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Domino’s taking bigger slice of the global pizza

Domino’s is biting off a chunk of the German pizza market, the world’s fourth largest.Domino’s Pizza upgrades guidance after snapping up German pizza chain Joey’s
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Congratulations to those investors that took a punt on investing in (rather than eating) n pizza.

Ten years ago Domino’s Pizza Enterprises listed on the n exchange with a market capitalisation of $132 million.

Today it is worth $4.8 billion. These numbers best illustrate the success this enterprise has achieved in rolling out its product and its disruptive technology around the world.

The recipe of addictive fast food  and technology-enabled ease of order and delivery is the perfect profit mix.

When Reserve Bank of governor Glenn Stevens bemoans the lack of animal spirits from n corporates who are reluctant to invest in growth, he clearly wasn’t referring to Domino’s.

This company, while selling a mainstream consumer good, is confident that its product and systems are capable of taking to the global stage.

While it is just selling pepperoni and various crusts, the art to Domino’s is in the  technology of its delivery and supply chain and the economies of scale.

On Wednesday Domino’s Pizza acquired an interest in another new territory, Germany, in order to grow earnings.

It is not a major capital outlay – $69 million  and one which will be shared by its British  joint venture partner – but it is one that will give it a major stake in the ground in a big market and it comes on the back of a French acquisition a  few months ago.

Domino’s paid €35 million to buy the 89-store Pizza Sprint chain in France, lifting Domino’s stores in France to 330.

The German deal may ultimately cost the joint venture more but only if performance targets are met.

Domino’s Pizza Enterprises is one of those stocks that  has crept up on investors. It started as a tiddler and has moved into the mid-cap market – supported by that part of the funds management market that trawls for smaller interesting growth stocks that don’t get noticed  by larger index-hugging funds.

The dilemma in investing in companies like Domino’s is that after many years of profit growth it is now priced for perfection – trading at a historical price earnings ratio of more than 70 times.

Under this scenario earning share price improvement is particularly difficult.

But Domino’s hit the target on Wednesday. Its shares bounded 14 per cent on the back of  yesterday’s announcement that its earnings would improve 30 per cent.

It was the second profit revision over the past six months and both have been positive. Last month it lifted its growth guidance from 20 per cent to 25 per cent.

The nearest business model to Domino’s is probably Coca-Cola Amatil.

In both cases the US brand owner allocates international territories But when it comes to the pizza business. Domino’s Pizza Inc, which is the brand mothership has market capitalisation of $US5.9 billion and is not significantly larger than the n offspring.

This is not a risk in the case of The Coca Cola Company whose market capitalisation of US$84 million dwarfs for example its n bottler, Coca Cola Amatil ($6.7 billion).

But Domino’s Pizza Enterprises is as successful as it has been aggressive.

Germany was not one of its allocated territories but it has inserted itself into this geography via a joint venture deal with its British Domino’s counterpart, which it might buy out over time.

Such a moveopens up the possibility that ‘s Domino’s  could capture a piece of other regions that are outside its list of agreed territories.

From a pizza perspective, Germany is dominated by independents,  rather than chains, and so it is ripe for infiltration. The group that has been acquired, Joey’s, is the largest pizza delivery chain in Germany.

Germany is the fourth largest pizza market in the world, with 4800 stores, but chain pizza outlets such as Joey’s account for less than 20 per cent of the market. About 4000 stores are operated by independents.

The challenge will be to increase the market penetration of the chains and take market share from the independents, using Domino’s disruptive supply chain technology.

The acquisition goes a long way to revising the the group pizza store plan to have a staggering 4250 outlets by 2025.

The plans are ambitious but no more than they have been over the past 10 years.

The current price earnings multiplesset a high bar and investors should be understandably sceptical of how long this run of success can last. But the fact remains that the formula appears to have worked thus far.

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