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Gamechanger?

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Gamechanger?

If you are fan of pizza – I am but only the home made variety I grew up with in inner northern Melbourne – you may have seen Domino’s Pizza promoting its “biggest announcement in twenty years”. The social media campaign caught our interest because the company made a $15.4 million net profit for the six months to December 2012 but enjoys a market capitalisation of $800 million. We wanted to know what their “game changer” was going to be. As one Facebook fan wondered, it could be GPS guided pizza missiles.

Dominos have done an amazing job of harnessing the internet and social media to radically change the fast food industry but this campaign backfired badly. Believe it or not, the “Gamechanger”/”biggest announcement in 20 years”, was the release of new toppings and rectangular pizza bases. In a press release at the weekend Dominos announced:

“In the biggest and tastiest announcement in Domino’s 20 year history, Domino’s Pizza have revealed their new Chef’s Best™ Range…

“Domino’s new Chef’s Best™ range is all about restaurant-quality ingredients designed with premium taste in mind – without the premium price tag! From ham off the bone, to roast pork belly, blue cheese crème fraiche and more, let yourself be tempted, treated and tickled pink by pizza unlike any you’ve had before.

The new range includes seven seriously delicious pizzas – with a slice to satisfy pizza traditionalists, aficionados and innovators alike – and all available for just $8! Pig out with Domino’s Chef’s Best™ BBQ Pork & Hollandaise – succulent BBQ roast pork, mushrooms, mozzarella, fresh tomato, tarragon & red onion on a BBQ base, topped with perfectly rich hollandaise sauce.”

Dominos Facebook fans reacted predictably: ”YOU HAD US ON THE EDGE OF OUR SEATS FOR THIS?”

As investors and business owners, we care about the effectiveness of management and marketing decisions. What we are most interested in is the thought process that went behind the campaign. To describe new toppings as the BIGGEST announcement in two decades is to say that there is nothing dramatic in the pipeline for the company – It’s more of the same. But when a company’s shares are trading at 27 times earnings, more of the same may just not be enough.

According to Skaffold.com, Domino’s is an A2 business with a 2015 intrinsic value estimated at about $8.00. That is a long way from the current price, which rallied nearly a dollar last week in anticipation of the game changing announcement.

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Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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12 Comments

  1. Your article in the Australian today (Local legends caught on flight to nowhere, 16/3), highlights the key to the continuing relevance of newspapers in the medium term – intelligent commentary. I use the adage “tell me something I don’t know”, or haven’t though about. That is value add worth paying for on a daily basis.

  2. Personally I was expecting something slightly more dramatic/game changing like dancing lips or drums…

    Not to take anything away from DMP the business has performed exceptional over the last couple of years, driven by a sound online strategy, revamping its image and products.

    DMP new strategy, Chef’s Best™ appears to be specifically targeted at retail food group’s (RFG) brands – Crust and Pizza Capers. Both brands have a decent market share within the gourmet pizza market and the price point at $8 is purely to grow market share. Given DMP retail footprint it could make a serious dent in RFG brands.

  3. What will also be interesting is RFG’s reaction – they own Crust & Pizza Capers, both of which they acquired in the last 12 months and both of which are clearly the targets of the DMP strategy to sell upmarket pizzas. I agree with the first comment that Domino’s appear to be going after volume at the expense of margin.

    In terms of price, it’s an eye-opener to see that RFG acquired Crust and Pizza Capers (both well established and well run pizza franchises) on 7x EBIT multiples in full control transactions, whereas DMP is trading on about a 14x EBIT multiple.

    • Two excellent points James:

      1) I agree with the first comment that Domino’s appear to be going after volume at the expense of margin.

      2) eye-opener to see that RFG acquired Crust and Pizza Capers on 7x EBIT multiples in full control transactions, whereas DMP is trading on about a 14x EBIT.

  4. I’m sorry, but if you want a great pizza, nothing beats a real Italian restaurant takeaway pizza, and there are tons of these in Melbourne.
    So I just can’t get excited about Domino’s pizzas. Yes I have tried them.

  5. It´s a pizza. What were people expecting?

    More important for my wallet, I´m not seeing many A1s and A2s with a decent MoS to justify a sizeable investment.

  6. They are implementing similar sales strategy to mcdonalds I think. More volume, less profit per sale. This will help them go after the local pizzeria sales. Also people who want healthier or more gourmet pizzas. They were seen as a reliable stock during GFC and its aftermath.

  7. Leanne Elliott
    :

    No games being changed here – square pizzas with gourmet toppings have been available from other suppliers for a looooong time. So – can I ask the dumb question? Skaffold is estimating value at $8, so it is suggesting that the company can’t maintain the current share price?
    And you are saying it isn’t going to maintain the share price with lame stunts – yes?

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