Inquiry into the Operation and Effectiveness of the Franchising Code of Conduct - Domino's Pizza Enterprises Limited's Submission to the ...
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Inquiry into the Operation and
Effectiveness of the
Franchising Code of Conduct
Domino's Pizza Enterprises Limited's Submission
to the Parliamentary Joint Committee on
Corporations and Financial Services
4 May 2018
Table of Contents
1. Executive Summary ................................................................................................................. 1
Inquiry's Terms of Reference - DPE's position and observations .............................................. 3
2. Introduction .............................................................................................................................. 7
DPE's History ............................................................................................................................. 7
DPE's Structure .......................................................................................................................... 7
Domino’s Business Model .......................................................................................................... 8
A Business, Not a Job ................................................................................................................ 8
The Franchisees' Voice .............................................................................................................. 9
Technology Innovation ............................................................................................................. 10
3. Domino’s Franchises ............................................................................................................. 10
Multi-Unit Franchisees ............................................................................................................. 11
External Franchisee Recruitment ............................................................................................. 12
Transparent Disclosure ............................................................................................................ 12
Domino’s Exclusive Territories ................................................................................................. 13
Performance Figures and Benchmarking ................................................................................ 15
Profitability ................................................................................................................................ 15
Training and Ongoing Support ................................................................................................. 15
Leasing Arrangements ............................................................................................................. 17
Procurement ............................................................................................................................. 17
Compliance and Monitoring ..................................................................................................... 18
Domino’s Marketing Fund ........................................................................................................ 19
Sub-Franchise Agreements - Breach and termination ............................................................. 20
4. Lessons Learnt ....................................................................................................................... 21
Appendix A - Case Studies ................................................................................................................ 22
Case study A – Under New Ownership: A focus on costs ....................................................... 22
Case Study B – A Multi-Unit Franchise Owner ........................................................................ 22
Case study C – An Unsuccessful Franchise Partnership ........................................................ 231. Executive Summary
1.1 Domino’s Pizza Enterprises Ltd (DPE)1 welcomes the opportunity to respond to, and assist, the
Parliamentary Joint Committee on Corporations and Financial Services’ Inquiry into the
operation and effectiveness of the Franchising Code of Conduct (Franchising Code).
1.2 The franchising sector makes a significant contribution to the Australian economy and it is
important to:
(a) examine whether the structure and regulation of the industry has kept pace with
external market developments;
(b) ensure a fair and balanced consideration of the strengths and weaknesses of franchise
systems; and
(c) consider any opportunities for improving regulation of the industry.
1.3 Overall, DPE considers the Franchising Code provides an appropriate framework for the
industry although it does believe there are opportunities to enhance that framework. These
include:
(a) strengthening the minimum disclosures that must be provided to prospective
franchisees;
(b) mandating that all new franchisees should obtain independent legal, business and
accounting advice; and
(c) providing mechanisms for franchisors to terminate (sub)franchise agreements when
franchisees do not comply with their legal obligations, particularly in relation to the
underpayment of wages and other forms of worker exploitation.
1.4 DPE is a franchisor with many ex-franchisees in its management team who understand that all
stakeholders – franchisees, employees, suppliers and other contractors, and shareholders –
need to receive an appropriate return for the model to be sustainable. To February 2017,
Australia's average annual store profitability is $137,000 in the Domino's franchise system.
1.5 It is important to note that DPE is itself also a franchisee, with its master franchisor based in
the United States.2 Being a franchisee means DPE understands the franchise model
thoroughly; the challenges, advantages and relationship management experience needed to
help it succeed. It also creates a level of empathy for its own franchisees.
1.6 While DPE recognises that there is always scope to develop and improve (indeed it makes a
significant investment in the ongoing continuous improvement of its systems), DPE believes
that in the overwhelming majority of cases it achieves an appropriate balance in its relationships
with franchisees and other third-parties.
1.7 In this submission, DPE:
(a) provides a detailed explanation of DPE’s business model and its relationships with
franchisees and other stakeholders;
(b) outlines the support that DPE provides to Domino's franchisees; and
1
In these submissions, "DPE" is used as a reference to the company, Domino's Enterprises Limited. A reference to "Domino's"
in the submissions is a reference to the Domino's brand.
2
Because of this, the agreements between DPE and franchisees in Australia are termed sub-franchise agreements. Where the
submission makes reference to the sub-franchise agreement or its terms, it is referring to the current standard form of the sub-
franchise agreement which was last updated on 23 April 2018.
1(c) summarises in the table below, DPE's position and observations in relation to the
Inquiry’s Terms of Reference.
2Inquiry's Terms of Reference - DPE's position and observations
Terms of Reference DPE's position and observations
(a) the operation and effectiveness of the Franchising Code, DPE is not familiar with the Oil Code as it is not relevant to our industry and,
including the disclosure document and information accordingly, makes no observations in relation to it within this submission.
statement, and the Oil Code of Conduct, in ensuring full
DPE considers that the Franchising Code including the disclosure document and the
disclosure to potential franchisees of all information
information statement, provides an appropriate framework for the industry. DPE
necessary to make a fully-informed decision when assessing
recognises, however, that, as with all systems and processes, continuous
whether to enter a franchise agreement, including
improvement opportunities are available as business and industry evolves.
information on:
Currently, under the Franchising Code franchisees may choose whether to obtain
independent legal, business and accounting advice. In view of the benefits that a
franchisee can receive by obtaining this type of independent professional advice,
there is an opportunity to enhance the effectiveness of the Franchising Code by
making it mandatory that all new franchisees obtain this advice.
Similarly, under the Franchising Code the provision of historical earnings information
to a prospective franchisee is optional. There are, of course, circumstances in which
a franchisor will not hold earnings information (for example, where the proposed sale
of the franchise is a direct sale between an existing franchisee to a new franchisee,
or where a new franchise is being sold and there is, accordingly, no historical sales
data). While the Franchising Code cannot prescribe the mandatory provision of
earnings data that does not exist or is not held by the franchisee, there may be a
benefit in the Franchising Code providing for the mandatory provision of earnings
information where it is held.
(i) likely financial performance of a franchise and worse-case All prospective Domino's franchisees receive a document containing average costs
scenarios, across all stores with the same weekly sales (to the nearest $2,500 or $5,000 per
week) for the last completed financial year. Where the franchise store is being
purchased from DPE, prospective Domino's franchisees also receive a document
which includes profit and loss statements for the previous two years. See paragraph
3.10 to 3.11 for more details.
DPE considers that legal, business and accounting professionals are best placed to
give advice as to worse-case scenarios to prospective franchisees. Mandating the
requirement for new franchisees to obtain legal, business and accounting advice will
assist franchisees in understanding their worse-case scenarios.
3(ii) the contractual rights and obligations of all parties, including DPE considers that the disclosure it provides in accordance with the Franchising
termination rights and geographical exclusivity, Code enables franchisees to understand their contractual rights and obligations. In
particular, DPE's disclosure document contains a concise summary of all the relevant
sections in the sub-franchise agreement required to be brought to a prospective
franchisees’ attention. The disclosure document also contains a copy of the sub-
franchise agreement in the form it is to be executed in. DPE also provides prospective
franchisees the history of the relevant site and geographical territory for the previous
ten years.
Termination rights
The sub-franchise agreement sets out the circumstances in which the parties may
terminate the agreement. Franchisees are able to terminate on three months' notice
where DPE unreasonably alters the requirements of the agreement in a manner which
prevents the franchisee from conducting its business.
DPE also has contractual rights of termination which are outlined in its disclosure
document including for example where food safety and handling standards have been
breached. In the past 24 months, all 11 of the franchisees in Australia who have had
their agreements terminated were able to repay their financiers from the proceeds of
their store settlement. See paragraph 3.75 to 3.80 for more details.
Geographical exclusivity
Domino's franchisees purchase an agreed territory for an agreed time (up to 10
years). Subject to discrete contractual exclusions, during the period of the sub-
franchise agreement, Domino's corporate stores or other Domino’s franchisees are
not permitted to open another store in that territory. See paragraph 3.12 to 3.20 for
more details.
(iii) the leasing arrangements and any limitations of the In DPE's view, the disclosure document it provides in accordance with the Franchising
franchisee’s ability to enforce tenants’ rights, and Code contains sufficient information for a franchisee to make an informed decision
with respect to leasing arrangements. The Franchising Code requires the disclosure
document to contain leasing information pertinent to the franchisee. In all cases
disclosure will include a copy of the Store Licence Agreement (including a copy of the
Headlease, and any ancillary storage or car park licences).
DPE holds the lease for approximately 75% of Australian stores. This is primarily to
ensure the contingent liability remains with DPE. This also allows most leases to be
secured without a bank guarantee from the franchisee. Franchisees may also benefit
from the lease cost savings secured through DPE's scale compared to the negotiating
4leverage available to an independent business owner. See paragraph 3.45 to 3.48 for
more details.
(iv) the expected running costs, including cost of goods required In accordance with the Franchising Code, the DPE disclosure document contains all
to be purchased through prescribed suppliers; information on prepayments, establishment and ongoing costs associated with the
operation of a Domino’s franchise.
All prospective Domino's franchisees receive a document containing average costs
across all stores with the same weekly sales (to the nearest $2,500 or $5,000 per
week) for the last completed financial year. Where the franchise store is being
purchased from DPE, prospective Domino's franchisees also receive a document
which includes profit and loss statements for the previous two years. See paragraph
3.10 to 3.11 for more details.
Subject to contractual obligations to ensure both product and safety standards are
met, franchisees are able to purchase goods from the supplier of their choosing,
provided the products are like-for-like. See paragraph 3.49 to Error! Reference s
ource not found.for more details.
(b) the effectiveness of dispute resolution under the Franchising Over the past 24 months, four disputes have arisen between DPE and a franchisee
Code and the Oil Code of Conduct; that have required independent dispute resolution. In all four cases, DPE has
engaged in the mediation process required by the Franchising Code as a result of
which the disputes have been resolved.
DPE's experience is that mediation has resulted in a fast, mutually agreeable
resolution of items in dispute on every occasion. Other advantages of the mediation
process prescribed under the Franchising Code are that it is cost effective and
confidential.
(c) the impact of the Australian consumer law unfair contract In DPE's experience, the impact of the unfair contract provisions has been negligible
provisions on new, renewed and terminated franchise in respect of changes required to the sub-franchise agreement.
agreements entered into since 12 November 2016, including
whether changes to standard franchise agreements have
resulted;
(d) whether the provisions of other mandatory industry codes of DPE is not familiar with the Oil Code as it is not relevant to our industry and,
conduct, such as the Oil Code, contain advantages or accordingly, makes no observations in relation to it.
disadvantages relevant to franchising relationships in
comparison with terms of the Franchising Code;
5(e) the adequacy and operation of termination provisions in the Given recent changes in legislation, DPE believes the Franchising Code should allow
Franchising Code and the Oil Code of Conduct; for immediate franchise terminations for unlawful acts such as the deliberate
underpayment of employees and contractors. For example, the existing termination
right for a fraudulent act should be elaborated upon to include the deliberate
underpayment of employee entitlements. See page 3.61 to 3.65 for more details.
DPE's ability to act decisively and swiftly where a franchisee is discovered to be
underpaying its employees, would be enhanced if the Franchising Code recognised
this serious issue as a reason, in and of itself, to immediately terminate a sub-
franchise agreement.
(f) the imposition of restraints of trade on former franchisees DPE's standard form sub-franchise agreement contains a restraint of trade provision
following the termination of a franchise agreement; following termination. In practice, this restraint has not been exercised by DPE in the
last three years following the termination of a sub-franchise agreement (and has only
been used on rare occasions in previous years).
(g) the enforcement of breaches of the Franchising Code and the In DPE's experience, it is regularly audited and reviewed for compliance with the
Oil Code of Conduct and other applicable laws, such as Franchising Code. DPE considers that the level of enforcement of breaches of the
the Competition and Consumer Act 2010, and franchisors; Franchising Code is appropriate, but is always open to discussion regarding how the
and processes may be further improved.
DPE makes no observations in relation to the Oil Code.
(h) any related matter. DPE's submission includes further detail of its business model and the support
provided to franchisees.
62. Introduction
2.1 The franchising industry is important to DPE.
2.2 The failure rate of small businesses is high, with the most common reasons for business failure
being: “financial mismanagement, bad management, poor record-keeping, sales and marketing
problems, staffing problems, failure to seek external advice, general economic conditions and
personal factors”3.
2.3 As with any small business, a Domino’s franchise is not a guarantee of success. However,
DPE's systems, including the ongoing training and support:
(a) provide a far greater opportunity for franchisees to avoid common reasons for small
business failure; and
(b) afford Domino’s franchisees the benefits of small business ownership (including the
ability to influence their own financial success) with the scale, buying power and
structures otherwise not available to small businesses.
DPE's History
2.4 DPE has a long history in Australia. Fel and Silvio Bevacqua opened a “Silvio’s” pizza store in
Brisbane in 1978, and soon after became the first Australian pizza store to deliver pizza to
homes. The Silvio’s chain of stores grew to about 80 stores by 1995. The company that is now
DPE was established by the Bevacqua brothers in 1983 to operate the Silvio’s chain.
2.5 The first Australian Domino’s store opened in Springwood, Queensland, on 27 December 1983.
From 1995, the Silvio’s stores were converted to Domino’s and, in 1998, the company that is
now called DPE obtained the master franchise for Australia and New Zealand. In 2001, DPE’s
then two largest franchisees Don Meij (now Group CEO and Managing Director), and Grant
Bourke (now an Independent Director) merged their stores into the business.
2.6 In 2005 DPE listed on the Australian Securities Exchange.
DPE's Structure
Domino's Pizza
Enterprises Ltd
(ASX:DMP)
Japan Australia/New
Total stores: 503 Zealand
Domino's Europe Total stores: 799
Franchised: 197 (France, Belgium, Franchised: 733
Netherlands,
Germany)
Total stores: 891
Franchised: 825
Figure 1- Store count as at 31 December 2017, reported at H118
3
Start me up!: https://www.uts.edu.au/sites/default/files/Start_me_up.pdf (accessed 13 March, 2018)
72.7 As illustrated in Figure 1, DPE holds the exclusive master franchise rights for the Domino's
brand and network in Australia, New Zealand, Belgium, France, the Netherlands, Japan and
Germany (this last country is operated by DPE under a joint venture with Domino’s Pizza Group
plc, an English company, with DPE owning two thirds of the business). It is the largest master
franchisee for the Domino's Pizza brand in the world. The Domino's Pizza brand is owned by
Domino's Pizza, Inc, a listed US company.
2.8 DPE operates around 800 stores in Australia/New Zealand (which as at 31 December 2017
comprised 66 corporate stores and the remainder are franchise stores). It is the largest pizza
chain in Australia in terms of network store numbers and network sales. Primary sources of
revenue for DPE are the:
(a) corporate stores' sales; and
(b) the royalties levied on franchisee sales, which is a maximum of 7% of the franchisees'
gross sales.
2.9 DPE's preference is to have a mix of corporate and franchised stores, with the latter making up
the majority of the store network. In DPE's experience across its seven international markets,
franchised stores are more profitable, efficient and innovative, which strengthens the entire
store network.
2.10 However, corporate stores are also an important component of DPE's success. They provide
an opportunity for DPE to establish flagship premises, as well as trial new menu items,
technology and promotional activities, to ensure they will be profitable for a franchised store.
Corporate stores also ensure DPE remains in touch with all aspect of the business, including
the impact of key costs on store profitability.
2.11 As a public company, information is provided to investors on a regular basis via the Australian
Securities Exchange on a twice-yearly reporting cycle and in its annual general meetings.
2.12 In 2017, Domino’s stores contributed in excess of $500 million to the Australian economy,
through wages of more than 15,000 team members, and the purchase of Australian-made food
and packaging materials.
Domino’s Business Model
Franchisee Profitability
2.13 DPE is keenly aware of the importance of franchisee profitability, and it is the focus of its
business model. It is of mutual benefit to the Company and its franchisees to have a thriving,
profitable franchisee network. Profitable franchisees are more able to invest in further growth,
and expansion, allowing Domino’s to reach more customers in more locations, and to leverage
this growth to invest in product and technology development, reduce costs, and increase
marketing – to the benefit of franchisees.
High-Volume Mentality
2.14 DPE operates a ‘High-Volume Mentality’ (HVM) model, which aims to increase profitability by
delivering affordable products to increase customer count (rather than increasing margins for
existing sales). DPE's experience and research shows that the HVM model places it in a better
position to deliver long term profit growth.
A Business, Not a Job
2.15 A Domino’s franchise is not buying a job, nor is it a passive investment; it is actively running a
small business. This enterprise carries with it the rewards and risks that any other business
ownership involves. Over the past 30 years of operations in Australia, Domino’s has provided
opportunities to many hundreds of franchisees, who have used those opportunities to build
careers, employ others, and establish financial security for them and their families.
82.16 Successful small business owners are ‘hands-on’ in their business, to best drive performance
(operational and financial) and a continued focus on the fundamentals of business success,
including customer service, product quality and marketing. A Domino’s franchise is no different,
with the most successful franchisees active in their business even as their network of stores
expands. This ensures they, as with any successful small business owner, know their business
and the community in which they operate, and are best-placed to identify and implement
improvements as they arise.
2.17 Domino’s franchisees may choose to buy, sell, expand or enter a joint venture with others.
Domino’s franchises are bought and sold to suit the owners’ personal circumstances. The
market determines the price paid for existing Domino’s franchises, typically taking into account
a multiple of average weekly sales.
2.18 There is not a ‘one-size fits all’ approach to Domino’s franchise ownerships. Domino’s has
franchisees who are:
(a) actively expanding their store network (individually or in partnership with other
Domino’s franchisees, many aspiring to build multi-store, medium-sized enterprises);
(b) reducing their store network (including those transitioning to retirement);
(c) partnering with younger store managers as joint venture partners; or
(d) maintaining their existing footprint while enhancing profitability and actively opening
greenfield stores to build profitable businesses suitable for sale (and associated capital
growth).
2.19 This flexibility allows Domino’s franchisees to realise the capital growth of their investment, and
allows DPE to build a diverse network of experienced franchise operators and entrepreneurs.
The Franchisees' Voice
Market Franchise Advisory Council
2.20 The Domino’s Market Franchise Advisory Council (MFAC) system has been in place since
DPE's inception as Silvio's Pizza. There are eight MFACs in the Domino’s Australian network
and DPE representatives meet with the franchisees of those MFACs on a monthly basis. The
meetings are an opportunity for franchisees in the same market to review the performance of
the business (often related to the market), co-ordinate market activities and share best practice
learnings. This process is driven by the franchise community. The franchisees elect a MFAC
Chair who, in the vast majority of cases, also sits on the Domino's Franchise Advisory Council
(see paragraph 2.22 below).
2.21 The MFACs are an important way for management to understand current market specific issues
and the minutes from meetings are sent to the DPE leadership team and other key DPE team
members for actions and/or responses.
Franchise Advisory Council
2.22 In 2009, DPE established the Domino’s Franchise Advisory Council (FAC) in response to calls
for more structure and positive involvement, engagement and decision making by franchisees
in the business' strategy. The FAC is a group of franchisees elected by their peers for each of
the major Domino’s markets in Australia and New Zealand. The FAC members represent those
markets in offering advice and recommendations to DPE to improve the system in which the
business operates.
2.23 The FAC acts as an interface between a franchisee and franchisor outside the normal
relationship between the franchisee and the franchisor’s field support personnel. The FAC
provides a forum for franchisee voices to be collectively heard by the franchisor at senior
management level.
92.24 The FAC meets on a monthly basis, or more frequently as required, to discuss operational
improvements. From time to time FAC members are invited to vote on topical issues and
options put forward to the system.
Technology Innovation
2.25 DPE is committed to the continual development of technology for the benefit of both franchisees
and customers. Recent examples are set out below.
Operations 360
2.26 In 2017, DPE launched Operations 360, a new set of business intelligence and benchmarks to
enhance Domino’s store operations, transparency and profitability for franchisees.
2.27 Operations 360 gives Domino’s Franchisees more detailed information about its business
operations, and clearer benchmarks to measure performance against peers, including those
relating to profitability.
2.28 The new system includes a series of transparent measures, readily understood by all
franchisees, that provide a 360-degree overview of their performance, from customer feedback
scores and food safety, to sales growth, through to maximising their local delivery areas.
2.29 DPE has dedicated business consultants, with access to this information, who work one-on-
one with franchisees to identify areas in which franchisees can improve profitability.
Project 3-10
2.30 With a focus on technology for its customers and its franchisees, in 2016 DPE announced its
commitment to Project 3-10, a suite of initiatives designed to enable orders to be cooked and:
(a) ready for pick-up in three minutes; or
(b) delivered to homes in 10 minutes
2.31 The Company’s commitment to this Project enables customers to receive fresher, hotter pizza
and is a huge driver for innovative development and creating operational efficiencies in stores.
2.32 The core idea behind this innovation is a culmination of significant changes in operations due
to advanced technology in stores. Everything from the introduction of faster ovens, electric push
bikes, improved IT systems, innovations in digital platforms and a greater level of transparency.
This focus has already seen a decrease in service times, estimated delivery times and a rise in
customer satisfaction.
3. Domino’s Franchises
3.1 There’s 10 clearly defined and outlined categories of benefits of the DPE business model
explained throughout this section.
Benefit Submission Outcome
Paragraph
Reference
a. a world-class brand that is the [2.7]-[2.12] Global Best Practice – continuing
market leader in Australia improvement processes, proven
and trusted brand
b. global economies of scale [2.7]-[2.12], [3.30]- Economies of scale,
derived from being part of not [3.32], [3.49]-[3.57] competitiveness, franchisee
profitability
10only the largest pizza group in
Australia, but the world
c. access to customer-facing [2.25]-[2.32], [3.28]- Operational efficiencies,
technology that has helped [3.29], [3.43]-[3.44] franchisee profitability
Domino’s franchisees grow
sales
d. clear policies and procedures [3.8]-[3.11], [3.28]- Transparency, knowledge of
covering all aspects of the [3.29], [3.58]-[3.62] obligations, highest standards set
business and monitored
e. business technology including [2.25]-[2.32], [3.28]- A brand that invests back into the
access systems and software [3.29], [3.43]-[3.44], business, creating operational
across different aspects of the [3.59] efficiencies and customer focus
business such as rostering, (attraction and retention),
point of sale, online ordering, franchisee profitability
GPS Driver Tracker, online
stock ordering and marketing
f. access to advice/support for [3.8]-[3.11], [3.33]- Compliance, knowledge of
legal, financial, operational, [3.44], [3.45]-[3.48] obligations, highest standards set
insurance and leasing and monitored
requirements
g. one-on-one business coaching [3.33]-[3.42], [3.76], Ongoing support and education –
[4.2], Case Study C safety net against failure
h. a marketing team that provides [3.66]-[3.68] National marketing support,
support across all marketing transparent disclosure in adfund
channels at a national, reports
regional, and local level
i. analysis covering key [3.28]-[3.29] Compliance, strong guidance and
operational and financial recourse, confidence meeting
metrics regulatory standards and best
practices
j. a procurement and supply [3.49]-[3.57] Economies of scale, competitive
chain that provides a one-stop- pricing, cost savings, highest food
shop for businesses, delivering safety controls and quality control
lower cost items at the highest measures, consistency
safety standards.
Multi-Unit Franchisees
3.2 There are benefits to having multi-unit franchisees. These include that the franchisee has
demonstrated, through their operation of their initial store, that they understand the Domino’s
business, products and customers, and are able to build sustainable businesses. Accordingly,
11in 2017 DPE reported its goal to have existing franchisees own an average of five stores by
2022.
3.3 In the six months leading up to 31 December 2017, 96% of new stores were opened by existing
Domino’s franchisees or store managers. Currently, average store ownership for a Domino’s
franchisee is almost two stores, with 38% of franchisees owning two or more stores.
External Franchisee Recruitment
3.4 DPE does not typically advertise for external franchisees, other than in some regional locations
where a local franchisee is specifically sought. Instead, most external, prospective franchisees
make their first contact with DPE through an online application process.
3.5 These candidates are assessed through a multi-stage application process which starts with an
expression of interest. After a pre-screening process, applicants complete a self-assessment
questionnaire and interview to determine, among other things, suitability, cultural fit, social
support, brand passion and financial position.
3.6 Applicants are required to complete a two-day orientation, to see ‘behind the scenes’ of a busy
Domino’s store, before a further series of interviews. Applicants must prepare a business plan
and cash flow model which is assessed by a local senior manager. Feedback is provided in a
further interview round. Should the applicant and DPE both agree to proceed, the applicant is
required to commence an initial training program, prior to being approved as a franchisee.
3.7 DPE’s recruitment process is rigorous, and less than 0.5% of candidates complete the
application process from expression of interest through to completion and store settlement.
Transparent Disclosure
3.8 In accordance with the requirements of the Franchising Code, prior to entering into a sub-
franchise agreement with DPE, prospective franchisees are provided an information statement
and disclosure document, which outlines the contractual relationship between DPE and its
franchisees and provides detailed information about the business. Not only does the disclosure
document address all of the items prescribed in the Franchising Code, in some areas it provides
an additional level of detail. For example, each contract a prospective franchisee will be
required to enter into at the outset will be provided in final form as an annexure to the disclosure
document. This enables our prospective franchisees to obtain holistic advice from legal,
accounting and business advisors.
123.9 The disclosure document includes a comprehensive listing of all stores in Australia (and their
owners), and prospective franchisees are encouraged to speak with other franchisees about
the business before committing to investing in a franchise. Franchisees are also encouraged to
seek independent legal, accounting and business advice. Any providers of this advice listed
by the prospective franchisee are required to confirm they have done so.
3.10 Prospective franchisees are also provided detailed financial information including:
(a) profit and loss statements for the previous two financial years for the store being
purchased (where a store is being purchased from DPE); and
(b) average costs across all stores with the same weekly sales (to the nearest $2,500 or
$5,000 per week) for the last completed financial year.
3.11 This means a prospective franchisee can see average expenditures of stores with a similar
turnover, across all fixed and non-fixed costs, with expected costs, or ranges of costs, for each
line item. This allows potential franchisees to make informed decisions about their possible
investment including the preparation of detailed business plans and cash flow projections.
Domino’s Exclusive Territories
3.12 Domino’s franchisees purchase an agreed territory for a set period of time as specified in the
sub-franchise agreement. Typically, where the franchise is being purchased from DPE, this will
be for a period of 10 years. Where the franchise is being purchased from another franchisee,
the period will be the remainder of the initial 10-year term.
3.13 Territories cover a defined geographical area and, as new homes or businesses open within
this geographical boundary, their addresses are added to the store’s delivery area (with the
franchisee’s approval). Territories are determined by analysing data on the likely number of
customers in the area, the identified number of local households, and the optimum maximum
delivery time and distance from the store.
3.14 Subject to discrete contractual exclusions, during the period of the sub-franchise agreement,
neither Domino’s corporate stores, nor other Domino’s franchisees, may open another store in
that territory. This provides franchisees certainty about their investment, as the number of
households in their territory cannot, without the franchisees' agreement, be decreased during
this term.
3.15 All delivery orders from within a designated territory are routed to the appropriate store. Online
orders require customers to select their address, which is linked to their local store. Should a
phone customer select a store for delivery that is not their local store, the store will refer that
13customer to the correct store. Franchisees are not allowed to deliver outside of their identified
territory, protecting all franchisees from a neighbouring franchisee seeking to service select
customers within their territory.
3.16 Pick-up customers may choose to order from a store that is most convenient to them, for
example a customer who chooses to order from a Domino’s that is close to their route from
work to home.
3.17 To provide franchisees the best opportunity for success, DPE uses a predictive dashboard
utilising detailed data to identify optimal locations for new stores. If a population centre (for
example a new housing estate) develops outside of an existing territory, DPE will examine likely
customer counts and future customer growth, as well as the number of households within an
ideal delivery zone to determine if a new territory is warranted. As part of this analysis, DPE
may offer to purchase some of a neighbouring territory to provide the best opportunity for
success for a new store. This is at the discretion of an existing, neighbouring franchisee, who
may also be offered the opportunity to purchase the new territory.
3.18 If a franchisee decides an area of their territory is not feasible to profitably service for deliveries,
they may:
(a) choose not to service that area, in which case it will revert back to DPE; or
(b) sell the rights to another Domino’s franchisee, with approval from DPE.
3.19 At the end of the agreed period of the sub-franchise agreement, Domino’s franchisees may
choose to seek a new agreement for an additional fee per year of extension. This is at the
discretion of DPE and any new agreement may be on varied terms (for example, one which
takes into account any identified adjustments to the territory based on population growth over
the previous decade).
3.20 Crucially, because of the exclusive territory model, DPE will not open a corporate store within
a franchisee’s territory without purchasing part of that territory on commercial terms.
Territory splitting
3.21 A larger geographical area encompassing more households may not be financially beneficial
for a franchisee. Longer delivery distances increase franchisee costs (as delivery drivers are
paid for their time and, if in their own car, mileage). Longer delivery distances also decrease
customer satisfaction, because customers have to wait longer for their meal and invariably food
is not as hot and fresh as it can be with a shorter, faster delivery run.
3.22 The potential market for home-delivered food is increasing in Australia. DPE’s response to this
opportunity is to target the fastest possible delivery times, delivering hot, fresh food from stores
that are closer to the customer. This is part of the approach of Project 3-10.
3.23 While it may appear counter-intuitive, ‘splitting’ territories can actually deliver increased sales
and profitability, as time-poor customers are more likely to choose a food option that is
consistently the fastest and freshest to arrive at their home.
3.24 Franchisees benefit as these deliveries are performed at a lower cost. In addition, new stores
receive an increase in pick-up customer numbers, as customers are more likely to frequent a
quick service restaurant that is closer to their home.
3.25 In some cases, territory splits are agreed upfront and are included as a term of the sub-franchise
agreement. In other cases, during the term of the sub-franchise agreement, DPE may offer
franchisees (where modelling suggests there is sufficient market to support it) to open an
additional store in their territory. The franchisee is able to accept or reject DPE's offer.
3.26 If accepted, DPE usually provides the franchisee with targeted support to increase the
franchisee’s return on investment. This support may include a reduction in the royalties payable
to DPE (from a maximum of 7% of gross sales), a reduction in marketing contributions, or
14additional local store marketing at DPE's expense (for example purchasing letterbox leaflets for
the new store).
3.27 This approach has a clear track record of success with the majority of stores growing sales and,
ultimately, profits, as a result of this strategy
Performance Figures and Benchmarking
3.28 DPE's Head Office systems are linked to the Domino's stores’ point of sale systems, allowing
live collection of sales data, as well as the tracking of key performance indicators such as food
usage, labour costs and customer order ratings.
3.29 This detailed level of data, covering a variety of financial and operational metrics, enables DPE
and the Domino's franchisees to drive continual improvement. In particular, the data allows:
(a) franchisees to analyse their performance, areas for improvement, and ensures that
franchisees have benchmarks against which they can measure their stores. Stores are
also required to submit monthly profit and loss statements, an essential requirement
for DPE to measure the health of its franchise; and
(b) DPE to monitor and improve on the performance of its franchise (and corporate store)
network. DPE monitors the data to identify trends, and adjust its practices to benefit
customers and franchisees. It then provides tailored feedback to each store,
recommending the best ways in which franchisees can improve their business. DPE
provides regular feedback to franchisees regarding their performance in key areas, with
more detailed responses to an identified challenge occurring when needed.
Profitability
3.30 To February 2017, average store profitability increased by more than 30% over the previous
two years to $137,000 per store,4 on a fully managed and staffed basis.5
3.31 Franchisee profitability is a virtuous cycle; profitable franchisees are better placed to invest in
further growth and expansion, allowing the franchise to reach more customers in more
locations, and to leverage this growth to invest in product and technology development, reduce
costs, and increase marketing.
3.32 Currently, the expected payback for a new store is between three and five years.6
Training and Ongoing Support
On boarding training
3.33 In advance of the settlement of their purchase of a Domino's franchise, new franchisees are
required to undertake online and in-person training at DPE's Head Office and in an operational
store (on boarding training). The cost of this on boarding training is included in a training fee
required for prospective new franchisees, for their first store only.
3.34 In recognition of the importance of on boarding training, in 2017 DPE extended the programme
from a six-week course to a course that takes around three months to complete. The program,
which commenced at the start of 2018, includes two weeks of in-store training at a certified
store (one identified by DPE as following best-practice) before a further eight weeks of training
at DPE's Head Office. This training consists of theoretical and practical training in all operational
areas of the store, including team member positions, management duties and an introduction
4
Average EBITDA on a Same Store basis.
5
Domino’s Market Presentation, HY Results, 2017, p20.
6
Domino’s Market Presentation, HY Results, 2017, p20.
15of the DPE’s business to franchisees. Training also includes online training through DPE's
proprietary online training tool, Domino's Online Training and Tracking Initiative (DOTTI).
3.35 After completing DPE's Head Office training, franchisees then return to a certified store where
their skills are assessed, to ensure they are competent in management duties.
3.36 Franchisees are also expected to complete a Certificate IV in small business with an identified,
accredited training provider. DPE is working with this provider to further customise this course
to ensure it is focused specifically on Domino’s. Franchisees also complete a one day “Finance
Management 101” course with a registered accountant.
3.37 At the end of this training, Domino’s franchisees are expected to have a comprehensive
knowledge of Domino’s systems and processes, covering everything from making dough and
the other items on the Domino’s menu, to stock control and ingredient preparation, through to
local marketing, point of sale systems and food safety and handling. If a franchisee is deemed
unsuitable to proceed from training to store settlement their purchase of the franchise will not
proceed and their training fees are refunded in part or in full, subject to a case-by-case
assessment.
Employee training
3.38 New employees and team members, from drivers through to store managers, are required to
successfully complete training through DOTTI. To date, more than 17,000 individuals have
completed 15 online courses, the results of which are reported to store management and DPE.
DOTTI also contains Domino's policies and procedures that cover all aspect of a store’s
operation
3.39 Additionally, DPE provides ongoing, multi-day, practical training courses to managers and
supervisors based on their level of experience. This training covers all aspects of store
operations including stock ordering, local area marketing, staff management and profit growth.
Ongoing support and continuous learning
3.40 A Domino’s store is not a ‘set and forget’ operation; even DPE's most successful multi-unit
owners with more than 10 stores typically spend time working in the business to retain a detailed
understanding of their business, and to refresh their skills.
3.41 New franchisees have the advantage of:
(a) learning and benefiting from the experiences of the other store managers and Domino's
franchisees who are familiar with the challenges new franchisees may experience;
(b) a variety of prepared procedures and other materials;
(c) a company-wide social network, for recommendations from DPE management and
other franchisees; and
(d) avenues for information sharing through frequent market meetings, to allow
franchisees and store managers to share best practice techniques for managing their
stores and growing sales.
3.42 DPE’s systems and processes are not ‘set and forget’ either. Franchisees and store managers
frequently recommend improvements to processes based on testing and experience, which are
then rolled out to the wider business, strengthening the network as a whole. These
improvements touch on all areas of the business, and provide guidance to franchisees seeking
to improve their business, for example by enhancing their local area marketing, making their
stock storage more efficient, or reducing the time taken to safely deliver a meal. New products
are also supported with training programs and recommendations on how these may best be
delivered to employees.
16Operations 360
3.43 As mentioned previously, DPE has launched Operations 360, a new set of business intelligence
and benchmarks aimed at enhancing Domino’s store operations, transparency and profitability.
3.44 DPE has dedicated business consultants who work one-on-one with franchisees, using the data
available through Operations 360 to identify areas in which franchisees can improve
profitability. This support is provided through regular store visits and telephone calls from a
team of 35 market managers, business consultants and trainers (a ratio of less than 1:10
franchisees). The advice may include, for example, identifying ways to reduce food wastage,
and improving delivery times, through to recommendations for local marketing and pricing.
Customer satisfaction is measured for each store, and improved operational performance at a
store level has been recognised as a key contributor to increased customer satisfaction, and
return business. This support is provided at no additional cost to Domino's franchisees.
Leasing Arrangements
3.45 Tenure within a retail environment is a significant issue that impacts on a business’ ability to
invest and expand with certainty. In the majority of cases (approximately 75%), DPE holds the
commercial lease for the franchisees' stores, and provides the franchisee with the right to
occupy the tenancy, under a store licence agreement. The store licence agreement typically
runs for the same length of time as the corresponding sub-franchise agreement.
3.46 By holding the lease, contingent liability remains with DPE. This means that most leases are
able to be secured without a bank guarantee from the franchisee. Franchisees may also benefit
from the lease cost savings secured through DPE’s scale compared to the negotiating leverage
available to an independent business owner.
3.47 Where DPE holds the head lease to a store, franchisees will pay an administrative charge to
DPE called the Lease Liability Fee (a percentage of weekly rent and outgoings). This charge
goes towards the administrative overheads associated with holding the leases, arranging
payments with landlords and overseeing bank guarantees, amongst other tasks.
3.48 It is in the shared interests of DPE and its franchisees for DPE's leasing and property team to
act as a vigorous representative of the store’s interests in negotiating with landlords, for both
financial and operational reasons. Ultimately, a non-commercial leasing agreement negatively
impacts on both DPE and its franchisees, and a landlord who is unwilling (or not prompt) in
rectifying tenant concerns can also impact store operations.
Procurement
Franchisees' ability to choose
3.49 Subject to contractual obligations to ensure both product and safety standards are met,
Domino’s franchises do not have to purchase supplies from DPE's third party suppliers. They
can purchase items from any supplier, provided the products are like-for-like. For example,
Domino’s franchisees may choose to buy soft drinks from a supermarket provided it is the same
brand and packaging size.
DPE's procurement and supply chain
3.50 DPE has a dedicated procurement and supply chain team in charge of negotiating supplier
contracts. DPE has minimum standard requirements (including internationally accredited food
safety standards), that its third party suppliers must adhere to.
3.51 DPE's supply chain in Australia serves around 700 stores and includes nine distribution centres
throughout the country to ensure stores can access a ‘one-stop-shop’ for everything their
business needs.
3.52 The supply chain starts with identifying and negotiating long-term supply arrangements with
partners that can provide high-quality products in large volumes on a continual basis. These
17partnerships can involve months of reviews, inspections and negotiations, of which the price
for franchisees is an important component, and results in a partnership that typically operates
for between two and four years.
3.53 Each supplier is required to meet stringent standards relating to factors including product
quality, continuity of supply and, in the case of food suppliers, HAACP food safety guidelines.
This approach assists with:
(a) consistency across the Domino's stores;
(b) franchisees secure savings; and
(c) food safety controls.
3.54 To ensure continuing product innovation and in order to meet the evolving demands of
customers, at times DPE may require equipment upgrades. As with other products, Domino’s
franchisees can choose to buy equivalent equipment from another supplier, provided it meets
required local regulations (including safety standards) as well as DPE's standards. DPE
recognises the cost of upgrading, or purchasing new, equipment. In these instances, DPE may
provide an extended grace period before this equipment is required, or provide financing to
support the franchisee’s cash-flow during upgrading.
3.55 DPE is committed to delivering its customers and franchisees the highest quality products at
the most competitive prices. As part of this approach, DPE receives rebates from the
procurement process which provides it with a revenue stream. DPE is committed to being the
‘best place to shop’ for franchisees, including for stores in regional and remote towns. The
Company also has the objective of making available to its franchisees the lowest cost, highest
quality products, while maintaining strict quality control measures that customers expect and
deserve.
3.56 DPE pays for the cost of freight to regional stores (DPE has the right to pass on 50% of the
charges in the situation a store is not meeting defined operational standards however DPE is
currently not charging any store for freight and hasn’t for the past two years). This ensures
stores throughout regional Australia can buy their food and other supplies at the same price as
in capital cities. It also means that every store in DPE’s system pays exactly the same price for
a product, regardless of where its produced. This assists stores throughout Australia to provide
the same, competitive pricing as part of national promotions without disadvantaging stores due
to geographic location.
3.57 In the interests of transparency, DPE welcomes franchisees’ input and feedback on matters of
pricing. This assists the Company to remain competitive and help drive franchisee profitability.
Compliance and Monitoring
3.58 Every Domino’s franchisee is expected to meet the regulatory requirements of the market in
which they operate. These cover all areas of business operations, ranging from food safety and
handling to meeting of employment and taxation obligations.
3.59 DPE provides guidance, training and support for franchisees to meet these obligations. By way
of example, this support may include bookkeeping services, providing food safety logs, and
technology aids such as rostering software.
3.60 To check, encourage and enforce observance of these obligations, DPE has a number of
inspection and compliance programs in place, such as spot checks of wage payments and
unannounced visits to confirm Food Safety and Handling requirements.
Employment obligations
3.61 In 2015, DPE implemented a proactive wages compliance program that remains in use. In
accordance with the program, DPE conducts audits of franchisees to monitor their compliance
with employment obligations. In circumstances where franchises are found to be non-
18compliant, DPE conducts an underpayment wages calculation to rectify any discrepancies. This
program also responds to any complaints received (for example, from individual team members
who have concerns about their employer).
3.62 As part of its continuous improvement process, during 2017 DPE:
• enhanced and formalised an overarching monitoring and supervision framework;
• developed a predictive risk-based data analytic tool;
• enhanced the employee complaints management process; and
• set up an independent whistle-blowing function to complement the existing employee
complaints process.
3.63 DPE takes a firm view regarding franchisees who underpay their employees. From 2015 to
February 2017, DPE terminated four sub-franchise agreements (which collectively operated
seven stores), where it found that the franchisees had been underpaying team members. In
this same period, DPE negotiated the exit of a further 22 franchisees following compliance
audits that raised employment law concerns.
3.64 The Franchising Code provides DPE with immediate termination rights in certain circumstances
(where the sub-franchise agreement gives DPE the right to terminate) including where a
franchisee has acted fraudulently in connection with the operation of the franchised business.
The Franchising Code does not currently provide DPE with an express right of immediate
termination if it discovers that a franchisee has been underpaying its employees. Where
immediate rights of termination are not available, the Franchising Code requires DPE to give
the franchisee:
(a) notice of the intention to terminate because of the breach;
(b) details of what is required to be done to remedy the breach; and
(c) at least 30 days' to remedy the breach.
3.65 Currently, in order to terminate a sub-franchise agreement where systemic underpayment of
wages has occurred, DPE relies upon the contractual provisions relating to fraud perpetrated
by a franchisee who is wilfully breaching his or her employment obligations. DPE's ability to act
decisively and swiftly where a franchisee is discovered to be underpaying its employees, would
be enhanced if the Franchising Code recognised this serious issue as a reason, in and of itself,
to immediately terminate a sub-franchise agreement.
Domino’s Marketing Fund
3.66 Domino’s franchisees contribute a maximum of 6% of sales towards a national marketing fund
(AdFund).
3.67 Under its agreement with franchisees, DPE has a discretion as to the marketing activities that
can be funded from the AdFund. For example, the AdFund provides for the development,
design, and execution of marketing activities, including television advertising, electronic direct
mail, social media promotions, search engine advertising, and targeted promotions using DPE's
own marketing channels such as its Offers App.
3.68 Domino's AdFund was independently audited in 2016, which confirmed all expenditure was
appropriate and meeting the requirements of the Franchising Code of Conduct. However, due
to an administrative oversight with DPE’s AdFund, a copy of this audited reported was not
provided to franchisees in the time period required by the Franchising Code. DPE apologised
to Domino’s franchisees for this oversight and has committed to ensuring that all future annual
statements will be distributed within the timeframe required by the Franchising Code each year
going forward.
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