In a recent investor presentation, Domino's Pizza (NYSE:DPZ) explained that it gets 53% of its revenue from outside of the US, and this percentage is likely to rise even further. The pizza chain has averaged 5.6% same-store sales growth abroad over a 20-year period, and as more people join the middle class around the world this looks set to continue. Domino's franchisees help it accomplish this growth, and one of them has been rapidly building out its footprint in India and neighboring countries. This move in particular will have major repercussions for Domino's shareholders, here's why.
The market opportunity
In the presentation, Domino's listed the number of stores it has in each country where it operates and forecast the store count that each market could eventually support. India shows up quite high on the list here. While the country comes in third overall on total stores behind the United States and the United Kingdom, it tops the list of emerging markets with 715 stores. In addition to this, this market offers a great deal of growth potential as Domino's thinks it can eventually get to 1,200 stores in India. This is much more growth in store count than Domino's expects from most of its international markets, except for France. A deal with a company called Jubilant FoodWorks makes this possible.
Jubilant FoodWorks has been growing very rapidly
The Domino's franchise holder in India, Jubilant FoodWorks, trades on the Indian exchanges. It was originally called Domino's Pizza India Limited, but it changed its name in 2009. Even back then, the company had put up some huge growth numbers; in 2010 it said it had grown at an annualized rate of 42% over the last five years. In that release, Jubilant announced that it had just opened up its 300th store. Now, four years later, this franchise holder has more than doubled its store count. After adding 150 stores in fiscal 2014 alone (its year ended on March 31, 2014), it reported that it had 749 stores in May 2014. If it keeps up this pace, it could hit 1,200 stores in 2017.
Jubilant FoodWorks has been more than holding its own against other major pizza chains. In 2010 it said it had a market share of 65% in organized pizza delivery and it announced that this had risen to 67% in 2014. This is impressive, but it also suggests that Pizza Hut of Yum! Brands (NYSE:YUM) and Papa John's (NASDAQ:PZZA) have expanded in India as well, albeit from smaller bases.
Yum! Brands just confirmed this in its latest earnings release. Its KFC and Pizza Hut footprints both showed dramatic year-over-year growth. Yum!'s KFC count rose 29% to 341 in India, while its dine-in Pizza Hut concept saw its store count rise 6% to 182 locations. The Pizza Hut delivery concept was the star of the show, as its store count expanded 44% to 186 locations.
Papa John's didn't break down the results from its operations in India in its latest earnings release, but its local site provides some detail about its current footprint and expansion plans. It lists five stores in the North Zone, five in the West Zone, and ten in the South Zone -- so it currently has a much smaller footprint in India than Domino's or Pizza Hut. It also has an upcoming stores section, but that's blank for now. It looks like this pizza chain might not be the best way to invest in growth in the Indian market.
Recent results from Jubilant FoodWorks and Yum! Brands do show a slowdown, though. Yum! Brands reported that its comps for India, which include KFC locations, fell 2% from the year-ago quarter, while Jubilant FoodWorks reported a steeper decline of 3.4% in its release for the fourth quarter of 2014. A tough comparison may have played a part in this, since Jubilant FoodWorks was up against a quarter with 7.7% comps growth, but this data does show that Domino's and Pizza Hut might be expanding too quickly in India. However, the rapid expansion does show that both companies have confidence in the long-term potential of the market.
Possible upside for Dunkin' Brands
Jubilant FoodWorks doesn't just have a deal with Domino's, it is a franchisee of Dunkin' Brands (NASDAQ:DNKN) as well. Right now, it doesn't operate enough Dunkin' Donuts stores in India to move the numbers much, as it has 29 stores there while Dunkin has 11,000 stores around the world. However, in 2012 the company did highlight the potential of India with its plan to open 80-100 stores in the country within five years. While this expansion plan doesn't meaningfully affect Dunkin's results right now, Jubilant FoodWorks has shown that it can build out a concept very quickly if it catches on.
With its lead in market share, Domino's looks like the best way to invest in the growth of the pizza business in India. The chain also has global strengths which will help it in this market such as its mobile ordering capabilities -- its franchisee reported that 18% of its orders in India come in through the Internet. The comps decline is a negative, but from a longer-term perspective Domino's has shown strong growth so this may just be a bad quarter. If Domino's can get to 1,200 locations in India, that would be good news for its shareholders.
Eric Novinson has no position in any stocks mentioned. The Motley Fool owns shares of 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.