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DP Poland: Making good progress towards profitability

Domino’s Pizza Poland is listed on the Aim market of the London Stock Exchange and has a market capitalisation of £50m. The company owns the Dominos master franchise for Poland and Croatia. There are currently 112 Dominos stores in Poland and 4 Dominos stores in Croatia. The company released half year results to 30 June 2023 on 26 September and we were delighted to welcome Nils Gornall, CEO, and Edward Kacyrz CFO, to present at the latest Yellowstone Advisory webinar for private investors. A recording of the webinar can be found here.

Nils Gornall joined the company 12 months ago as CEO when DP Poland bought the Croatian operations which he started. He has over 25 years experience successfully running Dominos Stores in Australia. He first worked in a Dominos aged 15, opened his first store aged 22 and owned 20+ franchises in Australia, including half of the top 10 performing stores. Edward is a chartered accountant with 18 years of experience and has worked for the likes of Mars, Levi Strauss and Kimberley Clark in Poland. He has held a number of financial and strategy roles.

The new team are twelve months into the turnaround and have laid some solid foundations for future growth. The board has been refreshed including bringing in people with global Dominos experience. Stores which were in the wrong locations, mainly shopping malls, have been closed and there has been investment in the remaining stores to bring them up to the required standard. Most importantly there has been an increased focus on improving the customer value proposition by providing high quality pizzas at a attractive prices, delivered quickly. The focus for the next twelve months is to continue to grow the average weekly order count (AWOC), which is a key driver of profitability, reduce delivery times further and improve customer satisfaction. Delivering these will improve profitability and enable faster growth through franchising.

The first half of 2023 included a number of significant improvements in operating performance. Group revenue grew 26.5% to £21m and LFL system sales grew 17.7%, AWOC was up 14.1% to 698 and Group EBITDA improved 171% to £1.1m. There was a 11.3% increase in Polish order count and this accounted for 60% of the LFL growth. Non delivery channels grew by 22.6% slightly ahead of the delivery growth of 15.8%. The early signs of operating leverage came through with direct costs up 20.8%. SG&A rose as a result of a TV campaign in the first quarter which produced good results but given the current size of the business, they believe digital spend will be more effective in the second half of the year. Inflation was over double digits at the end of 2022 and into the first quarter of 2023 but prices have begun to ease from the second quarter. To mitigate some of the labour costs a new scheduling system was implemented which has reduced labour costs by 3-4%. Q2 saw the company move into profitability after a tough Q1 impacted by higher inflation. Overall, the loss for the period was 27.6% better at -£1.6m.

The key thing with the progress that has been made over the last 12 months is that the building blocks are now in place for a highly profitable business. The quality of the pizza has been improved with more cheese being added, delivery times have been reduced and the pricing strategy has improved. Customers are getting a better experience and this is evidenced by higher net promoter scores. The company is now moving into the profitability stage and this is key to growing under the franchise model which is the next stage of company growth.

There have been significant improvements in two of the key metrics which are driving the improvement in profitability. Delivery times have been reduced to 25 minutes and the target is to lower this further to 22 minutes. Better delivery times has resulted in increased customer satisfaction, more loyal customers who are ordering more and this is seen in the growth in the order count. This was around the 500 level 24 months ago and since Feb 2023 has averaged over 700.

Improving their digital capabilities has been another part of their strategy. Mobile app downloads grew 163% and this is a focus for further growth as it improves customer loyalty and lowers conversion costs. Overall 89% of delivery orders are online but only a small percentage is through the app and there is huge scope for this to grow in line with other dominos territories. The net promoter score has grown from 25 to 40 for new customers and from 20 to 33 for returning customers.

Order count growth is important because higher volumes are a key driver of profitability. In the first half of 2023 average weekly order count grew 29% to 689. There are now 37% of stores achieving over 750 orders a week and 12% achieving between 650 and 750 orders. These higher order counts translate into 79% of stores achieving breakeven or better up from 68%. Store EBITDA has also improved from -1.3% to 2.6%.

Looking at Warsaw where they are the dominant pizza chain the figures are more impressive. AWOC grew 22% to 752 and 44% of stores are achieving over 750 orders a week. On the profitability front, there are now 53% of stores which are profitable and 88% of stores are breakeven or better. Store EBITDA improved from 0.3% to 5.7%. These improvements highlight the benefits of being the dominant brand in an area.

The monthly pictures of store profitability over the past 18 months show a steady improvement in profitability with the exception of January and February this year which were impacted by higher food and energy costs. The company has been profitable for the past four months and August and July have been the best months in the company history.

The mid-term opportunity for DP Poland is large and they have the potential to replicate the success of Domino’s in other markets. The Polish economy has been growing strongly and there is a population of 40m who have an increasing level of disposable income. The 3 years targets are to raise the number of stores to 250, improve AWOC to 900, increase the percentage of franchise stores to 60% and improve group pre-ifrs EBITDA to 10%. These are big improvements but all are below levels achieved by Domino’s operators in other countries. For example, Croatia, which is another market where they operate, is already achieving 1100 orders a week. The UK which has a population of 67m now has over 1200 Dominos stores.

In summary, under their new management team, Dominos Pizza Poland has made significant progress over the past 12 months. Improvements to delivery times and product quality are driving higher customer satisfaction. This in turn is driving higher average order count which is a key driver of profitability. There is still more to be done in improving profitability and this will attract new franchisees to the business and provide a flywheel for growth. The Polish market clearly has the potential to emulate the success of other markets for Dominos across the globe.

A recording of the webinar can be found here.

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