Domino's Pizza (NYSE:DPZ) has added pizza stores throughout the world with the help of its franchises. One of these franchises, Domino's Pizza Enterprises, recently announced its own international expansion initiative. The private equity firm Bain Capital already owned Domino's restaurants in Japan. Now, the Australia-based Domino's Pizza Enterprises plans to buy a stake in Domino's Pizza Japan from Bain.
The private equity firm didn't sell its entire stake in the pizza chain. Eli Greenblat at The Sydney Morning Herald reported that Domino's Pizza Enterprises will pay 12 billion yen to Bain for a 75% equity stake in Domino's Pizza Japan and supply 9 billion yen of new debt funding. The deal is expected to be accretive for Domino's Pizza Enterprises, adding around $0.08 per share to the company's earnings. The franchise owner is publicly traded in Australia.
Benefit to Domino's
The deal transferred ownership between two companies that already owned Domino's restaurants, so the transaction itself might not directly affect Domino's revenue. This deal does demonstrate that major franchise owners want to buy Domino's restaurants, and suggests that Japan's market can support more pizza restaurants, which both look like positive signs for the company.
Domino's Pizza Enterprises plans to add more than 300 restaurants in Japan. Domino's already has a lot of restaurants, but this expansion push could still be big enough to provide franchise fees that could affect the pizza chain's financial results. When Domino's reported its second-quarter earnings, the chain stated that it had 5,508 international restaurants and 10,440 total restaurants.
A challenge for Pizza Hut
Yum! Brands (NYSE:YUM) has also taken a piece of Japan's pizza market with its Pizza Hut chain. John Beveridge at the Herald Sun reports that Pizza-La and Pizza Hut both currently have footprints larger than Domino's in Japan. The Japanese market provides about 10% of sales for Yum! International, which reported revenue of $506 million from company restaurants and franchise fees of $207 million for the second quarter of 2013, which resulted in total division sales of $713 million.
Yum! International still had a relatively weak quarter, though, and its restaurants in Japan dragged down the division's overall results. Yum! reported that sales in Japan dropped by 5%. The Domino's deal shows that even after this weak performance, Pizza Hut could still have opportunities to sell more pizza in Japan, although the chain could also face more competition. China remains the most important expansion market for Yum!, though.
Comparison with Papa John's strategy
Papa John's (NASDAQ:PZZA) currently doesn't have any restaurants in Japan. The pizza chain does have restaurants in Asia, with locations in China, South Korea, Malaysia, and the Philippines. Papa John's may have focused its international efforts on countries that could grow rapidly. The pizza chain has added restaurants in Britain and Ireland, but it hasn't expanded into many other countries in Western Europe. Papa John's has expanded into Latin America and the Middle East.
The decision to avoid slower growth markets such as Japan may have helped Papa John's report higher international same-store sales growth than the other pizza chains this quarter. Papa John's reported 6.8% growth, which beat Domino's 5.8% figure. Yum! International reported 5% growth from emerging markets and negative 1% growth from developed markets, which provides more support for this theory.
This deal may indicate overlooked growth possibilities for Domino's. Emerging markets probably still offer the most expansion potential, but the right strategy could open up an opportunity in a developed market. Domino's Pizza Enterprises thinks it can convince Japanese diners to eat more pizza, and if this strategy works, the franchise could more than double Domino's footprint in Japan. Additionally, this deal makes the Domino's brand look better, in general. The deal doesn't make Domino's a buy by itself, but it does support the bull case for this pizza chain.