鉴于高估值、有限的收入增长潜力以及证券化债务带来的结构性风险（限制了资本配置灵活性），DPZ在当前价格下不值得持有。

But today, we're going to buck that trend and look at one of the holy grails of restaurant franchises, Domino's Pizza, and see whether it's worth investing in.

So, as Dominic's, which obviously was the original Domino's, scaled up, the original owner told Tom that he could no longer use the name as they didn't really want to create confusion with their customers. So, by 1965, the name Domino's was chosen. And so, you'll notice here that the name is actually very similar to Dominic's. And this was completely done intentionally. So, since Dominic had this kind of loyal customer base, Tom didn't want to end up losing those customers by choosing a name that would be buried somewhere else in the phone book under some different letter. So he figured Domino's works because it would be close enough to Dominic's in the phone book.

So Tom also discovered just how powerful the franchise business model was and decided to start maybe taking advantage of it himself. So he met Ray Croc of McDonald's and John Brown of KFC. And being kind of a younger man, he noted that they were flying a private jet and being chauffeur and Rolls-Royces. And you know, he felt like that was a lifestyle that he kind of wanted, but three stores was definitely not going to get him there. His first franchise had pretty low franchise fees of just about 2 and a half% with a 2% advertising fee. This is about half of today's industry standard.

Now, I could get into a lot more detail here with the history of Dominoes, but the business model has definitely changed a lot over the years. So, needless to say, I think Tom Monahan was once a large part of the Domino story, but he ended up selling about 93% of his stake in the business to Bane Capital in 1998, and now he's not really any part of the business. And Domino's is interesting because even though they've essentially been completely disassociated from their founder for almost 30 years, the business has still been incredibly successful over that time and creating shareholder value.

And we spent a lot of time on this show talking about the magic of founder businesses. And Domino's is is very much not that. On the other hand though, it is a business where if you just looked at the top line, I don't think you would be blown away by it. 6% revenue growth per year over the last two decades is okay, but it's definitely not inspiring by any means.

Yeah, I have no argument there, which is probably why I probably never really took a huge interest in this business, despite the fact I've been a pretty large consumer of Dominoes all through my 20s. But Domino's takes advantage of one thing that is missing from a lot of businesses, and that's a serious focus on capital allocation. And I mean, how else really can you describe their ability to increase their earnings per share by 15% over that exact same time period when they were just delivering 6% revenue growth?

Yes, they do. So, the first thing to know about Domino's is that it's actually the largest pizza company in the world with over 22,300 locations in 90 different markets.

So, when most people think of pizza, they may think of other competitors like a Pizza Hut or a Little Caesars. Now, together with Domino's, these three are the largest pizza chains in the world by store count, and they all kind of have their own different niches despite a little bit of overlap. For instance, Pizza Hut dominates the dinein pizza market. Little Caesars is kind of the leader in lowcost carry out options and then Domino's focuses mostly on delivery. And since Domino's really started as a delivery food business, it makes sense that it has stayed true to its DNA to this day.

But getting back to your original question, so Domino's focuses on the franchise model where it acts as a franchiser. So 99% of all the Domino stores that are out there are owned and operated by independent franchises. The franchisee model makes a lot of sense because as I mentioned earlier, Domino's provides their franchises with a few things. things like, you know, training, supplies, fresh ingredients, and then the marketing aspect. But they don't take part in actually owning the stores, which obviously saves a ton of money and is a big reason why Domino's has these really, really big gross margins at about 40% and free cash flow margins of about 13%.

Domino's is basically the engine in the back helping the franchises operate well. And both sides, I think, are well aligned. Domino's makes more money when their franchises make more money. And when franchises make less money, Domino's collects lower franchise fees. So yes, Domino's is a royalty business, but they are closely tied to the underlying performance of their franchises. So it's not like they've been able to completely hedge out all of the risk in this business model.

Right? So for starters to understand why I think Domino's wants to be vertically integrated you have to remember that a franchise business works best when everything is really in sync. So for a brand to work well across America, the pizza should really taste the same whether you're in Alaska, Hawaii or New York. And I think this is why they have the supply chain operations in the first place, just to really ensure consistency across their franchises.

So you know, Domino's actually went through a period where its pizza just kind of got out of favor with their customers and they had to make large adjustments to the original recipe just so that customers would actually enjoy the pizza again.

So I think the supply chain, it's not seen as a profit center. Obviously, it has these kind of lower margin profiles, but it's a very important function inside of Domino's. And that's really just guarantee that there's the right amount of quality and the right consistency in their overall product that the consumer will ultimately consume.

So, the interesting thing also to consider when you look at Domino's is that the supply chain isn't global. So, the supply chain is only really in North America. So, as of 2025, they have about 22 dough manufacturing and supply chain centers, two thin crust facilities, and one vegetable processing center in the US. And then in Canada they have five dough manufacturing and supply chain centers.

And just for context for the listeners I read that in those supply chain centers they're operating over,00 tractor trailers that supply more than 7,800 stores with dough and all the other complimentary products needed to maintain Dominoes quality.

And so my question for you is, has Domino's instituted some sort of strategy where they're able to avoid putting too much undue pressure on their franchises and better balance that relationship? I'm glad you asked this, Sean, because I think it's really important in terms of maintaining a healthy relationship and how they've actually basically outline the system. So from what I read, it doesn't appear that franchises are required to buy from the Domino supply centers, but it looks like most of them end up doing it anyways, and there's a really, really good reason for that.

So they have a profit sharing plan with their franchises who purchase their food from the supply centers. So their disclosures say that they offer franchises approximately 50% of the operating income from their supply chain operations.

And I think this is actually pretty brilliant because it means that if the franchisee increases how much of the product they are buying from the supply chain centers, they're also increasing their own share of the operating profits as part of that plan.

So, the disclosure mentions that franchises voluntarily choose Dominoes, meaning they could go elsewhere, but they wouldn't get the same benefits that they would get from a different supplier.

I do think it is interesting because it seems like a quality control issue here that you wouldn't want to make optional, right? I would have assumed that franchises didn't even have the choice to source ingredients elsewhere that they would have had to order all their ingredients through the same supplier.

So, how does that work with their international locations though, right? If they don't source their ingredients from the same suppliers, that's hard enough to domestically. How do you manage that and maintain quality standards abroad?

Yeah. So, I actually have a really good story about this. So, my wife a couple years ago was traveling with her sister for a wedding a few years ago. And after the wedding, they ended up in Athens, Greece. And so, while they were there, they went to a Domino's and she said, hands down, it was by far the best Domino's pizza that she'd ever had.

And you know, she's had Domino's with me in Vancouver. She's had it in Hawaii where she grew up. So she's had a lot of Domino's from all over the place. So it was really interesting that Athens, Greece of all places, would have Domino's pizza. That was the best that she ever ate.

So I found this kind of interesting at the time because I was thinking, well, why why is it that Domino's halfway around the world is going to taste different than, you know, a Domino's right around my block. And I think I figured the answer to that since researching Domino's specifically for this episode.

So internationally, Domino's has a whole bunch of franchises that are actually run by master franchises. So they kind of offload a lot of that franchising to these master franchises.

So in these cases, the master franchises are actually building out their own supply chain centers. And this is part of the reason that they pay a lower franchise fee to Domino's. It's much more of a pure royalty play, but that's why the margins are so high.

So, there's actually a number of publicly traded entities tied to Domino's effectively. Yeah, surprisingly, there are actually over half a dozen publicly listed companies that are master franchises.

How about we shift topics here and discuss some of the competitive advantages that Domino's has because there is no way that Domino's would be able to have the scale it has without at least some kind of barrier to entry or at least you would think.

And even though technically anybody can open a pizza shop pretty much anywhere around the world and after all there is no patent on dough and cheese and pepperoni. So, what is the special sauce that Domino's has that keeps customers coming back for more pizza?

But obviously, like you just mentioned, for Dominoes to scale up to over 22,000 locations, there's got to be something going on there. So, I would say that Domino's definitely does have some competitive advantages.

Some of them are obvious, some of them are less obvious. I think the less obvious ones tend to be more interesting. So, let's just start there. The first advantage that Domino's has is something they call fortressing.

So instead of spacing their stores far apart in order to reduce cannibalization, which you kind of intuitively think makes sense, they actually take a completely different approach and purposely open stores that are closer and closer to each other.

So the reason for this is that it helps maintain very very high store level economics while actually improving the customer experience. But think of this from a customer's point of view. You know, instead of ordering a pizza from maybe 10 km away, you can order from just 2 km away. And that means that your pizza is going to arrive faster. It's going to arrive hotter. Or if you're thinking of doing carry out, then you're obviously much more likely to visit that location that's in closer proximity.

Well, so with how easy it is to order a meal straight to your house using Uber Eats or Door Dash, why does it matter if Domino's itself is really close to you or not? And just in terms of delivery?

Yeah, it's a valid concern, but I think Domino's has actually turned this risk into some sort of advantage. I'm very hesitant to say it's a competitive advantage, but some sort of advantage.

So, what they've done is they've got these multinational agreements with both Uber and Door Dash to get their product to their customers while also taking advantage of the network effects of those two apps, which are vast, much more than Domino's would ever get on its own.

So, in their Q2 2026 earnings call, CEO Russell Weiner said that they believe that they are the number one pizza company on both Uber and on Door Dash.

Now, being number one should be an advantage as that hopefully means the algorithm is going to push more users towards Domino's when they want to look for pizza. But obviously the algo can change based on customer preferences.

Now Domino's is different from most of the businesses that are located on either Uber or Door Dash. And that's because it actually uses its own delivery drivers to deliver its product.

So obviously Domino's, yes, they pay them a fee to use their platforms, but they feel that it's worth it. Domino's actually sees the aggregators as another growth lever to onboard hopefully more and more customers into Domino's who normally wouldn't be Domino's customers.

But I think part of Domino's moat isn't necessarily about aggregators like Uber or Door Dash or whether, you know, Domino's own delivery services are good enough. I think you really need to look at the unit economics of a Domino's store because from a franchisees perspective, they'll want to open a store that offers them the most amount of upside.

I think we're seeing a theme here where over and over again, Domino's chooses to ensure quality over everything else, right? They could outsource delivery to Uber Eats drivers like most restaurants do, but instead they choose to fulfill each of the deliveries through their own Domino's employees.

So, it's a no-brainer to tie into Uber Eats and Door Dash as a way to reach more customers. But, I don't know. I guess it's not totally clear to me how much of an advantage it is for Domino's to be fulfilling orders themselves rather than allowing third party drivers to pick them up because it's not like Domino's drivers can drive faster or have some secret way to speed along the delivery.

They're bound by the laws of the road and physics. So, I'm not really sure how they justify this when they could save so much on labor cost by relying on fewer delivery drivers and outsourcing the whole process.

Yeah, you make a really, really good point there, Sean. And it was really interesting cuz if you go back far enough, Don was used to actually guarantee 30-minute deliveries, but unfortunately, they had a lot of drivers who were basically putting themselves at risk, and I think they had some fatalities, and they essentially just had to completely get rid of that.

So, you're completely right. I mean, in terms of the speed, I think there's no difference between how fast Dominoes can do it versus how fast a delivery driver can do it. But I think getting to your point there about customer service, I think that's what's really important.

So, I'm not sure, Sean, about how much luck you've had with delivery. I've actually personally had some pretty good luck, but my wife, oh my god, she's got some absolute horror stories. So, one time she ordered food, I can't remember what it was, and the delivery diver essentially brought her food to someone else and then brought the other person's food to her. When they messaged the delivery driver about this, he was like, "Oh, I'm so sorry. I'm going to go grab the food from the other person and bring it back." Which he did. And when they opened the food up, it would literally was half eaten.

She's had food arrive like completely cold. She's had food that literally took 2 hours to come. And then she's had a one event happen where the delivery driver came, dropped the food off, 5 seconds later, they were basically texting her all annoyed because she hadn't tipped them like immediately after that they delivered the food.

So needless to say, you know, my wife, she hasn't had very much luck, so I tend to do the ordering cuz I have much better luck than her. But the point being here, you know, my guess here is that since Domino's is so focused on delivering the best possible customer experience, they just want to use their own drivers and their own system to help ensure that customers get their pizza delivery in a timely manner with absolutely minimal amounts of friction.

So Domino's even has its own operating system which they can use to help delay putting pizza in the oven if their pizza drivers are running a little bit late to ensure that the food is hot and fresh once that pizza gets delivered to their customers.

So you know that's just my guess as to why they want to keep delivering pizzas inhouse and rather than having third party delivery drivers. Gosh, after hearing those horror stories, I I think I'm pretty relieved that my experiences have been more mundane, but I can definitely imagine how a lot of things can go wrong with third party food delivery.

So, getting back to something important here, which is looking at Domino's from the franchisees point of view, if you wanted to open a new franchise, what really shapes the rationale for which brand you would go with? I mean, why choose Domino's over Pizza Hut?

Well, if you're looking to open up a pizza franchise, you really have three really, really good options. Of course, there's other smaller ones, but the biggest ones are going to be Domino's Pizza, Pizza Hut, or Little Caesars.

So, from some of the information that I could find on Pizza Hut, the average revenue is around a million versus 1.4 million for Domino's. So, based on an average investment of, let's call it $500,000 plus a onetime franchise fees, then the recurring fees on your revenue, you'll make somewhere around $165,000 in Ebida annually. And in that case, you're looking at a payback period of about 4 to 6 years.

Now, since these three companies have such a high share of the pizza market, there's a pretty good chance that someone would probably want to go with one of them if they wanted to open up a pizza franchise. And since the average Domino's makes 40% more revenue, you can see why a potential franchisee might choose Domino's over the others.

And then, if you're thinking about opening an independent store, well, you know, you skip all the advertising and scale benefits that Domino's has to offer. And that's not to say that an independent can't work. You know, obviously Sean, I think you told me about a pizza place that's independent around your house that you usually use. But obviously, I think from someone opening it, there's a lot more risk to going the independent route versus going with the franchise route.

And so, like I mentioned, you know, if you go with the franchise route, you have that turnkey solution where they're kind of giving you the blueprint to how to succeed. Whereas, if you go independent, well, you're figuring that all out completely on your own.

Yeah. And restaurants try to cultivate loyalty programs. And there are some diehard fans that are religiously loyal to one brand of pizza or cheeseburgers or whatever it is. And it sounds like you might have been a pretty diehard Domino's fan back in the day, but there's also still really no lack of alternatives either.

I mean, you're not just competing with other pizza chains, but literally any food that someone could choose to buy and also the option to cook at home if eating out becomes too expensive. with the point being there is no customer lock in like with Intuit QuickBooks where a user might have run their company's bookkeeping through the QuickBooks software for decades in some cases. And that just makes it very very hard to switch away from their platform.

And if there's something new and exciting out there or a pizza available at a special discount, even most fans of Domino's aren't going to exclusively eat at Domino's. Recurring customers can change on a whim.

So at a high level, I I still am trying to understand, you know, what is it that really keeps customers coming back to Domino's?

Yeah, there's, you know, definitely zero switching cost to ordering a pizza from somebody else. And yet Domino's, for whatever reason, keep selling more and more pizza. So based on some of the data, again, this is data that Domino's provided from their latest investor presentation, they claim to have captured another 1.6% 6% of the market, whereas other national brands have actually lost share along with some of these kind of more regional brands.

So, I think Domino's in simplicity and probably to some degree in mind share. If you don't want to think about dinner on a Friday night after a long busy week, it's kind of easy to just open up the Domino's app and just go to town ordering whatever you want on the app. You know what you'll get and you'll know that it'll be delivered on time and fresh.

I do think brand recognition is a real advantage for sure, but you do have to spend a lot on marketing to maintain that advantage and Domino's certainly does do that as just a recurring cost of business and it does help to have a decent product behind all that marketing.

And with Domino's, they have done a really good job improving the perceived quality of their pizza in the last few years. I would say just my own experience, I think the pizza tastes a lot better than it did maybe a decade or so ago.

I want to make sure though that we discuss a topic I'm sure our audience knows you're very passionate about Kyle and that is capital allocation and capital efficiency. So without looking at the numbers, my assumption is that the capital efficiency of a business like Domino's is pretty good simply because the franchise model doesn't require a lot of investment from the corporate perspective, right? The franchises are the ones putting up the money and the margins are super high specifically on the franchise part of the business.

Yeah, you're absolutely correct. And then to your point there on advertising, the franchises basically aggregate all their money together and that also takes care of a lot of the advertising as well, which obviously boosts the capital efficiency of Dominoes as well.

So yes, I mean the franchise part of the business is really about as capital light as you can possibly get, especially internationally where Domino's just leaves a supply chain

think I would be comfortable with it given the scale that it now has. If you have these large swings in customer preferences, it's going to be hard to maintain the need for customers to eat, let's face it, not the healthiest food. And while they can always rely on the college age demographic, once that demographic ages and is making more money, in my view, Domino's just becomes a much less attractive place to choose as a food option.

Given that I think this business is still expensive and is probably unlikely to grow that much in revenue, and my base case is basically no expansion of margins over the multiple, I'm fine just taking a complete pass on dominoes.

You know, I've been interested in Domino's a few times before, but I do have to say I never dug into the details around their whole business securitization approach to debt financing. And it is a great way to lower your borrowing costs, but there is a real cost to it. You're mortgaging your best assets. And so, these creditors get priority claims on the cash flows and can literally control how much cash is released to the parent company to ensure that they're paid back. And so yeah, that is a turnoff for me. Management not having full discretion over the business's cash effectively. And you know, that could very much impact their ability to share buybacks or dividends in the future.

And then on top of that, you have this lack of insider ownership. And then like I said, there's really not an obvious catalyst for the business going forward. If anything, there's more obvious headwinds.

And so, yeah, Domino's brand, I think, is really at odds with this movement toward eating healthier. and GLP1s as we've both alluded to. So, it's a pretty interesting case study, but unless it were a really bargain bin price, it's not something I would personally be invested in.

Um, yeah, if we could get at like eight times earnings, I would look at it, but not so much today. And so while it looks like Domino's has this really stable royalty revenue stream, if the underlying franchises hit rough spots, at the same time that Domino's has to roll over its debt, the sacrifices they've made to access cheaper debt financing will become more evident and will really hinder the company's ability to make shareholder distributions as I mentioned a moment ago. And I think that would lead to the stock just absolutely getting punished.

I would say that Domino's hits the first point on selling a product that is needed or desired, but I can't see how it fits into his other two criteria.