Dominos Profits and Exchange Rate Risks

Founded in 1960 by Tom and James Monaghan in Ypsilanti, Michigan, Domino’s was first known as DomiNick’s, it was not until 1965 when Tom, now the sole owner renamed it Domino’s Pizza, Inc., and in 1967 its first franchise was established. Nearly a decade and a half later in 1983 after establishing its first franchise, Domino’s Pizza launched their first international store located in Winnipeg, Canada. Today, Domino’s delivers an excess of 1 million pizzas a day worldwide, operates 11,700 stores world-wide with more than 5000 franchised stores in over 75 countries (Domino's, 2015). In 2013 Domino’s Pizza ranked 7th out of 14 quick service restaurants (QSR) in the world in terms of revenues, and generated a reported $1.8 billion dollars (Statista, 2015). As a result of global expansion, now in 2014 more than half of Domino’s $8.9 billion in retail sales were generated from international operations alone totaling $4.8 billion (Domino's, 2015). Domino’s international expansion has enabled the parent firm to become the number one pizza delivery company in the world and second to Pizza Hut of Yum! Brands in terms of worldwide retail sales.

Domino’s has grown into an international pizza powerhouse through a strong international master franchising system, which has increase global brand recognition and overall profitability of the firm. Pricing of revenues and costs in terms of currency denomination may have a direct impact on the profitability of a MNC due to exchange rate exposure. Domino’s a US based MNC prices its revenues in terms of currency denomination in the form of the US dollar (Domino's Pizza, Inc., 2013). All revenues generated domestically and internationally are remitted to the parent firm in the form of US currency, which makes Domino’s susceptible to foreign exchange rate risks. In addition to revenues, Domino’s foreign operational costs are priced in terms of the currency denomination in the country in which they are incurred and are the sole responsibility of the foreign franchisee. Domino’s international operations pay both their suppliers and employees in the foreign currency in which their locations are established, which means foreign operating costs do not have a direct negative impact the parent firm profitability.

Moreover, in terms of currency denomination it should be noted that revenues received from Domino’s international operations are not based on profits generated. Rather, revenues generated from the parent firms international operations are derived from continuing royalty fees, which are 2.8% of individual unit retail sales (Domino's Pizza, Inc., 2013). In addition, the cost of international operations do not directly impact the parent firm, as the franchisee in international markets are responsible for all cost associate with doing business as Domino’s. In summary, due to the nature of Domino’s licensing agreements with its international franchisees, there is limited financial risk to the parent firm in terms of cost. Finally, revenues earned in a foreign currency directly impact the firm profits which are priced in terms of the US dollar; however risks associated with costs are limited to the parent firm through international master franchise agreements (MFAs).

As a result of global brand recognition Domino’s International has experienced 85 consecutive quarters, the equivalent of 21 years of positive same store growth at the end of Q1 2015 (Domino's, 2015). All of Domino’s international operations are franchised through master franchise (MFA) agreements; these agreements contain a growth clause which requires the master franchisee to open a minimum number of stores within a defined period of time. As a result of the master franchisees growth clause, Domino’s the parent firm realizes increased revenues with each additional store opened, through the collection of a 2.8% of retail sales royalty fee charged to each individual store. In addition to the increased royalty revenues, international master franchisees also contribute to the parent firm’s profits through their MFAs, as they are required to pay an additional franchisee fee for every new store opened (Domino's Pizza, Inc., 2013). Master franchisees Domino’s Pizza Enterprises Ltd (DMP) of Australia and Domino’s Pizza Group (DPG) of the UK have significantly contributed to the global expansion, brand awareness, and increase store count, which have resulted in increased revenues and profits to its parent firm Domino’s USA.

Domino’s Australia a master franchise of Domino’s brand is the largest franchisee of the US based MNC in the world in terms of total stores and network sales. Domino’s Australia owns and operates more than 1400 stores and as a master franchise of Domino’s owns the rights to control the supply chain within its own country and a specified region in Europe. Having rights to control their own supply chain enables Domino’s Australia to deliver locally sourced ingredients and pizza dough to all of their stores across France, Belgium, and the Netherlands (Domino's Pizza Enterprises Limited, 2013). Domino’s Pizza Group (DPG) of the UK a master franchise of Domino’s has also made significant contributions to the global expansion and profits of its parent firm. Currently, Domino’s UK owns and operates over 832 stores and is positioned to add 40-50 new stores per year projecting to have 1,200 stores inside of its master franchise by 2020 (Avahaz, 2014).

In addition to controlling a significant market share of Domino’s global operations, master franchisees Domino’s Australia and Domino’s UK also operate their own supply chain and distribution centers. Through the control of supply chain and distribution Domino’s Australia and Domino’s UK can reduce foreign operating costs as well as ensure quality and consistency of its ingredients and end products, which add value to the Domino’s brand. Furthermore, both Domino’s Australia and Domino’s UK contribute through their foreign operations to Domino’s revenues through a 2.8% royalty fee which is derive from each individual stores total retail sales. Domino’s well known for being the pizza delivery experts earns over 56% of its domestic revenues from its supply chain which includes food, supplies, and equipment. However, in terms of its foreign operations their main contributions to Domino’s the parent firms profitability is generated through a 5.5% royalty fee of total per unit retail sales of which 2.8% is added to Domino’s overall revenues (Hitt, 2012).

Globalization and the growth of MNCs have contributed greatly to the US economy and the countries in which their foreign operations are located. MNCs are faced with many challenges; this report will now focus on how Domino’s hedges against exchange rate risks and the effects of an increase or decrease in profits due to currency fluctuations and exchange rate risk. Expansion of a firm into foreign markets enables it to gain access to international markets which can result in increased revenues. In contrast, as with most investments there is an element of risk MNCs are exposed to, such as exchange rate fluctuations which can affect the parent firms revenues and profitability. As the world’s largest pizza Delivery Company in the world Domino’s generates revenues through foreign