Domino’s Pizza and Its Master Franchise Model

Domino’s Pizza (DPZ) has master franchise agreements with international market restaurants that are in charge of developing business in a given region. Master franchises can sub-franchise or run another pizza restaurant themselves.

The chart below shows the international restaurant count, most of which are developed through master franchise agreements.

The master franchise agreement also gives the master franchisee operating rights to a supply chain in a given region. Needless to say, the potential master franchisee must demonstrate certain requirements such as knowledge of local laws, understanding of local consumers, and an appreciation of real estate restrictions in the region. Among other things, potential master franchisees also need to have access to capital.

In the domestic market, Domino’s Pizza grants independent franchise owners the right to open additional franchised stores. According to the company, about 90% of its domestic independent franchise owners started their careers either in-store or as a delivery driver. But when it comes to expanding internationally, Domino’s uses the master franchisee approach.

Domino’s, like other restaurant companies, charge a royalty fee for its franchise. Royalty fees average 3.1% in international markets, but Domino’s fee is  5.5%, and it’s charged as a percentage of sales.

Papa John’s (PZZA) royalty fee is 5% of sales, and Pizza Hut’s parent, Yum! Brands (YUM), charges between 4% and 6% of sales.

Domino’s franchise royalty revenue accounts for 12% of total revenue. In comparison, McDonald’s (MCD) franchise revenue accounts for about one-third of the company’s total. MCD makes up between 3% and 4% of the Consumer Discretionary Select Sector SPDR (XLY) and the iShares U.S. Consumer Services ETF (IYC).

Domino’s franchise agreement is typically for a ten-year term, renewable for another ten years. According to company filings, Domino’s renewal rate is 99%.

Besides the royalty fee, Domino’s also collects a 6% marketing and advertising fee based on sales from domestic franchisees. These funds are used for advertising, commercial production, public relations, market research, and other brand promotional activities.