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Domino’s Pizza Enterprises (ASX: DMP) plans to close its loss-making Danish operations in a massive cost-saving push as the company writes off its chances of improving underlying profit until FY24.
The Brisbane-based fast-food giant has announced plans to close all 27 stores in Denmark after failing to make the business work over the past four years following a trouble-plagued history for the Scandinavian operation.
Domino’s acquired the Danish arm for about $4 million in 2019 from receivers to Domino’s Pizza Scandinavia, which prior to its collapse was the country’s largest pizza chain.
At the time, the Australian fast-food group had envisaged it could grow the business to as many as 150 outlets.
Today, Domino’s Pizza Enterprises says performance in ‘this small market’ has not improved since then. Domino’s will exit the business by the end of this financial year, which Domino’s says will deliver an immediate $12 million lift to group EBIT.
The store closures in Denmark are leading a shake-up of the Domino’s business globally that will see the company cut down the size of its corporate store network and streamline core operations.
The company plans to either franchise or close down up to 70 underperforming corporate-owned stores, with the combined closure representing about 2 per cent of the company’s 3,827 stores globally.
Today’s announcement was accompanied by a trading update showing a 3 per cent lift in same-store sales over the current quarter, except for its operations in Taiwan.
However, due to a slow recovery of weekly order volumes, Domino’s has warned that EBIT growth for the second half of FY23 has not improved on the first half. Same-store sales in FY23 also remain below the medium-term outlook of 3 to 6 per cent annual growth.
The sluggish performance has led Domino’s to declare that it will not deliver ‘materially higher profitability’ until FY24.
CEO Don Meij has highlighted the ‘burden’ of inefficiency on the group’s performance as reasons for the proposed shutdown in Denmark and its underperforming corporate stores.
“The decisions of today will immediately deliver a stronger business and improve efficiencies for the long-term,” Meij says.
“As these initiatives are completed and deliver savings, we intend to reinvest approximately one third of these savings to stores, as we reinvest in the franchise network base.”
Meij says the latest initiative is part of a long-term plan that includes ‘building out the sizeable opportunity we have in Europe and the Asia-Pacific to more than double our business’.
“This is the right time for us to redesign for future growth; we are taking deliberate action to bring more focus to our business, removing distractions and maximising the benefits of our global reach and scale.”
Domino’s had high hopes when it entered the Danish market in 2019 amid the fallout of a national scandal for Domino’s Pizza Scandinavia after it was exposed that it had been using out-of-date ingredients and that some stores were infested with rats.
Domino's today concedes the former owner had ‘breached public trust' but it expected that with a solid track record of fast-food services globally it would be able to restore the faith of Danish customers.
“Our team in Denmark consistently delivered some of the highest quality operations not just in Domino’s, but in the QSR industry,” says Domino’s Europe CEO Andre ten Wolde.
“While our team’s efforts won back some customers, and created loyal fans, the legacy of damage from the previous ownership was ultimately too great for us to overcome in the foreseeable future.”
Domino’s global shake-out of operations includes its pre-planned closure of commissaries in South-East Asia following previous acquisitions in the region, as well as legacy IT assets.
The initiatives, including the exit from Denmark, will deliver the group between $53 million and $59 million in annual savings.
Meanwhile, despite a 6 to 7 per cent slowdown in new store openings in FY23, and expectations that store openings in FY24 will be below the medium-term outlook of 8 to 10 per cent, Domino’s says it has not reduced its long-term target of hitting 7,100 stores by 2033.
Domino's shares slumped by as much as 12 per cent in early trading following today's announcement, hitting a low of $40.75. The shares were trading at $41.14 at 10.46am (AEST).
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