Turnaround strategy: Domino’s Pizza

PizzaFor the past 20 years, Tom Monaghan has managed to steer his pizza delivery chain through adversity. Despite near bankruptcy, a major lawsuit over the use of its name, two partnerships turned sour, and a devastating fire, Monaghan never lost his sense of direction. Now, Domino’s is the second largest pizza chain in the country in number of units with 1,200 stores which generate systemwide sales of $400 million. RB associate editor Ralph Raffio spent four hectic days with Monaghan at the time he announced his purchase of the Detroit Tigers baseball team. With every local and national media rep trying to get an interview with the sports world’s newest celebrity, Raffio talked pizza with Monaghan, and not only learned every shortcut in Ann Arbor, but every aspect of Domino’s turnaround strategy.

Today, Tom Monaghan’s Domino’s Pizza is the second largest pizza chain the country, behind only Pizza Hut in total number of units. Its growth rate has been phenomenal, averaging 45 percent a year throughout the 70s. In the past five years, 1,000 units were added to the now 1,200-unit chain, five times its size in 1979. Last year’s sales exceeded $400 million system-wide, nearly seven times ’79 sales. Still privately held, the company has been valued at least $200 million, and will probably go public sometime in the near future.

But for a long time things weren’t nearly as good for the Ann Arbor-based chain, or its 46-year-old president. Domino’s has been on the razor’s edge of bankruptcy and survived a major lawsuit designed to strip it of its name.

Monaghan has been through two early partnerships, both turned sour, not to mention a devastating fire which nearly wiped him out.

Those who are close to him credit Domino’s founder with an unyielding survival instinct. Monaghan himself agrees, a devout Catholic who spent most of his early years in orphanages, foster homes and work farms in northern Michigan.

restaurantThe company’s history goes back to the early 60s, when Monaghan and his brother became partners in a failing restaurant, Dominick’s, across from a college campus in Ypsilanti. The partnership didn’t work out, ending in Monaghan’s buying out his brother’s share. A year later, lacking any knowledge of business finance (in school he had aspired to become an architect), he again took on a partner. That arrangement soon failed, leaving Monaghan to pay off his then bankrupt partner’s large debts.

In 1965, now on his own, the 28-year-old came upon the concept that would ultimately distinguish his company from others. He got rid of every item on Dominick’s menu except pizza. He took out the seats and went entirely to take-out and delivery; then he changed the name to Domino’s. While running Dominick’s, however, Monaghan experimented with various operations techniques and products, figuring that he’d succeed if he could consistently deliver pizza very fast and very hot. Until recently, Domino’s largest presence had been in college towns and near military bases. That has changed as a result of the chain’s expansion, and now residential areas account for most of the company’s growth.

Today, the chain, through carefully trained drivers and in-store personnel, and ovens in delivery cars, guarantees delivery in 30 minutes. Domino’s sells pizza and cola, nothing else. Delivery accounts for almost 90 pecent of total sales. Average unit sales are $460,000 annually, and many stores reach profitability by the third month of operating.

pizza marketing

The concept is kept simple, offering two sizes of pizza with a choice of 11 toppings. Some stores offer three sizes, though the company doesn’t promote that for simplicity’s sake. A pan pizza is being tested, but it’s too early to tell how the product will go over.

By 1968 there were eight stores. Sales were good, especially at the first store, a Victorian house which was also the company’s office and commissary. As luck would have it, though, a fire that year destroyed the store and everything else. Bob Cotman, now senior vice president-development, then Monaghan’s close friend and confidant, lived in the house but escaped injury.

Losing his best store, commissary and all his records, Monaghan, his wife, and Cotman went back to working the stores. The biggest problem was that commitments had already been made to open five more stores–Domino’s largest expansion program ever. Bound by agreement, the stores opened.

“I don’t know how we did it, but in six months we were caught up with all our bills and the stores were doing better than ever,” says Monaghan. “That’s when we took off on our next expansion plan which really killed us.”

What happened then was that a local investment firm got together with Monaghan to counsel him on how to make a public offering. First, of course, the seat-of-the-pants operation had to become more professional. Monaghan had to build an organization.

“I did everything they told me to do,” he says, looking back. He left his one-man law office in Ypsilanti for a larger firm in Detroit, and did the same with his accountant. He began hiring people with business degrees for management positions, but lacking foodservice skills.

“But the main thing was growth. That’s what gets the multiple up.” In 1969, Domino’s began the year with 12 stores, and in 10 months had grown to 44. The office became top-heavy, 29 people at peak, and many of those people, says Monaghan, “didn’t know what the hell they were doing.

“It was the growth they were talking about–what I had to produce in order to go public–that got me into trouble,” says Monaghan in regret. “We just went too far, too fast without being ready.”

The toughest spot

By 1970, Domino’s was in trouble. Having expanded too quickly, training and supervision suffered. Sales were down, and franchisees were dissillusioned. Worse, Monaghan owed back taxes and was unable to satisfy claims of more than 1,500 creditors.

The creditors panicked and demanded someone else run the company; Monaghan lost control that year. At the end of two years, stated an agreement signed by Monaghan, he would regain 49 percent of the company stock. (Today, Monaghan and his family own more than 90 percent.)

On top of losing control of the company, Monaghan was further discouraged when franchisees filed a Federal antitrust suit against Domino’s. Monaghan had set up a commissary system early on, a structure designed for quality purposes, he says not to make money. In fact, the commissary was losing money at the time. However, since he had more or less required franchisees to buy from the commissary, antitrust was in order. Franchisees then stopped paying royalties.

Monaghan lost control of Domino’s in May 1970. Contrary to the signed agreement, though, he got back control in March of ’71. What had essentially happened was that the executive put in charge of Domino’s a retired manufacturer who had little knowledge of the franchisor/franchisee relationship, had alienated franchisees even further. He immediately raised the price of commissary goods, while cutting back on services. The company’s performance did not improve either. Franchisees weren’t paying royalties, they stopped buying goods from the commissary, adn antitrust suits were still looming. Frustrated, the bank returned control to the company’s founder.

But Monaghan, who had always been sensitive toward franchisees, and who, he says, felt sorry for them during his forced absence, had another surprise waiting for him and when he got back. Franchisees, who by that time had become totally disillusioned with the company under the appointed president, went ahead with their antitrsut suit. That was just three weeks after Monaghan returned.

“I really though they’d be glad to get me back,” he says, obviously hurt by what had happened. “I had had it with the whole thing.”

Angered, Monaghan went o a pizza chain in Detroit and offered the company. “‘I don’t want it,’ i said. ‘I’ll take a few stores, but I don’t want the company.'” A week later, his offer was refused.

From a dollars and cents standpoint, Monaghan’s best move then would have been bankruptcy. His creditors still numbered about 1,500, and he hadn’t nearly caught up with his tax payments. He was well over $1 million in debt.

As he explains it, “I lived with the fear every day that someone else would put me into bankruptcy. But I wasn’t going to do it. It would have relieved all that pressure, but I had to make good to my creditors. I was literally living like a pauper, and the strain was almost unbearable, but I had to pay those people.”

He laid off his whole staff, except his wife and bookkeeper. During the days, he had to be in the office and available to creditors, the sheriff and pistol-armed bailiffs looking to impound anything of value. At night, he worked the stores. At that time, there were about 35 stores, a dozen that were company-owned. A third of those stores were doing poorly, as were some of the franchised stores, which Monaghan bought out with notes.

No longer retaining a law or accounting firm, Monaghan began digging himself out of debt. “I took bit discounts on settlements, as low as 20 or 30 cents on a dollar,” he says. “Then I’d spread those paymennts over a period of time, and slowly start paying off creditors.” Two things helped him most, he says, and both boiled down to isolating the company’s activities.

“First of all, I had to pay cash for everything. That helped me know just where I was at. There wasn’t any such thing as accounts payable anymore. So, and I don’t mind saying so, I did a masterful job on our cash flow. I broke it down by the day for three months, and got very good at it.”

Next, Monaghan set up the commissary system as a separate corporation. “By doing that I got rid of the busiest part of the business.” That allowed him to spend time concentrating on dealing with creditors and the bank.

By 1973 the franchisees’ antitrust suit had dissipated. Many came back into the fold, others were bought out or released from the system. Relations were becoming more solid. Monaghan still had his debts, but he was pulling out of trouble slowly. Careful training was again stressed, and stores perfrmed better because of it.

But again Monaghan hit a snag. About 1974 he took on the title of chairman, giving the presidenty to another Domino’s executive. Monaghan had earlier devised what he called a “49/51” program, which sold 49 percent of a corporate store to its manager. The new president replaced 49/51 with his own arrangement, which gave the manager about 25 percent of the profits, a program still in effect. However, the change caused ill will among managers. Some stores became unionized, as did the commissary. Supervision and training again were overlooked under the new president, franchisees felt they weren’t being supported with adequate services.

“In 1975 it was evident that we had done a bad job,” says Cotman. “We simply weren’t providing the opportunities or supervision we should have. Part of that, I think, was that the president wasn’t a people oriented person. He was a great second-in-command under Tom, but lacked the skills and understanding to oversee people.”

Most Domino’s executive attribute the company’s recent success to its high concentration on supervision and training. All Domino’s franchisees must have worked in a store for a year before becoming eligible for their own unit. The company does not grant franchises to investors; all licensees must work in the store.

“It’s the only way that makes sense to us,” says Cotman. “Someone who knows the operation has a better chance of being successful than someone who doesn’t.”

Domino’s began ’75 with 100 units, but ended the year with only 80. The 20 that were lost were break-away franhises. Monaghan assumed the presidency, and within two years the breakaways were back.

When he regained the presidency, Monaghan started laying the ground-work for serious long-term growth. He began by restructuring his management team, and expanding their responsibilities to include working in the field. Supervision was crucial. Traveling supervisors, called field consultants, would be responsible to service stores in designated areas. Under them were corporate areas. Under them were corporate area representatives, whose main concern was constant communications with franchisees. Each corporate area representative was responsible for between five and ten stores.

“That went a long way toward correcting the problem of insufficient training and oversight,” says Cotman. “It’s when we really got serious about doing a superb job supporting our franchisees.” Today, each franchised store is visited by a company representative once a month.

The final hurdle

But before Domino’s corporate restructuring went any further, a final obstacle had to be conquered. In 1975, Amstar Corp., maker of Domino Sugar, field a trademark infringement suit against Domino’s Pizza. (The sugar producer had filed an objection four years before that resulted in no action on either side.) By ’78 the case went to court.

In September of ’79, a federal judge in Atlanta rules against the pizza chain. New stores, he ordered, could not be called Domino’s, and existing sotres had to be renamed. At the time, a store was opening every three days.

Monaghan settled on a new name, Pizza Dispatch, and quickly began the changeover, but field an appeal in October. In April of 1980, a federal apeals court in New Orleans reversed the lower court’s decision. Monaghan has spent about $1.5 million on the case and countless hours traveling the country gathering reseearch and filing depositions.

At that time Domino’s numbered 150 stores, 40 of which were Pizza Dispatches. But Monaghan had yet another crucial decision to make. The new name, it turned out, tested much better than stores named Domino’s, and Monaghan had to consider the possibility of going with the new name, regardless of any struggle he and his team went through during the sale.

Cotman strongly argued to change over to Pizza Dispatch. “It proved much more successful, particularly in soft markets,” he says. But Monaghan resisted.

“When it came right down to it,” he says, “It just didn’t have the guts to do it. Bob was right, though. I should have changed the name. It was a better name, tests were proving that Pizza Dispatch defined the concept much better than Domino’s ever will. But I didn’t want to get into a situation with the franchisees; they put a lot more value on a name than it really deserves; nevertheless, it’s the way they think and changing the name would have caused internal problems I just wasn’t up to facing.” Across the board, everthing switched back to Domino’s.

“Fighting the suit did an extraordinary thing in building our morale and confidence. When adversity dissipated, we felt like nothing could stop us,” says Cotman. “There always seemed to be an obstacle to our growth,” says Dave Black, vice president-operations, who started with Domino’s as a store manager 12 years ago. “After the Amstar case, that seemed to change.”

The organization

In 1980, Domino’s, now grown to almost 400 stores had $98 million in system-wide sales, decentralized. The company was broken down into six regional areas: Atlanta, Dallas, New York, Los Angeles, Chicago, and Columbus, Ohio. Field consultants, now in charge of a regional office, became known as regional directors. A controllr and coordinators for training, franchising, advertising and marketing were added to each regional office.

Marketing and Advertising

Black says that decentralization has helped operations. “It’s allowed us to keep supervision as close to the stores as possible, and that works very well,” he says.

Also about this time, Monaghan brought in Don Vlcek to tighten up commissary operatons. Vlcek, president of Domino’s Pizza Distribution Corp., asked Monaghan for a Six-month moratorium on building commissaries (there were 10 at the time). Fourteen months later, having concentrated efforts on training managers and increasing sales, commissary building resumed, going from 10 to 18 in six months.

“What had been happening, prior to our cleaning things up, was that anyone willing to relocate was given a key, an address and a plane ticket, and told ‘Here, go run a commissary,'” says Vlcek. “There wasn’t any training or guidance as to how you’d go about running a commissary. There wasn’t any paperwork system; managers weren’t even given a P and L.”

Vlcek and Doug Dawson, Domino’s vice president and treasurer, began quarterly training simenars. The sessions resembled mini business courses, covering topics ranging from basic business philosophy to the nuts and bolts of running a commissary.

Dawson joined Domino’s in ’78, when Monaghan’s primary goal was to develop a strong executive team. Dawson had been with Arthur Andersen & Co., and had worked on auditing Domino’s for two years.

“The company had outgrown its management team,” says Dawson. “When I came on board, there was a controller, a training director, and Tom ran operations. Tom needed a strong team to handle the growth.” From that point on, Monaghan has evolved from a hands-on operator to a corporate executive. Dawson handles finance, Black operations, and Cotman, who had formed his own company–now Dominos’ design firm–returned as Monaghan’s second-in-command.

Strategy for growth

Since franchises must come up through the Domino’s system, growth truly depends on consistently turning out quality people who have been adequately trained. That has been a priority of Domino’s for a long time. And, since the chain has become so large, there shouldn’t be a shortage of managers-turned franchisees.

To encourage franchisees to move managers through the system, Domino’s has established a sponsorship program. A franchisee who has trained a manager, and who will lose him when he decides to open his own store, receives a one percent share of the new franchisee’s royalty payments for four years.

“That helps to encourage franchisees to act more unselfishly,” says Cotman. “The program seems to work very well.” The franchise fee is $3,500, with a 5.5 percent annual royalty fee. A typical store requires about $160,000 in start-up costs.

Another, and more complex issue facing the chain is capturing the take-out customer. In rough figures, 30 percent of pizza consumers eat in restaurants, another 30 percent are carry-out customers, 16 percent have it delivered, and the rest buy frozen in stores or other ways.

“The leaves a lot of room for us,” says Cotman. “We’ve got to convince the carry-out customer that we can deliver a pizza faster than he can get it himself. We’ve also got to show him we can get it to him a lot hotter and in better shape. We’ve got to do quite a bit of attitude adjusting.”

One interesting note regarding this is the result of Domino’s drive-through windows. Only a few stores have them, but so far results have been surprising.

“We’ve noticed that sales have increased in those units,” says Cotman, “But the increases haven’t been generated through the drive-in windows, they’ve been in delivery.” What Cotman and other Domino’s executives believe is that pick-up customers are exposed to the store’s operations, and see drivers moving fast. That, they think, changes a customer’s mind about delivery.

Domino’s stores are opening with higher sales now (about $9,000 a week), partly because of increased awareness, partly because of greater opening store promotions and marketing. Domino’s does not advertise on television nationally, only radio, Franchisees contribute three percent of sales to an ad fund. About half is returned to support local ads.

But the chain–though growing rapidly–can do even more to capture the take-out market, says Cotman. “In a typical market where we’ve got a presence, stores are located about 1.5 miles apart. That frequently means that one store is servicing 20,000 addresses. But we’ve opened stores in areas covering only 2,000 addresses, and they’re doing the same sales as the others. That tells us that we can tighten delivery areas, put in more stores, and not hurt any one store’s sales. We’re losing some of the market to pick-up customers where we’re not placing stores closer together.”

Two years ago, Domino’s national awareness was about seven percent. Right now that is probably closer to 40 percent, and the company’s goal is 80 percent total national awareness by 1985. Awareness has grown along with unit increases.

Monaghan’s goal is to have 5,000 units within the next five years, at which point, he says, he’ll consider being chairman again and appoint another CEO, a position that will be filled from within the company. Though a public offering is imminent, Monaghan will not commit himself either way. Even company insiders are hard pressed to predict when the founder will make a move.

They stress the fact that Domino’s doesn’t need to make a public offering in order to grow. And it doesn’t. The company, whose equity has hovered around $25 million, even has a $52 million revolving loan, of which it used very little last year.

“We’ve got a lot of momentum. Everything we’ve done, we’ve done for the long term,” says Monaghan, the new owner of the Detroit Tigers baseball team. “We do one thing. Not many do.”

“What’s kept me going through the bad times was remembering what a great company we had at the beginning,” he says, noticeably moved by his own thoughts. “A lot of good people wanted to work for us, banks wanted to lend us money, investment bankers wanted to take us public. But mostly we had a lot of charisma in the community.

“Back then, Domino’s was a great company. Now we’re on the border of becoming one again.”