* Domino's UK confident of success in Germany
* Deals with high pay costs, different pizza tastes
* Halves 2020 opening target in Germany
By Neil Maidment and Victoria Bryan
LONDON/FRANKFURT, Sept 25 Can a British food
chain with U.S. origins sell Italian pizza to the Germans?
Domino's Pizza is sure it can, but two years after
launching a drive for explosive growth across Germany, Britain's
biggest pizza delivery firm accepts that expansion will take
longer and be harder than first expected.
"It's been about resetting expectations, taking a little bit
of medicine and getting on with growing it," Domino's Chief
Executive Lance Batchelor told Reuters.
Crucially, big shareholders of the London listed company - a
master franchisee of U.S. group Domino's Pizza Inc -
agree that there is a gap in the German market and it is a prize
worth waiting for.
Domino's has halved its original target of 400 stores by
2020, and pushed its break even forecast for the German business
back as much as two years to 2017.
The company is thriving in its home market and has almost
trebled profit in six years to 50 million pounds ($80 million),
feeding a core army of teenagers and young adults.
Its German growth has stumbled chiefly over a rise in
minimum pay for restaurant staff that is unexpectedly being
applied to pizza delivery firms.
It also took a while to grasp German preferences for
Italian-style thin crusts over the cheese-laden, deep pan pizza
popular in Britain, and for steadily low prices over promotions.
Batchelor believes that armed with better knowledge of
Germany's worker-friendly pay structures, a menu tailored to
local taste and experienced franchisees to run its stores, the
company can deliver in a market under served by big chains.
Not that there is any lack of pizza outlets in a country
that acquired a passion for pizza from Italian migrant workers
after World War Two.
A single busy street in western Berlin offers a choice
between Cafe Pasta Pizza, Pizzeria Senza Nome, Porto Fino,
Venezia, City Pizzeria or Mr Pizz. And now Domino's Pizza.
Pizza often heads Germany's favourite food lists. Its top
four pizza delivery brands achieved total turnover growth of 180
percent in the last decade, according to trade magazine Food
Margins are also rewarding. German market leader Joey's says
its stores can offer a pre-tax profit margin of 10-14 percent.
In 2012 Domino's comparable margin was 8.4 percent on sales
in the UK and Ireland, its core market, where it sold the
majority of 61 million pizzas last year.
That kind of demand, coupled with its ambitions for Germany,
a country with 14 million more homes than Britain, helped
Domino's shares hit an all-time high of 710 pence in June.
News that the recipe for success was going to be more
complicated has since pulled them down to 582 pence.
But Anthony Cross, special situations fund manager at
Liontrust AM, one of the 20 largest shareholders in Domino's,
said he would be patient while it gets the German formula right.
"(It's) the right menus, the right properties and a better
understanding of the vagaries of national employment costs,
taxes etc. Through trial and error they will get the right
formula and when cracked, the roll out will succeed," he said.
WILLKOMMEN IN DEUTSCHLAND!
Domino's biggest headache is pay in the most populous state,
North Rhine-Westphalia (NRW), where the company has 17 of its 25
German stores. Minimum hourly pay for hotel and restaurant
workers has just risen there to 8.50 euros, up from the average
6 euros paid by Domino's.
The jump, which could be replicated elsewhere given growing
calls for a nationwide minimum wage, will mean higher costs and
a slower roll-out as stores take longer to make a profit.
"I think we were overly bullish in the spring of 2011 when
we talked about hitting break even in 2015 - we needed
everything to go right in order to hit that and the NRW labour
change is the straw that broke the back of that," Batchelor
"Germany is seen as one of the top growth opportunities in
the world for Domino's," Batchelor, a former submarine warfare
officer with the Royal Navy, said. "(But) building another UK is
not going to happen overnight."
Still, 200 stores in its first nine years will be over
double the rate Domino's achieved in the UK in that time.
The slowdown to 10-12 openings over the next couple of years
is more in line with a steadier approach adopted by local
rivals, who face similar issues over pay levels but have had
longer to grow used to them.
"Welcome to Germany!," Joey's managing director Karsten
Freigang told Reuters as he spoke about staff costs.
Joey's took 25 years to get to 206 stores and is opening
10-15 a year. German No.2 Hallo Pizza has 174 after 24 years.
BRING IN THE EXPERTS
Another challenge is that Germany has more independent
stores fighting for customers, Joey's boss Freigang said.
Sales at pizza delivery chains in Germany reached $509
million in 2012, while independents racked up $693.6 million,
according to Euromonitor. That stands against $1.213 billion for
the chains and $515 million for the independents in Britain.
Domino's says there's room for everyone. To gee-up German
sales at its 25 stores, it is handing its 15 poor performing
directly-managed stores over to its expert franchisees.
Most of these managers, who pay to use Domino's brand and
ingredients, and then hand over a percentage of net sales, have
honed their skills in Britain, and their German stores have
fared much better than Domino's 15.
That approach reflects its set-up in the UK, where all
Domino's stores - 790 and rising - are run that way, and
Domino's hopes the formula will work again.