Choice is often more important than effort. For example, Dase shares standing on the shoulders of giants.
Recently, Dase Co., Ltd. (hereinafter referred to as “Domino’s China”), the domestic franchise operator of Domino’s Pizza, submitted the application to the Hong Kong Stock Exchange. It is worth noting that this is a reapplication after its March 2022 submission form expired.
“Second Chong” IPO, what are the odds of winning?
01
How much is the loss-making takeaway model?
Cash return on investment in stores is only 9.2%
LAOCAI
When it comes to Domino’s, everyone is familiar with it. In terms of global retail sales in 2021, it is the world’s largest pizza company. As of June 2022, it has more than 19,200 stores in more than 90 markets around the world, making it a proper giant.
Domino’s China is the exclusive master franchisee of Domino’s Pizza in Mainland China, Hong Kong and Macau. Although it carries the prestige of the global leader, it has not dominated the domestic market. According to the prospectus, Domino’s China is the fastest-growing company among the top five pizza brands, and the third-largest pizza company in the Chinese market in terms of sales revenue in 2021.
How fast is the growth?
From 2019 to 2021, it will achieve revenue of 837 million yuan, 1.104 billion yuan, and 1.611 billion yuan respectively. But the price is also eye-catching, with net losses of 182 million yuan, 274 million yuan, and 471 million yuan in the same period, continuing to lose money, and the loss continues to increase.
In the first half of 2022, it will lose another 95.5 million yuan.
In just three and a half years, the total net loss exceeded 1 billion yuan. Just looking at the loss, is it more like a TMT company? Is this growth sustainable? In addition to volume, what is the quality of development?
It is true that in the post-epidemic era, all industries are under pressure, especially the catering industry. As strong as Yum China, it is also caught in increasing revenue but not profit, but it is still profitable overall.
Why is Domino’s China difficult to understand?
The prospectus stated that in the past few years, the company has invested a lot of resources in researching potential new markets, opening more stores and central kitchens, marketing and promoting brands, investing in preparations for the establishment and operation of more new stores, and training store-level staff to expand service scope. and investment in technology, resulting in the company recording a net loss during the reporting period.
In other words, the company is in a period of expansion, and there are a lot of places to spend money.
The most intuitive point of view is that before you start to “make money”, you need to pay a lot of “franchise fees”.
As a “Domino’s” franchisee, it needs to pay licensing-related fees to the brand company every year, which were 39.5 million yuan, 50.7 million yuan, 115 million yuan, and 29.2 million yuan respectively during the reporting period.
The other is the biggest problem in the catering industry: there are three big mountains in terms of cost – rent, manpower, and raw materials.
Taking the first half of 2022 as an example, the cost of raw materials accounted for 27.2%, the cost of labor accounted for 37.1%, and the depreciation of right-of-use assets reached 10%.
Among them, the high cost of distribution is particularly eye-catching.
This is closely related to the selling point. As early as the 1970s, Domino’s first proposed the guarantee of “half price if delivery time exceeds half an hour”, which can be said to be the originator of the instant delivery industry.
Focusing on Domino’s China, food delivery is also its “specialty”, propping up a big chunk of revenue. From 2019 to the first half of 2022, the takeaway channel revenue was 586 million yuan, 822 million yuan, 1.180 billion yuan, and 650 million yuan, accounting for about 75% of the total revenue.
But such a size also means that it needs to be quite the size of the rider, and the front-end distribution model is more asset-heavy.
As of the end of June 2022, Domino’s China has 3,199 full-time employees and 9,705 part-time employees, most of which are riders and shop assistants.
Even so, staff costs remain high. In 2021, the company’s employee compensation expenses will be 703 million yuan, accounting for 43.66% of revenue.
This is just an explicit cost of volume expansion. In order to support the nationwide store network, the company also needs market research, technology research and development, brand promotion and marketing, personnel training, and the construction of a central kitchen. Many hidden costs are also a lot of expenses.
Domino’s China admitted that most new stores have been opened for less than three years, which is not enough to achieve a return on cash investment.
In 2019, 2020, 2021 and the first half of 2022, Domino’s China store-level operating profit margins were 4.4%, 4.0%, 9.2% and 9.2%.
Based on this calculation, only about 46 of the 508 stores at the end of the first half of 2022 have achieved a cash return on investment.
The prospectus bluntly stated that the opening of new stores may have an adverse impact on its financial position, and the continuous net loss “may not be able to maintain or expand the sales of existing stores.”
02
How fragrant is it that the store expansion does not stop and sinks?
Beware of the Scale Trap
LAOCAI
Interestingly, Domino’s China has not stopped expanding. In his opinion, there are still many locations in China for him to successfully open new stores, and the company also has plans to further expand its geographic coverage and strengthen market penetration: 120 and 180 new stores will be opened in 2022 and 2023, respectively.
Ambition is commendable, but big doesn’t mean strong, fast doesn’t mean stability, Domino’s China, which is running wildly, is betting on volume, can it win a profitable future? How many worries? How much uncertainty?
Not to be questioned, investors are more and more chasing certainty when uncertainty is intensifying.
The prospectus shows that since 2018, Domino’s China has been focusing on expanding its store network, with the number of stores increasing from 188 on January 1, 2019 to 508 on June 30, 2022, an increase of 170%. Overall, in the past three and a half years, Dase has opened 320 new stores. In three and a half years, the number of stores has increased by 1.7 times.
The latest data shows that by October 2022, Domino’s China will have 547 newest stores.
The Frost & Sullivan report also shows that, taking the 2021 data as a reference, there are 10.9 pizza stores per 1 million people in China, while Japan and South Korea, both in East Asia, have 28.1 and 28.3 pizza stores per 1 million people respectively. Family.
Based on this, Domino’s China believes that the Chinese pizza market still has a lot of room for growth. An extensive nationwide store network is critical to future success and competitiveness.
Indeed, the market is big enough that Domino’s China has its own logic of burning money. The consideration is that the real scale effect requires specialization, refinement, precision and efficiency in addition to volume support, which is an extreme test of comprehensive operational capabilities. There is no problem in speculating money, the key is whether it can burn out the core competitiveness and profitability.
Especially in the post-epidemic era, scale effects are often easy to fall into the scale trap. There are many people who fail to expand stores against the trend. Haidilao, Xiabuxiabu, Zhou Heiya, etc. are all examples. Although Domino’s China is very strong in delivery, it is difficult to be alone.
The prospectus bluntly stated that the opening of new stores may have an adverse impact on its financial situation, and the continued net losses “may not be able to maintain or expand the sales of existing stores.”
Looking deeper and further expanding, Domino’s is bound to enter the sinking market. But how fragrant is this market?
Industry analyst Hao Rui said that the complexity of sinking rivers and lakes is far beyond imagination. Compared with first-tier cities such as Beijing and Shanghai, the consumption enthusiasm for pizza and take-out in lower-tier cities is relatively weak, and Domino’s is not cheap in terms of price. At the same time, the collaborative construction of related hardware systems is also a challenge. The promise will be delivered in minutes, so you have to continue to increase investment, which in turn brings the risk of increased losses.
It is true, the prospectus shows that Domino’s China will sell an average of 90.5 yuan per order in 2021. How easy is it to quickly sink into the market and rely on expansion to make profits?
03
Questions about the stability of the front wolf and the back tiger
How to read the quality control and risk control scriptures
LAOCAI
Perhaps, there is also helplessness and urgency.
In terms of industry competition, despite the rapid growth, Domino’s China is not dominant.
As of the end of June 2022, the number of Pizza Hut restaurants has reached 2,711; previously disclosed data from Zunbao Pizza showed that as of 2020, the number of company-owned and franchised stores was 1,100+ and 500+, respectively.
To follow the reason, although the “Domino’s” brand has a long history and has entered the Chinese market for a long time, it is only in recent years that Dase shares have obtained the exclusive general franchise qualification.
Before, Domino’s Pizza’s management rights were scattered, and it missed the market opportunity. In 2017, Dase and Domino’s International (a subsidiary of Domino’s Pizza, Inc.) renewed the master franchise agreement and expanded the franchise to the entire mainland China, Hong Kong, China and Macau, China.
So far, Dase has become a veritable “Domino’s China”. Currently, the entry date for most of its current core executive management team is in 2018. In other words, the real development time of Domino’s China is only about 5 years.
It is worth noting that the first phase of Domino’s franchise authorization obtained by Dase shares will be terminated in June 2027. Although it can be renewed for two additional 10 years if the conditions are met, the success of the renewal and the hidden dangers of uncertainty are also indispensable.
Secondly, Cheng Yu is also trapped in take-out.
Industry analyst Yu Shengmei believes that with the strong domination of third-party platforms such as Meituan and Ele.me in terms of traffic and brand power, the competitive advantage of Domino’s instant delivery has been significantly weakened. “In other words, when consumers want to order takeout or eat pizza, the first thing they open is the takeout software rather than Domino’s WeChat applet.”
Of course, Domino’s China is not too stubborn. Rhodium found that Domino’s Pizza is currently in Meituan and Ele.me, but it still insists on “self-operated delivery” and the timeliness advantage of promising 30-minute delivery.
Just going back to the product itself, in addition to speed, consumers are more concerned about the quality and taste of the food.
Browsing the Black Cat Complaint Platform, as of 16:00 on October 28, Domino’s Pizza had accumulated 234 complaints, including overtime delivery, food safety issues, and service disputes.
In the opinion of Lin Yong, an industry analyst, these complaints, on the one hand, reflect Domino’s China’s lack of solid basic skills, and on the other hand, they also reflect the hidden worries of lack of management brought about by rapid expansion. “As a Western-style fast food, whether pizza can meet the needs of the Chinese stomach is also a proposition worth discussing.”
It’s not too demanding. In terms of competition, the pizza field is already very fierce. In the past, there was Pizza Hut with greater scale advantage and brand voice, and then there were Zumba, Zhigenzhidi, etc., which divided the market with lower unit price and cutting-edge innovative products. They also paid attention to the delivery of pizza, and they were trying to win with unique flavors. …
There is not much room for trial and error for Domino’s China.
In February 2022, Xinhua News Agency reported that the People’s Bank of China notified and punished 32 units that refused to accept cash, including the Mentougou Road store of Beijing Domino’s Pizza Co., Ltd.; Domino’s Pizza Co., Ltd. Fangzhuang Branch was warned and punished.
In May 2022, the Wudaokou store of Beijing Domino’s Pizza Co., Ltd. was notified due to incomplete disinfection records and failure to implement epidemic prevention and control responsibilities.
In July 2022, Beijing Chaoyang notified 22 companies with insufficient epidemic prevention, and Beijing Domino’s Pizza Co., Ltd. Liufang Store joined the list.
…
The foundation is not strong, and the ground is shaking. With big strides and continuous store expansion, Domino’s China still needs to strengthen its quality control and risk control. The store is not open at first, and it is an extreme test of the follow-up management ability and business coordination and integration ability. Once the speed and volume exceed the ability of the team to control, all kinds of chaos will breed.
04
Efficiently promote new innovations and break through digitalization
Wang Yi’s burden is still not light
LAOCAI
“In the long run, our goal is to become China’s premier pizza company, just as other Domino’s Pizza franchisees have achieved across Asia, Europe and North America,” Domino’s China said.
The vision is good, not unfounded.
Domino’s, which started in the United States in 1960, landed on the U.S. stock market in 2004, and its stock price has increased more than 40 times in the 18 years since its listing, which is quite a bull stock.
Focusing on Domino’s China, the level of digitalization is remarkable. In 2019, we independently developed the “integrated service center”. Customers can not only track out-of-store orders online in real time, but also “go deep into the back kitchen” to track the entire process of orders from preparation to baking to riders picking up meals. state.
Superimposed on a strong takeaway service, its store layout is no longer affected by traditional factors such as area, decoration, and table turnover rate. Its kitchen accounts for about half of the store’s area and can also be customized according to the store’s expected service capabilities.
Efficiency is also reflected in the ability to push new products. According to the Frost & Sullivan report, as of December 31, 2021, Domino’s has a market advantage in the number of pizza sku, and has launched more than 100 pizzas and snacks since 2018.
The rapid rise also depends on the senior management with outstanding ability. In all fairness, Domino’s China is inseparable from the “soul man” Wang Yi.
In 2017, Wang Yi, a former McDonald’s China executive, joined Dase and became CEO. Under his leadership, Dase shares restructured and renewed the contract with Domino’s Global, and expanded the franchise scope to the entire mainland China, Hong Kong, China and Macau, China. Wang Yi once said: “Domino’s is actually a technology company, but it happens to be selling pizza.”
Focusing on this IPO, the funds raised are mainly used to expand the store network and expand the capacity of the central kitchen; improve technical capabilities to improve operational efficiency, service capabilities and customer experience, and for general corporate purposes.
Domino’s China expects to continue to experience net losses for at least the next 3 years, but also expects to have a sufficient number of well-developed stores in the next 3 to 5 years to generate sufficient expenses to make up for the company’s expenses arising from opening new stores and Depreciation and amortization expenses.
It can be seen that it is also polishing the level of refinement and specialization to improve the quality of development. However, this force accuracy needs to be stronger. Especially under the premise of volume expansion, it is not easy to integrate quality and efficiency.
In a word, it is not terrible to burn money, but the fear is that the core profitability cannot be burned. How to strengthen the scale effect and avoid scale risks, Domino’s China and Wang Yi still have a soul test question.