Company Analysis Team B6 December 14, 2010 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) NOI Interest Expense DSCR FY 2007 193,910 130,374 1.49 FY 2008 195,030 114,906 1.70 FY 2009 189,509 110,945 1.71 FY 2010 (3Q) 160,314 67,945 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 costof-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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Domino’s Pizza – Integrated Company Analysis Team B6 December 14, 2010 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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Domino’s Pizza – Integrated Company Analysis Team B6 December 14, 2010 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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Domino’s Pizza – Integrated Company Analysis Team B6 December 14, 2010 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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Domino’s Pizza – Integrated Company Analysis Team B6 December 14, 2010 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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Domino’s Pizza – Integrated Company Analysis Team B6 December 14, 2010 APPENDICES

APPENDIX A. Sales Revenue by Business Segment. Sales Revenue by Business Segment (In 000s)
1,800 1,600 1,400 1,200 1,000 800 600
51.8% 58.5% 56.6%

1,556.9 1,363.2 1,166.1
36.4% 42.8% 57.1% 58.0% 37.5%

1,628.0
34.6%

1,542.6

1,569.1

1,378.6

1,438.0
34.5% 36.2% 35.7% 35.2%

1,524.7

1,492.4

33.6%

33.1%

57.5%

56.3%

56.7%

57.1%

57.1%

400 200 0
Dec-00 Dec-01 Dec-02 Dec-03 Dec-04
International

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Domestic Distribution

Domestic Stores

Historical Segments

APPENDIX B. Selected International Markets for Domino’s.

Market Mexico United Kingdom Australia South Korea Canada India Japan France Turkey Taiwan

Number of Stores 589 562 411 329 319 296 179 154 132 120

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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Domino’s Pizza – Integrated Company Analysis Team B6 December 14, 2010 Yum! Total Debt to Total Assets Ratio (MRQ) LT Debt/Equity (MRQ) Total Debt/Equity (MRQ) LIQUIDITY METRICS Yum! Current Ratio (TTM) Working Capital (MRQ) 0.95 $126M* Papa Johns 1.04 $3.0M * Dominos 1.65 $104.1M * Industry 1.30 Sector 1.07 S&P 500 1.81 0.45* 1.87 2.33 Papa Johns 0.25* 0.53 0.53 Dominos 3.47* -1.19* -1.19* 0.84 0.96 1.52 1.77 0.65 0.75 Industry Sector S&P 500

PROFITABILITY METRICS Yum! Gross Profit Margin (TTM) Gross Profit Margin - 5 Yr Avg Return on Equity (TTM) Return on Equity – 5 Yr Avg Return on Assets (TTM)** Return on Assets - 5 Yr Avg** Net Profit Margin (TTM) Net Profit Margin - 5 Yr Avg EPS (MRQ) EPS 5 Yr Growth 47.36% 47.18% 89.50% 86.42% 14.71% 14.09% 10.04% 8.84% $2.58* 12.82% Papa Johns 27.40% 26.58% 27.82% 32.43% 13.61% 12.66% 4.92% 4.57% $1.82* 29.03% Dominos 27.77% 26.22% -6.57%* -6.91%* 20.10% 17.32% 5.62% 5.33% $1.41* 11.23% Industry Sector S&P 500 44.70% 44.68% 19.43% 20.02% 8.49% 8.46% 13.50% 12.08%

38.43% 37.28% 36.22% 44.15% 39.40% -2.22% 27.48% 14.52% 14.18% 10.79% 13.93% 10.45% 0.40% 2.94% 4.85% 8.61%

17.07%

8.69%

10.75%

OPERATIONAL EFFICIENCY METRICS Yum! Papa Johns 45.49 47.41 Receivables Turnover (TTM) 44.28 48.59 Inventory Turnover (TTM) 1.47 2.76 Asset Turnover (TTM) 8.70* 13.02* Days Inventory on Hand (MRQ)

Dominos 22.09 43.36 3.57 9.37*

Industry 32.76 36.64 1.21

Sector 18.99 19.19 1

S&P 500 13.24 14.56 0.93

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

APPENDIX D. WACC.
WACC Components
Fiscal Year Ended 12/2009

Capital Structure Components
Debt Equity Short Term Debt 50 2010-12-10 Market Value Beta 910 1.17 Risk Free Rate 3.30% Market Risk Premium 9.0% Long Term Debt 1,522

WACC 7.2%

Cost of Debt ## 5.8%

Weight of Cost of Debt Tax Rate Equity 63.4% 41.2% 13.8%

Weight of Equity 36.6%

10 Yr US Treasury

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. 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. Product:  According to survey results, frequent Domino’s pizza

Weaknesses:

Opportunities:

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

Threats:

Place:  Domino’s believes it has achieved 50% of its growth potential across its top 10 international markets. 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 Frequent Pizza Consumer Frequent Domino’s Consumer Infrequent Domino’s Consumer Order Frequency Orders pizza 7 times or more per yr Orders Domino’s 7 times or more per yr Orders Domino’s 1-6 times per year Sample Size 170 23 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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Domino’s Pizza – Integrated Company Analysis Team B6 December 14, 2010 Purchase Frequency 140 120 100 80 60 40 20 0 Less than 1-3 Times 4-6 Times 7-11 Once a a Year a Year Times a Year Year Once a 2-3 Times Once a Month a Month Week or more All Pizza Domino's

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? Brand of Loyalty (All) Pizza Hut 9% Papa John's 10% Not Loyal 22% Other Local 42% Other Chain 11%

Domino's 6%

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 DineLow 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 3topping 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

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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?

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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 Online 48%

Order by Phone 43%

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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