🍕 What Vertical SaaS Can Learn From Domino's Success?
Overlooked #186
Hi, it’s Alex from 20VC. I’m investing in seed & series A European vertical solutions (vSol) which are industry specific solutions aiming to become industry OS and combining dynamics from SaaS, marketplaces and fintechs. Overlooked is a weekly newsletter about venture capital and vSol. Today, I’m looking at how Domino’s is using a franchise model to maximise value extraction from industry’s participants.
As a vertical software nerd, I have an exciting week of writing ahead! ServiceTitan just released its S-1, and Procore is hosting its Annual Investor Day. I can’t wait to dive in!
Historically, vertical SaaS companies were limited to capturing 5% of the total sales within their target industries, reflecting the IT expenditure in well digitised industries. In recent years, vertical SaaS have started to embed financial services, effectively breaking through this software penetration ceiling. With AI now tapping into services budgets, we can anticipate further expansion in value capture.
The franchise model is another powerful approach to extracting value from stakeholders within an industry. In this post, we will explore how Domino’s has implemented this model in the pizzeria industry. It’s a prime inspiration for vertical solutions aiming at going beyond software to maximise value extraction while building strong competitive moats around its business.
In a subsequent post, we will explore how Slice is positioning itself as a counterpoint to Domino’s by adopting a reverse franchise model. This approach provides independent pizzerias with access to the same technology and procurement infrastructure as the Domino’s network, all while allowing them to maintain complete independence.
This post is divided into 3 sections: (i) Domino’s value extraction playbook, (ii) an overview of Domino’s technological stack, and (iii) key insights into the best practices for operating a successful franchise.
Domino’s Extracts a 42% Gross Take Rate and a 10% Net Take Rate from its Restaurants when Most Vertical SaaS will Plateau at 5% Gross Take Rate
Domino’s has three revenue streams to extract value from its franchised restaurants:
a 7.0% franchise fee on revenues which is pure operating margin,
a 5.5% marketing fee on revenues which has to be fully reinvested to promote the Domino’s network of restaurants and,
a 29.1% on revenues dedicated to food costs on which Domino’s has a 10.2% gross margin.
As a result, Domino’s has a 41.6% gross take rate and a 10% net take rate on its restaurants when most traditional vertical SaaS would plateau at around 5% gross take rate.
Domino’s is a Tech Company with a Proprietary Operating System for its Franchisees with Nothing to Envy to Platforms like Lightspeed or Toast
“We are as much a tech company as we are a pizza company.” - Patrick Doyle (ex. CEO at Domino’s from 2010 to 2018)
Domino’s has an all-in-one platform to manage the relationship franchisor-franchisees and to help franchisees operate efficiently their entire business with the following product pillars:
Digital ordering: Domino’s launched an online and mobile ordering system in 2007 and today digital ordering channels account for 85% of total sales. It pioneered order tracking with its Pizza Tracker. In 2023, Domino’s launched Pinpoint Delivery to allow customers to receive a delivery anywhere beyond their homes (e.g. a park, a baseball field, etc.). In 2024, Domino’s partnered with Microsoft to launch an AI-based pizza ordering assistant. Transitioning customers from phone-based to digital ordering has a significant positive impact on the business. Digital customers tend to have higher average order values and place orders more frequently. It also reduces the operational burden on restaurants by minimizing the need to handle phone orders.
Proprietary Point-Of-Sale (POS) called PULSE: process transactions from customers, handle the revenue split between the franchisor and its franchisees and facilitate franchisor reporting.
Supply chain management: centralized supply chain system to provide franchisees with consistent, high-quality and ready to use ingredients. Domino’s has its own factories to produce dough, cheese and toppings.
CRM and loyalty: Domino’s is optimising the lifetime value of its customers with a successful loyalty program (20m active users in 2019) and marketing/ordering personalisation.
Dispatch: tracking the preparation and delivery of an order, location based delivery system to orchestrate a fleet of riders.
Labor management: tool to create labor schedules, offer more flexibility to workers and drive more engagement.
Domino’s has Implemented Multiple Best Practices to Run a Franchise Model that Vertical Software Companies Can Learn From
If you’re looking to replicate Slice’s playbook and build a reverse franchise model in another industry, it’s crucial to study Domino’s best practices for managing the franchisor-franchisee relationship.
Even as a traditional vertical software, there is a lot to learn from Domino’s approach including (i) running your own location to be credible as a software provider, (ii) training your customers to become exceptional business operators, or (iii) scaling alongside your customers as they open new locations.
Even at scale, Domino’s is still operating proprietary stores in parallel of its network of franchises. In the US, it has 6,888 stores including 288 owned stores and 6,600 franchised. It gives Domino’s credibility to operate as a franchisor. It’s a playground to make tech and business experiments. It’s also a school to train the next generation of Domino’s franchise owners.
To maintain operational excellence and maximise value extraction, Domino’s enforces a strict playbook to its franchisees. As a franchisee, you need to use Domino’s operating system which is constantly connected to the HQ. You need to exclusively purchase your hardware (e.g. ovens) and your supplies from Domino’s. You also need to use Domino’s fleet of riders.
Opening a Domino’s pizzeria is a great financial investment for franchisees. It costs $250-350k to open a store. On average, a store generates $1.1-1.2m in sales and $125k in EBITDA implying a 2.5-3 year payback (30%+ cash on cash return, compared with 4-5 year payback for a McDonald’s) if you have to payback interests on a debt raised to build the store.
Domino’s provides an end-to-end support to its franchisees. The company provides ongoing support in areas such as site selection, supply chain management, and marketing. Franchisees benefit from a robust supply chain that ensures consistent product quality and timely delivery of ingredients.
Once successful with one store, Domino’s incentivises its franchisees to scale to multiple locations. It has a business strategy called “Fortressing” which aims at adding stores in the same geographical areas to increase Domino’s density. Most of the time, a franchisee will be offered the option to add a store close to its other stores with an incentive like waived royalties for a period. This additional proximity improves Domino’s service which results in additional sales and profitability for all the stores in the area.
Abroad, Domino’s is adapting its model to local markets with dedicated menus and marketing strategies. For instance, in the UK, it offers affordable lunchtime menues with small pizzas or wraps or in Japan, it offers seafood toppings.
Domino’s franchisees are properly trained in the network before being granted the right to franchise. 95% of Domino’s franchises started as a pizza driver or pizza maker in the Domino’s network. It’s impossible to open or buy a store without having worked in the network.
“A franchise applicant must have been a Store manager or Store supervisor for at least 12 months to be eligible for a single Store franchise and must also have attended certain classes on operating a Store.” - Domino’s 2023 Franchise Disclosure Agreement
Thanks to Julia for the feedback! 🦒 Thanks for reading! See you next week for another issue! 👋