PE & QSR: Selling pizza in Japan

With the opening of its 600th store in June, Domino’s Japan supplanted Four Seeds-owned Pizza-La as the local market leader. Five months, later the company gained global bragging rights as the Yotsuya store in Tokyo achieved an average safe delivery time – i.e. no speed limits were exceeded in breaking this record – for a freshly made pizza of two minutes 38 seconds over the course of one week. 

The 34-year journey of Domino’s Japan from pizza pioneer to third-place laggard and back to the summit is among the more rousing in Asia’s quick-service restaurant industry, featuring a cross-cultural entrepreneur, caviar toppings, and TV ads about opening outlets on the moon. Bain Capital arrived in 2010, convinced it could help the 175-store chain realize its potential.

“It’s tough being the number three player. You wind up not getting the best real estate locations, you wind up at a scale disadvantage, and sometimes it’s hard to attract the best people,” says David Gross-Loh, a managing director with the private equity firm. “While it was not the market leader at the time we invested, Domino’s Japan was the best box economic model, and its profitability and delivery approach were best in class. We felt if we could take it nationally, we could bring the company to its rightful leadership position.”

Impact on arrival

Domino’s made its Japan debut in 1985 courtesy of Ernest Higa. It was he who convinced founder Tom Monaghan to break with the tradition of only handing out franchises to those who had worked their way up through the organization and were imbued with its culture. “I told him I could learn Domino’s Pizza quicker than he could learn Japan,” Higa told AVCJ earlier this year.

It was thought that Shakey’s Pizza and Pizza Hut had struggled in Japan because local people didn’t like natural cheese. Higa put it down to a failure to localize – and duly turned the traditional Domino’s model on its head. Diners were confronted with a plethora of pizza topping and beverage options, and there was an emphasis on quality over supersizing orders. Toppings were either deliberately colorful or delightfully indulgent, while cheese and dough recipes were tweaked to suit local tastes.

The price points were high – top-end pizzas cost as much as JPY5,000 ($46) in the late 2000s – by necessity. “In the US, Domino’s is low-cost fast food for college kids,” Higa explains. “In Japan, the mass market is a bowl of noodles. I knew if I positioned pizza as fast food, we wouldn’t make money. We needed a higher average check because we wouldn’t get the same frequency of orders as the US.”

Success was almost immediate. The average monthly take for a McDonald’s store in 1985 was JPY5-6 million; the first Domino’s outlet generated JPY30 million. Margins were boosted by the focus on delivery, which meant outlets could be small and located away from expensive, high traffic areas. However, growth slowed in the 1990s and then retrenched, reflecting a general stagnation in Japan’s restaurant industry. By the time Higa sold to Bain, Domino’s was still Tokyo-centric and hadn’t opened a new store in years. 

The new owner responded with a push into franchising, inviting managers of existing stores to open new ones under an “employee-to-own” program. A franchisee financing initiative helped them buy equipment, while equipment standardization reduced the capital required to launch an outlet by half. By January 2017, there were 472 outlets, one-third of them franchised.

Under a new management team headed by Scott Oelkers, who previously ran Domino’s in Taiwan, the company moved away from the premium-only model. Elaborate toppings were joined by more basic offerings – as well as special offers such as two pizzas for JPY1,400 – to widen appeal. Steps were also taken to improve store-level efficiency. Rather than incentivize managers purely based on revenue, a new set of metrics including labor and food costs was introduced.

 “Once the stores became more profitable, it was easier to justify the capital expenditure to open new stores, which made franchising more attractive,” says Gross-Loh. Before the end of 2013, Domino’s Japan had reclaimed second place in the market, by store numbers, from Pizza Hut. 

Selling a narrative

These efforts were supported by a creative approach to marketing. In addition to having Oelkers – dressed in a full astronaut suit – announce in a TV ad that Domino’s Japan’s expansion plans were, literally, out of this world, the company launched a competition based on delivering a pizza the farthest distance ever. “There was a lot of buzz, but it was around things new things we were doing – carry out, buy one get one free, thin crust pizza, entering Nagoya,” Gross-Loh adds. “By the end, we had enough stores to justify national TV advertising.”

Having acquired Domino’s Japan for a reported JPY6 billion, Bain sold a 75% stake to Domino’s Pizza Enterprises (DPE) – the master franchisor for Australia, New Zealand, and parts of Europe – for JPY12 billion in 2013. The deal included JPY9 billion of new debt funding, implying an enterprise value of JPY25 billion. The GP also secured a put option for its remaining 25% stake and this was exercised in mid-2017.

When DPE acquired the business, it wanted to reach 850 stores by 2022. The long-term target has since been pushed out to 1,000. The barbell menu strategy continues – prices range from JPY799 for basic pizza to JPY3,800 for toppings such as wagyu beef – while delivery and technology are prioritized as highly as in DPE’s other markets. The average delivery time for non-franchised stores is 19.2 minutes and by next year 40% of orders will be made by e-bike.

In 1985, part of Higa’s pitch to Monaghan was that Japan was so different from other markets – and his local expertise therefore so valuable – that he “wasn’t about to start as a driver” in the hope of one day being awarded a franchise. It is perhaps a mark of the business’ maturity that the wheel has turned full circle. A recent winner of the Domino’s Japan franchise owner of the year award started out as an hourly wage driver in 2005 and now owns five stores.  

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• Topics
• North Asia
• Consumer
• Buyouts
• Trade sale
• Japan
• Bain Capital Asia