This case was digested and edited for classroom use by Ms.Lorna B. Balina based on the work of Rod Carlit, Rhoda Chua, Aditya Gupta, Ben Mabanta, Aavind Sankaran and Bunny Villarosa, all Master in Business Management (MBM) students. The paper was part of the requirements for the Development of Enterprise course at the Asian Institute of Management. All case materials are prepared solely for the purpose of class discussion. They are neither designed nor intended to illustrate the correct or incorrect management of problems or issues contained in the case. Copyright 1997, Asian Institute of Management, Makati City, Philippines, http://www.aim.edu.ph, e-mail:
[email protected]. Re-edited January 2002. No part of this publication may be reproduced, stored in a retrieval system, used in a report or spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without consent from the Asian Institute of Management. To order copies or request for the reproduction of case materials, write to Knowledge Resource Center, AIM, MCPO Box 2095 Makati City, Philippines or e-mail:
[email protected]. DOMINO’S PIZZA: Franchise Viability Assessment A. INTRODUCTION In October 1996, a group of Master in Business Management students at the Asian Institute of Management (AIM), inspected a site for a possible franchise location. The group had Mr. Donut in mind then. The site was in Amber Avenue, across the NEDA Building in Ortigas Center. The site did not have a frontage. It opened to the side. There was, however, enough space for a frontal signage. It was a weekday, Wednesday, around 2:00 p.m. The group was trying to look for pedestrian traffic. There was hardly any. Commuter traffic was also light although one group member, Ben, mentioned that traffic did get heavy during rush hours. The location had enough parking space for five cars, which the site shared with the other shops. There was also no big “traffic generator” (e.g., Jollibee or McDonald’s) near the area. The group concluded that the place did not attract pedestrians. Although the location would be accessible to offices, it would take a long walk. Thus, the group decided the site did not suit a Mr. Donut outlet. The location did not warrant a low ticket food business. A dine-in or a take-out outlet was also not feasible. On the other hand, the location was strategic because of its proximity to offices, condominiums and residential villages. If there were any fast food franchise that might be feasible, it would have to be pizza delivered to the offices without an existing outlet. Domino’s came to mind. After finding out that Domino’s had been accepting franchisees since the beginning of the year, and that they were interested in opening a site in Pasig, the group decided to study the feasibility of a Domino’s franchise in Amber Avenue. This case documents the group’s cursory look at the pizza business, their discussion on Domino’s
DOMINO’S PIZZA: Franchise Viability Assessment Page Asian Institute of Management Copyright 1997 2 Pizza fast food company, and their pre-feasibility study on locating a Domino’s outlet in the site. B. FAST FOOD INDUSTRY Trends The fast food industry was one of the biggest businesses in the Philippines. Total food consumed in 1994 amounted to Php357.0 billion, 92 percent of which was eaten at home and 8 percent was eaten out. Of the eating-out consumption, 60 percent was in fast food chains, 30 percent in restaurants, and 10 percent in carinderias.1 This translated to total fast food (eaten out) sales of about Php18.0 billion for 1994. Jollibee earned the biggest share (29%), followed by McDonald’s (10%). At an estimated growth rate of 5 percent per annum from 1994 onwards, fast food was an estimated Php18.9 billion industry by year end 1995. It was also projected that the fast food market would continue to boom in the next five to 10 years.2 Thus, projected 1996 and 1997 industry sales were Php19.845 billion and Php20.837 billion, respectively. The phenomenal growth of the industry over the past 10 years ending in 1994 (pegged at a solid 25% to 30% annually) was seen in the rapid expansion of food outlets in key areas in Metro Manila and its surrounding towns, as well as in the urban emerging centers in other parts of the country. The consensus of key industry players was that the market was far from saturated (as shown by multiple branches in one area). The University of Asia and the Pacific projected dining expenses to grow by as much as 8.5 percent over the next five years, a clear indication that Filipinos were increasing the use of their discretionary income by eating out. In a related study, Private Development Corporation of the Philippines (PDCP) stated that higher disposable income and changing lifestyles had been the main reasons for the steady integration of the fast food industry in the Filipino’s way of life. In a constantly improving economy, Filipinos had more money to spend and subsequently greater freedom of choice in terms of what kind of food they wanted and where they made their purchases. To support its argument, PDCP cited data which showed that Filipinos spent more of their income on dining out (3.5%) than sending their children to school (3%) or engaging in recreational activities (0.4%). Characteristics Fast food outlets offered a wide variety of quality products that ranged from simple refreshments to full meals. The eating out public had also become more 1 “Market Trends in the Fast food Business,” M. Reyes & A. Palma. Food and Agribusiness Papers, No. 3, 1995. 2 “Updates and Trends in the Fast food Business,” CRC-IAP’s Food and Agribusiness Marketing Seminar, August 3-4, 1995.
DOMINO’S PIZZA: Franchise Viability Assessment Page Asian Institute of Management Copyright 1997 3 sophisticated in its demands. More importantly, since fast foods catered to a price sensitive segment, they had to offer affordable prices. This was very evident in the heavy promotions for “value” meals. Almost all key players in the fast food industry offered “value” meals because consumers were stretching their peso. Product quality remained the most important factor for customers to patronize an outlet. Restaurants like McDonald’s, Pizza Hut, to name a few, followed strict quality control systems. They had operating manuals and state-of-the-art equipment that ensured food quality and hygiene. Advertising and marketing strategies played an important role in maintaining the competitive edge in the industry. Major fast food outlets spent millions of dollars in advertising. Some of them even allocated a fixed percentage of their sales to a corporate wide advertising fund. Location was another important factor which could further boost competitive advantage in the industry. Fast food restaurants were usually found in areas where there was heavy pedestrian traffic. Another factor adding to the prosperity of the industry was the “home-delivery” concept which was considered a key success factor by the major fast food outlets in maintaining an edge over competition. Eating-Out Behavior Based on a national survey by the Asia Research Organization in 1994, an average Filipino spent Php149.95 per visit to a fast food or restaurant. He or she ate out around 1.3 times a month. The working class ate out most often (four times a month or about once a week) and spent the most per visit (Php312.00). Salary earners and students averaged twice a month. A wage earner spent Php161.00 per visit; a full-time student, Php120.00. Self-employed individuals (formal and informal) ate out once a month, spending Php134.00 to Php156.00 (Working class expenditure is summarized in Table 1). Industry Growth Prospects The Philippine population was young. According to 1990 statistics, half of the 62 million Filipinos were below the age of 18. Since a large portion of the fast food joints catered to this age group, this was a good sign for the industry. This growth was also characterized by increased urbanization. The urban population had risen considerably over the last decade from about 25 percent to 43 percent of the total population. Increased urban population meant more customers for fast food chains. Table 1 Expenditure on Eating Out, by Respondents Working/Employed Class Average Number of Visits/Month Average Spending/Visit ( in Pesos ) Wage/Salary Earner 2.0 161.32 Self-Employed Formal 1.3 156.25 Informal 1.1 133.80
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