Domino's Pizza Group (LSE: DOM) has been one of the LSE's most reliable success stories with the company's shares rising over 150% in value over the past half decade. It's been a less successful ride for DP Poland (LSE: DPP) the AIM-listed company that controls the rights to Domino's in that country. But after constant stops and starts since listing in 2010, can this tiny challenger replicate the success of its bigger brother?
To answer that it's important to look at why Domino's Pizza has been so successful in the UK. The key has been twofold: licensing out stores to franchisees, and investing in digital sales efforts and marketing campaigns that have improved organic growth for the entire estate.
The former allows Domino's to expand rapidly by leaving the nitty gritty work of running each business up to the franchisee. This also keeps margins high. Operating margins were 23% last year, and provides high cash flow from franchisees buying ingredients and paying royalties.
The latter has been instrumental in expanding awareness of the brand and driving increased sales by emphasising the ease of online ordering. In Q3 these online sales rose 18.1% year-on-year and now represent 81% of total sales, with a whopping 64% coming from the mobile site or app.
And by increasing brand awareness Domino's Pizza has also widened the pool of available consumers, which means more stores can co-exist profitability in the same area. This has provided the firepower for the estate to grow to 950 by the end of 2016 with a long-term target of 1,600 stores in the UK. Given all this, it's no wonder that investors have fallen head over heels for the company's shares.
Everything's a bit rockier for AIM shares
Unfortunately DP Poland faces a tougher task ahead of it. The biggest issue is that the company is still in start-up mode and is bleeding large chunks of cash. Losses in H1 2016 totalled £944k, although this is a 12% improvement on the year prior. At the end of June the company was down to £5.3m in cash, which necessitated a share placing in October that raised £3.2m. This came after the previous £5.5m share sale in June 2015, which suggests to me that current shareholders can expect further dilution of their holding as long as losses are significant.
Now, this isn't necessarily a bad thing as long as the cash is being used to fund expansion in a sustainable manner. This certainly seems to be the case as full-year results for 2016 saw total sales rise 62% year-on-year due to 12 new store openings, taking the year-end total estate to 39. More encouraging was the 27% rise in like-for-like sales that signals Polish consumers are coming round to Domino's.
It must be said that the company has expanded rapidly previously before, needing to scale back once new stores proved untenable. The good news is that management has learned from these mistakes, is leaning more on the franchisees who run 23 of 39 locations and is mimicking its UK counterpart and investing heavily in mobile sales and building brand awareness. This appears to be working as my Polish friends in Warsaw certainly buy their pizzas through Domino's. If losses continue to shrink and growth rates keep steady there's no reason this tiny £75m market cap company can't rise 150% in five years.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Domino's Pizza. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.