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DPP: large opportunity for new management team

I was lucky enough to spend some time with DPP CEO Nils Gornall and FD, Edward Kacyrz this week. The new management team have been in place since July 2022 and Dec 2022 respectively and are already having a big impact on the performance of the business. If you have not looked at the company for a while, now would be a great time to revisit the story. Here are my notes from my time with them.

Nils is a Domino’s Pizza man through and through. He started work in a Dominos aged 15, opened his first store aged 22, owned 20+ franchises in Australia, including half of the top 10 performing stores, and opened up a new Dominos market in Croatia generating strong store profits. He has taken on the franchise of a number of underperforming Dominos stores in his time and turned them all round to be very profitable.

The history of DPP starts in 2010 when the company listed on AIM with the Polish master franchise for Dominos but without any stores open. It was run by an entrepreneurs with excellent coffee experience but no Dominos experience. Then came bankers and restauranteurs with dine-in Italian style pizza experience. The appointment of Nils Gornall as CEO marks the first time that DPP has been run by someone with in-depth knowledge of running Dominos stores successfully. Simply, he knows what it takes to run a successful pizza delivery operation and has experience turning around underperforming Dominos stores and making them supremely profitable.

The DPP board has also been refreshed with proven Dominos experience. Andrew Rennie, previously the European CEO of Dominos Pizza Enterprises (the largest Dominos franchise co outside of the US) joined as a non-exec in the middle of 2022 and David Wild, the ex-CEO of Dominos UK joined as Chair in Jan 2023.

Pizza has proved popular the world over and the Dominos franchise has proven to be one of the best franchise models globally. Once scale is achieved, Domino’s franchisees become strong and consistent cash generators wherever they have been rolled out around the world. The only thing that has stopped Domino’s being a success is when it has not been run correctly. That’s been the case in Poland in the past, but with new management in place with operational experience the company is now being run properly for the first time.

Stores have a high degree of fixed costs and so to drive profitability you need to drive volume and to drive volume you need to deliver 3 things: great value, great tasting pizza and deliver it quickly. DPP had great tasting pizzas but the value proposition was unclear and delivery times were not fast enough (in some cases they were not even being tracked). A number of operational changes were made to improve delivery times which have come down from above 30 minutes to c25minutes. These changes include improving the store layout, simplification of the menu and appropriate incentivisation program for store managers. Best in class delivery times are at 20-22 minutes so further improvements are possible. The value message has been more consistently communicated with clearer price points and promotions.

Ensuring the three areas of taste, value and delivery time meet consumer needs has resulted in order count and repeat orders improving. Dominos Pizza TV Ad campaigns have proven to be very effective at driving volumes when used in other territories. DPP launched their first Ad campaign for 5 years in January of this year which will run for 6 weeks. Management expect this to have a positive impact on order count.

The strategy is clear and simple - improve the performance of the existing store portfolio and then when profitability reaches levels which attract new franchisees into the business, growth in store numbers will be accelerated. Australia with a population of 27m has close to 740 stores and the potential for 1,200. The UK with a population of 67m has c1200 stores and the potential for 1675 stores. Poland with a population of 38m has only 113 Dominos stores currently. Over time store numbers could get to 5x that figure.

The Croatian operation has 3 stores and all are profitable despite only launching in the country in 2021. The plan is to open 2 company owned stores this year and start franchised the brand in Croatia. With a population of 4m there is the potential for store numbers to be a multiple of the current level.

When stores deliver high volume, they also deliver excellent EBITDA margins. Double digit EBITDA margins are definitely possible which suggests a big improvement in EBITDA going forward from the EBITDA loss that Singers is currently forecasting for 2022.

With the new management team in charge, the operational performance of the business has already improved considerably but the turnaround in profitability is only just beginning.

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