Rethinking Domino’s Expansion Plan—The Case of India
“It is a lesson for every retailer. Unviable units should be shut down. A pizza joint or a burger joint should realize that in a fast-expanding market, they are not just competing with outlets which have similar interests but also with other kinds of food outlets as well.” Arvind Singhal, MD, KSA Technopak
November 1999 to March 2001– “Sky is the Limit”
In November 1999, Pavan Bhatia took over as the CEO of Domino’s . He seemed to be very ambitious and wanted to make Domino’s the largest fast-food chain in India. Pavan went about opening Domino’s outlets across the country. According to a company handout released in early 2001, the increase in number of outlets was fourfold during March 2000-January 2001. It was the fastest growth Domino’s had in any of the 63 countries it operated in. From an average of four stores every year in its first four years of operation, Domino’s expanded to more than 100 outlets in 10 months across 30 cities in India.
Dominos entered into an agreement with a real estate consultant CB Richard Ellis to help with locations, conduct feasibility studies, and manage the construction. Pavan said, ” We are in the business of selling pizzas, and one of the biggest barriers in retailing is real estate, so we decided to hand over the entire real estate operations to estate consultants CB Richard Ellis. ” Pavan realized that fast track growth could be achieved only by focusing on the core business of selling pizza. Incidentally, CB Richards was already working with oil companies, advising them on how to go about making their petrol pumps ready for competition once private players came in. therefore, CB Richards made a recommendation to Indian Oil Corporation (IOC) to let Domino’s operate in its petrol pump premises. In December 2000, Domino’s entered into an agreement with IOC to provide food products at the latter’s 7,500 outlets across the whole country.
Meanwhile, in early 2001, Pavan signed an agreement with the CEO of Jet Airways to launch their ‘ultimate deep dish,’ and ‘sweetie pie’ products on Jet Airways flights. He wanted quantum growth and felt that Domino’s needed to tie up with airports, railway stations and petrol pump stations. In early 2000, Domino’s had opened an outlet at the corporate office of Infosys, Bangalore, which was very successful. It also had outlets at cinema halls – in Delhi, Bangalore, and Kolkata. Pavan said, ” For Domino’s, sky is the limit. We like to deliver hot, fresh pizzas everywhere, anytime.”
During March 2000-January 2001, Pavan opened Domino’s outlets in small towns and cities. Pizza consumption in these places was very low. Analysts felt that even those willing to choose the product, found the price unacceptable. The cost per meal was too high. In September 2001, due to low footfalls and lower volumes, the top management representative, Hari Bhartiya, planned to shut down Domino’s outlets not only in some small cities but also a delivery outlet in the wealthy Gujranwala Town in North Delhi.
Hari said, ” We realized we’d be wasting too much time, money and resources trying to do it all ourselves. For instance, just acquiring a bunch of permits for each store in each city is itself a big job. Then there are the brokers, city laws, markets, licensing, title, infrastructure, water, power, lease agreements, and most important, dealing with competing restaurants.” However, Domino’s officials felt that there was nothing wrong with increasing the number of outlets and Hari commented , “We needed to grow to effectively utilize the expensive back-end infrastructure (like distribution centers) that we had set up by March last year (1999) but, we feel that the growth had taken place on a business model that was not able to support it. ”
Finally, in March 2001, at a board meeting, Domino’s top management, represented by Hari Bhartiya concluded that “ Pavan’s performance during his 18-month tenure was not up to the mark. ” The board felt that Pavan had initiated an expansion strategy that was ‘ rush, thoughtless, and not properly thought out. ‘ Therefore, in May 2001, Pavan Bhatia, CEO, Domino’s Pizza India Ltd.1 (Domino’s) stepped down from his post.
However, many analysts did not agree with the board’s conclusion as they felt that the board was not considering the possible long-term benefits of Pavan’s strategy. The analysts felt that there was nothing wrong with Pavan’s expansion plan, and a consultant associated with the expansion plan said, “One has to take risks to reach economies of scale. Domino’s also shook-up competition when it reached a target of 100 outlets.”
Domino’s officials who supported Pavan Bhatia’s expansion plan were of the view that only 5% of all stores were in places where business was poor and this was a globally accepted trend. They further argued that the profitable stores cross-subsidizing the unprofitable ones was also a common practice globally. However, Hari Bhartiya, without whose approval the expansion could not go ahead, insisted that the increase was only 100% in 2000-2001.
Analysts were divided in their opinion about Hari Bhartiya’s role in all these developments. While some felt that Hari Bhartiya was kept in the dark, others felt that he was a silent observer. Still others felt that Hari Bhartiya agreed with Pavan Bhatia’s strategy, only to make him a scapegoat when things went wrong. Officials who supported Pavan Bhatia’s expansion plan felt that Hari Bhartiya was completely aware of all the developments. They said that he had actively supported some of Pavan Bhatia’s plans including expansion of outlets.
However, others claimed that Pavan did take some initiatives without prior consent of Hari Bhartiya. For instance, marketing expenses of about Rs.50 million were allegedly spent without prior budgetary approvals. It was also believed that there were no records to account for an expenditure of about Rs.20 million on the Sri Lankan operations which was not completed. However, Pavan Bhatia’s supporters claimed that such claims were meant to harm Pavan and nothing of the sort could take place in a professionally run organization.
To Grow or Not To Grow?
By mid-2001, Domino’s future growth plans were also slowed down. (Refer Exhibit II) In early 2001, Domino’s had announced plans of adding 100 outlets every year, and an investment of Rs.500 million in 2001. Hari Bhartiya said, “The board had never approved either the investment or the plan to start 100 new outlets in a year’s time.” The plan to open new outlets in Bangladesh was also postponed. These corrective measures were expected to be over by late 2001. Explained Hari Bhartiya, “When you grow the way we did last year, (2000), there are bound to be problems. Now, we are dealing with them.” He was also looking for a new CEO.
Questions for Discussion:
1. Most strategic analysts would agree with Pavan believe that “fast track growth could be achieved only by focusing on the core business of selling pizza”. So, what went wrong? Explain.
2. Some analysts felt that Domino’s expansion had taken place on a business model that was not able to support it. Do you agree with them? If yes, what were the drawbacks of Domino’s business model?
3. A comment on the performance of Domino’s– “Pavan Bhatia’s expansion plan would not have come under criticism if the actual sales matched the projections.” Why do you think the new outlets were not contributing to Domino’s growth?
4. In September 2001, they announced that it will shut down outlets in some small cities and a delivery outlet in Delhi. Do you think the closure of the outlets would affect the growth of Domino’s?