The world’s biggest pizza maker is leaving the home of pizza

Sascha: [00:00:02] From Equity Mates media. This is the dive. I'm your host, Sascha Kelly. The world's biggest pizza maker is leaving the home of pizza and Domino's should have taken its chances elsewhere. The birthplace of pizza doesn't want to slice Domino's Pizza. It's the largest pizza company in the world with more than 17,000 stores in 90 countries. But the home of Pizza Italy was always going to be their biggest challenge. In 2015, the company launched in Italy with big plans 880 stores by 2030. But seven years later, Domino's, Italy has declared bankruptcy. The conclusion, perhaps unsurprisingly, was clear Italians didn't like American style pizza. It's Monday, the 15th of August. And today I want to know who ever thought Domino's in Italy was a good idea. To talk about this today, I'm joined by the co-founder of Equity Mates and my colleague Alec Renehan. Alec, welcome to the Dive. 

Alec: [00:01:02] Hey, Sascha, this episode is going to make me hungry. I can already feel it. 

Sascha: [00:01:06] All right. What's your order, then? What's your go to for pizza? 

Alec: [00:01:09] Oh, look like the Italians. I've got to say, Domino's isn't My Go to. 

Sascha: [00:01:13] I don't think you're alone there, Alec, but we won't be pizza snobs. Let's keep on with the story. So, first of all, I just want you to clear up a bit of complexity around the Domino's brand, because when we're talking about it, there's actually three listed companies with the same name, Domino's Pizza listed on the New York Stock Exchange. Domino's Pizza Group listed on the London Stock Exchange. And Domino's Pizza Enterprises, which is listed here on the Australian Stock Exchange. So the big question, which one thought it was going to be the good idea to go to Italy? 

Alec: [00:01:46] Yeah, that's right. The Domino's story can get a little bit complex because as you said, there's a number of different companies that all share the same name. So Domino's is a franchise business, much like McDonald's or KFC or a lot of their fast food peers. Domino's Pizza, the American listed company, is the parent company there. The franchise owner is a Domino's Pizza store, a store of pizza specialist. Then there are a number of massive franchisee companies. The British Domino's Pizza Group, Australia's Domino's Pizza Enterprises are two of the bigger franchisees go thanks to a clever new delivery system called Heat Wave. But there's also franchise businesses listed on stock exchanges in Mexico and India. 

Sascha: [00:02:32] Okay, bye. Bye bye. 

Alec: [00:02:34] Now. Domino's Pizza Enterprises listed in Australia has the rights to Australia, New Zealand, Belgium, France, the Netherlands, Japan, Luxembourg, Denmark and Taiwan. It's a pretty big business. While Britain's Domino's Pizza Group listed in London has the rights to the United Kingdom, Ireland, Germany and Switzerland and Sacha, to make it even more confusing, there's actually two Domino's listed in London. There's also deep Eurasia, which controls Domino's in Turkey, Russia, Azerbaijan and Georgia. But put all that to one side, Sascha, because today we're talking about the American parent company. They were the ones who decided to go to Italy. 

Sascha: [00:03:18] I'm so glad you don't have to go through all of those companies to order a pizza, because that would just be way too confusing. Before we get to the story of the day, I am intrigued by all these Domino's. Let's get competitive. Which one of them would have been the best investment? 

Alec: [00:03:35] Well, Sascha, let's just look at the big three, because we don't have the research team to look at all the different Domino's around the world. 

Sascha: [00:03:42] But you're not going to tell me how Azerbaijan's Domino's went. 

Alec: [00:03:46] Well, deep Eurasia who own Azerbaijan, Domino's only listed in 2017. So we don't quite have the history there as some of the others. So let's let's look at the big three. We've got Domino's Pizza, the franchise or the UK is Domino's Pizza Group and Australia's Domino's Pizza Enterprises. Over the last ten years the UK Domino's has returned 90%. So you've almost doubled your money. Australia's Domino's has returned about 800%, while America's Domino's has returned over 1,000%. That's right, Domino's was a ten bagger. And for context, Domino's Pizza in America has outperformed Apple over the past ten years. 

Sascha: [00:04:29] Wow. So you can get those ten bag is not just in the tech stocks that's here. That didn't go into the fast food industry as well. 

Alec: [00:04:36] Yeah. Now, Sascha, if we zoom out a little further, the UK Domino's listed on the London Stock Exchange in 1999, America's Domino's listed in New York in 2004 and Australia's listed in 2005. So if we take their whole history since their IPO, America's Domino's is up 2,900%. The UK's Domino's is up the. 8,200% and Australia's Domino's is up 3,300%. That is a lot of cheap pizzas that they're selling. [00:05:09][33.0]

Sascha: [00:05:09] I had no idea the pizza industry was so profitable. So that sets the context. These are businesses that have done incredibly well over the past couple of decades. So with that in mind, take me to 2015. What was the thinking around Italy? You're going to have to really convince me there's a good strategy here. [00:05:30][20.3]

Alec: [00:05:31] So in 2015, the American Domino's announced that they'd sold the Domino's master franchise to a company called Eat Pizza. Basically, a pizza could start Domino's, Italy, and they had big plans. [00:05:43][12.0]

Audio clip: [00:05:44] The company opened a location in the Italian city of Milan in early October and hopes to open three more in the city by the end of the year. [00:05:50][6.7]

Alec: [00:05:51] Domino's wanted to open 880 stores in Italy by 2030. Now that's almost 60 stores opening every year between 2015 and 2013. [00:06:00][9.1]

Sascha: [00:06:01] That's a very ambitious plan. So how did they think that they were going to win over the locals? [00:06:06][5.4]

Alec: [00:06:07] Yeah, so they had two key points. The first was, quote, a structured national delivery service. And the former Domino's America CEO, Patrick Doyle, said in 2014 that there was hope yet for a distinctly American pizza chain to thrive in Italy because Italians didn't have many options for getting a pizza sent to their door. He said, quote, There's a lot of pizza, but not a lot of delivered pizza. And so that was the first, I guess, idea or the first leg of the strategy that Domino's had. They were going to bring delivery to Italy. The second leg of the strategy was that Domino's had a bit of a unique offering compared to the traditional Italian pizza makers with their American style pizza toppings. You don't see pineapple on many pizzas in Italy, and you certainly don't see Texas barbecue on many pizzas in Italy. So that was the second leg of the strategy. Much better than Texas. Barbecue chicken on top of tender pulled pork on top of bacon on top of me and Ed's world famous crust. [00:07:07][60.0]

Sascha: [00:07:07] Nothing focussing isn't a visual medium, but honestly, if my eyebrows could get any higher, they would. You mentioned before they said they were going to open 880 stores by 2030. How many did they open? 29 out. That's a far cry from 880. Yes. What happened? [00:07:30][22.9]

Alec: [00:07:31] So Domino's get the ball rolling in 2015. They start in Milan. Great place to start. They venture into other cities, including Turin, Bologna, Parma and the capital, Rome. They don't, however, make it to Naples, the southern city where Pizza Margherita was created. But they're you know, they've got a pretty good spread across Italy. Now, Sacha, when we think about Domino's here in Australia and wherever people are listening, when they think about Domino's, what's the one big advantage? Cheap, that's it. Price They're cheaper than most of their local competitors. But it wasn't the case in Italy. A pizza in an Italian restaurant can cost as little as €5. Now, Sascha, I did some quick Google thing. Domino's Pizza in Italy costs about €6 so they didn't have the price advantage. There were some other issues which I'm sure we'll get to. But after seven years, the Italian Domino's has declared bankruptcy. [00:08:30][58.8]

Sascha: [00:08:30] I'm not surprised at all. I like the best pizza of my life I had was in Naples and it was a religious experience. So I just I've never said that about Domino's. So let's leave it there. You can tell that I'm going to be really hard to win over with this topic today. We're going to take a quick break and then let's unpack how it all went so wrong. [00:08:51][20.6]

Audio clip: [00:08:58] And. Finally, Domino's Pizza is to close down all its stores in Italy. The US brand opened its first store in Milan seven years ago and expanded around the country, despite being shunned by traditionalists opposed to North American innovations such as putting pineapple on pizzas. Domino's says the coronavirus pandemic led to local pizza restaurants encroaching on their. [00:09:21][23.7]

Sascha: [00:09:22] Home delivery markets. Welcome back to The Dive. Today we're talking about Domino's pizza's failed expansion into Italy. Seven years after launching, the Italian company has declared bankruptcy and all remaining stores are closing. Alec, continue this story for me. Where else did they go wrong? [00:09:40][18.3]

Alec: [00:09:41] Well, Sacha, you remember Domino's thought they had two big competitive advantages when they entered Italy. [00:09:46][5.3]

Sascha: [00:09:47] Yeah, so we've talked about price. And then the other two were going to be a national delivery network and American style toppings. [00:09:54][7.6]

Alec: [00:09:55] Yeah, that's right. So let's take those to one by one. Now, the first big competitive advantage was meant to be food delivery. Getting pizzas to your door. Well, the food delivery market changed massively since they launched in 2015. And the big reason they changed was all these food delivery apps Uber eats Deliveroo Just Eat Takeaway, which owns GrubHub and Menulog. A number of others all entered Italy and all started offering delivery to your door. So the competitive landscape shifted massively for Domino's, and a lot of these local pizzerias who weren't offering delivery services started through those apps and then such a COVID hit. [00:10:35][39.9]

Sascha: [00:10:36] Overseas to Italy now, where all 60 million residents are on lockdown. [00:10:39][3.4]

Alec: [00:10:40] Restaurants got locked down and everyone turned to home delivery and that just supercharged the whole delivery network. Every restaurant that was a holdout that didn't want to have their pizzas delivered had to have their pizzas delivered to stay in business. And for Domino's, this meant that the pizza delivery market, a market that they thought was pretty empty when they entered Italy in 2015, was suddenly flooded with new competition. [00:11:05][24.9]

Sascha: [00:11:06] Yeah. So can you elaborate on the other point then, which was American toppings? [00:11:10][4.2]

Alec: [00:11:11] Yes. So this was a bold bet. And looking back on the history, it's somewhat confusing. So when the chain launched in 2015, they were planning to create, quote, purely Italian recipes with purely Italian ingredients that were looking to make Italian pizzas in a Domino's system and then deliver them, as we've spoken about. So alongside this purely Italian strategy they wanted to pursue, they also had their traditional Domino's toppings that they wanted to bring to the home of pizza. Looking at the Domino's Italy menu before it closed down, there were a lot of very American pizzas that you probably wouldn't call purely Italian recipes a cheeseburger pizza, a barbecued chicken pizza, a Hawaiian pizza. Those toppings that we know so well but didn't go down well with Italian customers are probably building a new method of pizza. You haven't heard of green. [00:12:01][50.5]

Audio clip: [00:12:01] Crispy barbecue bacon. Bacon. Why do you need to put Peking duck and bacon and red onion and barbecue sauce on a pizza is strange. 

Alec: [00:12:12] Yeah.

Sascha: [00:12:13] Okay. So they had three competitive advantages price, pizza delivery and different toppings, and none of them panned out. [00:12:20][7.1]

Alec: [00:12:21] Yeah, that's right. They are strengths in the US, the UK, Australia. Most markets around the world couldn't really hold in the home of pizza. 

Sascha: [00:12:30] It all makes sense, you know. I travelled to Italy and I certainly didn't reach for the Domino's app when I was looking for my local pizza to order. I was going straight for the recommendations of the local pizzeria. So it doesn't surprise me that the Italians who are so proud of their food heritage didn't do the same. So to wrap it up for me. Alec, how big a deal is this Italian bankruptcy for the larger Domino's company? Is it threatening their business or can they basically accept this failure and continue to dominate in other markets? 

Alec: [00:13:02] Look, it matters, but it doesn't really matter. And I think that's the beauty of a franchise model that the franchisee in this case, Pizza, took on a lot of the risk when they decided to open up the Italian market. And they're the ones that have declared bankruptcy at the moment. So for the Domino's parent brand, the American company, you know, they were distracted. It doesn't look great for them. They would have invested some time and effort into expanding in Italy, but it doesn't affect their business in any other country meaningfully. They just redirect those resources and keep on keeping on a lot of the other businesses. Britain's Domino's Pizza Group, Australia's Domino's Pizza Enterprises, it doesn't affect them at all. They might you know, they're both in mainland Europe. They're probably not going to try and have a crack at Italy any time soon.

Sascha: [00:13:52] As someone else has learnt that lesson for them. So sir Alec, one more question. Are you hungry at starving? Well, well, let's leave it there and. I'll let you go get a slice of pizza. Probably not from Domino's. If you enjoy this episode, please tell a friend about it. It really is the best way for the podcast to grow. And if you're listening because you've been referred, we have a growing back catalogue that is well worth checking out. Our last three episodes have covered celebrity crypto endorsements, a new weight loss pill, and Disney's fight to retain control of Mickey Mouse. There really is something for everyone. Remember, you can follow us on Instagram at the dived up business news. You can contact us by email. The dive at Equity Mates dot com and you can subscribe wherever you are listening right now. See, you never miss an episode. Thanks so much for joining me today, Alec. 

Alec: [00:14:41] Thanks, Sascha. 

Sascha: [00:14:41] Until next time