Bain Capital – Domino’s Pizza Japan
Background: Bain Capital acquired 100% of Higa Industries, Japan's oldest pizza delivery chain
operator and Domino's master franchise in the country, in 2010, and in its three-year holding period,
Bain Capital grew the top line by 10-11% a year and tripled profits.
The deal was born out of a long-time relationship between Matsuo Ernest Higa, the company's
owner and founder, and a Bain managing director in Japan. Higa wanted to step down and was
looking for a way to transition the business to new owners. He felt because of that relationship and
because of Bain Capital’s global experience in the restaurant sector Bain Capital would be the logical
buyers.
Operational Improvements
Management: Higa had been with the company for many years so
Bain Capital’s first challenge was to come up with a new
leadership team. It opted for a hybrid approach, bringing in some
of its own people and having them work in partnership with the
existing management.
Scott Oelkers was an obvious choice for CEO, having previously
performed the same role for Domino's in Taiwan where he
oversaw the opening of around a 100 stores.
Menus and pricing: While Bain Capital had previously invested in Dominos International in the US,
few comparisons could be drawn with the Japanese market. Pizza, though popular in Japan, is much
less of an every-day purchase. Broadly defined, consumers are divided into two groups: heavy users,
typically younger people, ordering pizzas online in the low to medium price range; and families
willing and able to pay a premium for a better product.
While the premium segment remains important to this day Domino's continues to produce top-end pizzas - the company
has also sought to develop its consumer base by expanding the
menu and introducing some lower priced products. For
example, Domino's started producing lighter, less ingredientheavy pizzas as an alternative to the gourmet variety.
Marketing: In order to build the brand and increase Domino's market share, the marketing team had
to be really creative, offer a raft of promotions and
taking full advantage of internet and mobile
technology.
Aside from supposed plans to establish a store on
the moon, Domino's also launched a competition
where the winner received a part-time job paying
$25,000 per-hour and tasked with delivering a pizza
the farthest distance ever - based on the Guinness
Book of World Records. The existing record, set by a
Domino's franchise in the UK, saw a pizza travel
from Fulham in London to Sydney, Australia.
Store expansion and "employee-to-own" program: Bain Capital also focused on expanding the
store network. When Bain Capital acquired Domino's, it had around 175 stores, but they were
concentrated in Japan's two largest cities, Tokyo and Osaka. The company was effectively missing
out on 65% of the population.
Furthermore, it hadn't opened a new branch in years, because it was such a capital intensive
exercise and a new store typically doesn't see payback for around six years. The first thing Bain
Capital did was to significantly reduce the capital expenditure required to open a new outlet, in part
by standardizing the equipment used across the network. By doing this Domino's managed to reduce
the payback period to three years.
The company then looked to expand the
number of Domino's Japan franchisees by
giving store managers the opportunity to
open their own outlets in an "employee-toown" program.
Through this approach Domino's has entered
cities such as Nagoya, Kobe, Kyoto, Fukuoka
and Sendai, which had hitherto been
untouched. The company now boasts 250
stores nationwide with around 42 of the 75
new outlets opened since 2010 being
franchises.
In addition to opening new stores, Domino's
expanded its carry-out service. By offering this convenient alternative to customers and saving on
delivery costs, pizzas could be discounted further. New stores are now being planned with a view to
accommodating carry-out. This means eschewing traditional back-street locations in favor of stores
on main thoroughfares.
In-store efficiencies: Bain Capital also focused its attentions on the company's bottom-line, which
turned out to be a more challenging aspect of the value-add process. In the early days some
inefficiencies were visible, especially in terms of managing store labor. There wasn't a scientific
scheduling tool to match labor in the store against order patterns, so Bain Capital introduced a
number of tools so managers could make accurate forecasts and that had really big improvement.
This meant staff cuts were minimized by having more people working at peak times and fewer at
quiet times.
Employee incentives: Domino's then took steps to ensure its workers were suitably motivated
through the launch of an employee incentive program. There were previously no sales-driven
incentives for store managers who were judged mostly by labor used and by labor as a percentage of
sales. The metrics by which productivity was judged were changed to make employees much more
sales driven.
Bain partnership with Domino’s Pizza Enterprises
In 2013, Bain Capital sold 75% of Domino’s Japan to Domino’s Pizza Enterprises (ASX: DMP) in
Australia, which holds the exclusive master franchise rights for the Domino’s brand and system in
Australia, New Zealand, France, Belgium, the Netherlands and the Principality of Monaco. In August
2014, Domino’s Pizza Enterprises announced a $42.3 million profit in the 2014 financial year, up
almost 50 per cent on the previous year, to which Japan has been a large contributor. Earnings from
Japan exceeded expectations, rising 25.5 per cent to $11.2 million, with same store sales continuing
to grow.