Top Franchises: Investing in Domino's Pizza

Although the fast-casual pizza niche is grabbing all the headlines lately as everyone rushes to be the next "Chipotle of Pizza," traditional pizza delivery shops, like Domino's Pizza , continue to slice up most of the market.

Competition from rivals like Papa John's Pizza , Pizza Hut, and even the local corner pizzeria remains hot, but Domino's has maintained its leadership position through it all.

The dominos are falling strong: Domestic and international sales growth numbers light up the pizzeria. Photo: Flickr user Klaus Nahr.

With a broad, international network of stores, and even a franchisee association dedicated to assisting store owners make the most of the opportunity, a Domino's Pizza franchise may just be a way to grab a slice of the burgeoning pizza market. For individuals willing to work hard, but work for themselves, franchising has long held an allure as a limited-risk opportunity. But because it's not without risk, entrepreneurs and investors will want to carefully weigh where they put their money.

A piece of the pie
Franchising isn't a get-rich quick scheme by any stretch -- it can be quite costly to buy into a concept, reiterating the old saw that it takes money to make money; but there several good reasons to consider the option. There are just as many to dissuade you, as well.

We're not telling you any one restaurant is better than any other if you're looking to get into franchising. Yet, for those researching this avenue of opportunity, Domino's is a top company that uses the franchise model, and could be one to consider.

One thing is clear: The oversize of the delivery-pie market is still growing. Data: Company quarterly SEC filings.

Domino's operates a global enterprise of more than 11,000 stores in more than 70 countries, generating retail sales of more than $8 billion in 2013, making it two-and-a-half times larger than Papa John's in terms of global restaurants, and some five times bigger on an annual revenues basis. Upstarts, like recently IPO'd Papa Murphy's , which operates 1,400 restaurants in 38 states and the United Arab Emirates, generated only $80.5 million last year.

Pizza Hut, the global Yum! Brands pizza chain, is larger than Domino's, with almost 13,400 restaurants worldwide and some $5.7 billion in annual revenues. While it does offer delivery service, it's primarily a casual-dining chain, and faces more of a threat from fast-casual chains like Chipotle Mexican Grill and Panera Bread, rather than Domino's or Papa John's.

Virtually all of Domino's restaurants are franchised. Only 44% of them are located in the U.S., where it is the No. 1 pizza delivery company with a 23.6% share of pizza delivery based on consumer spending reports.

Internationally, the U.K., India, Mexico, Australia, South Korea, Canada, Turkey, Japan, France, and the Netherlands account for almost 80% of the company's global retail sales. And when you look at those sales, you see it continues to reap a strong return customer response, as comparable sales routinely outpace those in the U.S.

Pizza remains hot. As the industry leader in delivery, Domino's remains the one to beat. Data: Domino's Pizza quarterly SEC filings.

By the numbers
While buying into a Domino's franchise doesn't come cheap, it's within the realm of possibility for many people. Prospective franchisees need a minimum net worth of $250,000, and minimum liquid assets, or those you can quickly turn into cash, of $75,000.

International growth seems to be where it's at these days. Domino's largest franchisee, Domino's Pizza Enterprises, operates 1,270 stores in six global markets, accounting for around 22% of its total international store count and some 12% of worldwide stores.

It opened just 58 net new stores in the U.S. in 2013, compared to 573 net new stores, 125 of which were in India. Another 76 net new stores were opened in Turkey, with the U.K., Japan, and Australia also figuring prominently in the calculation. However, another large franchisee, TASTE Holdings, is looking to open 150 Domino's stores in South Africa by the end of next year.

Not your typical Domino's delivery service -- Puerto Penasco, Mexico. Photo: Flickr user Chuck Coker.

A business model you'll want to grab a slice of
The franchise business model has been a boon to entrepreneurs and investors. Forbes found that the top 45 franchise stocks outperformed the S&P 500 in 2012 by nearly two to one, generating returns of 23.2% compared with the index's 13.4%.

Although specialty pizza shops like Blaze Pizza, Pie Five, and PizzaRev are trying to expand their brands and are getting backing from larger restaurant chains that see the potential of pizza, including the likes of Chipotle and Buffalo Wild Wings, the market demographics don't really support them long term.

Pizza caters primarily to young males between ages six and 19, not exactly the demographic of those just discovering "nouveau pizza." And the market researchers at NPD Group say that, while the pizza business was expected to grow 2.3% in 2013 -- down from the 3.7% growth it achieved the year before -- it's only expected to achieve 2% growth this year. Analysts, though, are looking for Domino's to achieve 8% revenue growth this year, and 5.6% growth next year, with per-share profits growing 17% and 16%, respectively.

Regardless, you still need to consider the risks, and understand that franchising is not for everyone. You need to take into account your own temperament, have your finances in order and, if you're the creative type, recognize the restrictions franchisors place on franchisees. That could always end up feeling constricting -- even claustrophobic. In short, you need to do your homework.

If that still sounds like a business you'd like to operate, Domino's Pizza just might be one place where you should start your due diligence

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FollowRich Duprey's coverage of all the most important news and developments surrounding the leading brand name products you use. He has no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings, Chipotle Mexican Grill, and Panera Bread. The Motley Fool owns shares of Buffalo Wild Wings, Chipotle Mexican Grill, Panera Bread, and Papa John's International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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