Dominos Pizza and the price of flour

[TheMotorcycleBoy]

Hi folks,

When Mel and I first started investing (2018) the first stock we bought was Dominos (LON:DOM). Unfortunately this was at the time that David Wild was at the helm. Sadly we sold out after David, seriously "cheesed" off the franchisees and the price dropped.

I'm now trying to diversify into lower PE shares, and I'm considering opening another position. However, I'm now wondering how much of it's flour does it and other firm get from countries from Ukraine? I can't imagine harvests will be that good this year; with a large amount farmland probably destroyed, most of the farm labourers holding a Kalashnikov instead of driving a tractor. And personally I wouldn't exactly want to be sat in a tractor in Ukraine right now - the term sitting duck springs to mind.

Matt

[ReformedCharacter]

Hi folks,

However, I'm now wondering how much of it's flour does it and other firm get from countries from Ukraine? I can't imagine harvests will be that good this year; with a large amount farmland probably destroyed, most of the farm labourers holding a Kalashnikov instead of driving a tractor. And personally I wouldn't exactly want to be sat in a tractor in Ukraine right now - the term sitting duck springs to mind.

Matt

Undoubtedly wheat prices will rise but what percentage of the sale price of a pizza is flour? I'd be more concerned about the cost of energy to cook the pizzas than the cost of flour and probably lower footfall as people's disposable incomes gets hit. Doesn't necessarily mean than Dominos is a bad investment though, just that I wouldn't personally be too concerned about the cost of flour.

RC

[simoan]

Hi folks,

When Mel and I first started investing (2018) the first stock we bought was Dominos (LON:DOM). Unfortunately this was at the time that David Wild was at the helm. Sadly we sold out after David, seriously "cheesed" off the franchisees and the price dropped.
I'm now trying to diversify into lower PE shares, and I'm considering opening another position. However, I'm now wondering how much of it's flour does it and other firm get from countries from Ukraine? I can't imagine harvests will be that good this year; with a large amount farmland probably destroyed, most of the farm labourers holding a Kalashnikov instead of driving a tractor. And personally I wouldn't exactly want to be sat in a tractor in Ukraine right now - the term sitting duck springs to mind.

Matt

I would take the view that anyone making and selling pizza will be in the same boat, and Domino's would be better placed to cope than most smaller operators. All in all, I'd say it is pretty irrelevant to the investment case tbh. I'm more concerned that you consider a forward PER of 18 as being low

All the best, Si

[TheMotorcycleBoy]

Hi folks,

When Mel and I first started investing (2018) the first stock we bought was Dominos (LON:DOM). Unfortunately this was at the time that David Wild was at the helm. Sadly we sold out after David, seriously "cheesed" off the franchisees and the price dropped.
I'm now trying to diversify into lower PE shares, and I'm considering opening another position. However, I'm now wondering how much of it's flour does it and other firm get from countries from Ukraine? I can't imagine harvests will be that good this year; with a large amount farmland probably destroyed, most of the farm labourers holding a Kalashnikov instead of driving a tractor. And personally I wouldn't exactly want to be sat in a tractor in Ukraine right now - the term sitting duck springs to mind.

Matt

I would take the view that anyone making and selling pizza will be in the same boat, and Domino's would be better placed to cope than most smaller operators. All in all, I'd say it is pretty irrelevant to the investment case tbh. I'm more concerned that you consider a forward PER of 18 as being low

All the best, Si

Ok. Relatively low! I've got several holdings which are still a lot higher than 18. E.g. Croda, Spirax-Sarco, Nvidia. Isn't 18x pretty cheap these days still for a decent quality share?

My concern now is that, even though the markets are very uncertain, because I'm still earning, I want to keep up my current pace of equity investment, because I want to protect my savings against inflation. But I'm also aware of my current portfolio, being quite overweight in a few firms which whilst I do consider them "quality shares", they are high PE, nothing is without risk, and no one seems to be quite sure about whether we will be hit with high inflation, or a global recession in the years end.

But that's just my somewhat naive and quite probably ill-formed view!

Matt

[simoan]

Hi folks,

When Mel and I first started investing (2018) the first stock we bought was Dominos (LON:DOM). Unfortunately this was at the time that David Wild was at the helm. Sadly we sold out after David, seriously "cheesed" off the franchisees and the price dropped.
I'm now trying to diversify into lower PE shares, and I'm considering opening another position. However, I'm now wondering how much of it's flour does it and other firm get from countries from Ukraine? I can't imagine harvests will be that good this year; with a large amount farmland probably destroyed, most of the farm labourers holding a Kalashnikov instead of driving a tractor. And personally I wouldn't exactly want to be sat in a tractor in Ukraine right now - the term sitting duck springs to mind.

Matt

I would take the view that anyone making and selling pizza will be in the same boat, and Domino's would be better placed to cope than most smaller operators. All in all, I'd say it is pretty irrelevant to the investment case tbh. I'm more concerned that you consider a forward PER of 18 as being low

All the best, Si

Ok. Relatively low! I've got several holdings which are still a lot higher than 18. E.g. Croda, Spirax-Sarco, Nvidia. Isn't 18x pretty cheap these days still for a decent quality share?

My concern now is that, even though the markets are very uncertain, because I'm still earning, I want to keep up my current pace of equity investment, because I want to protect my savings against inflation. But I'm also aware of my current portfolio, being quite overweight in a few firms which whilst I do consider them "quality shares", they are high PE, nothing is without risk, and no one seems to be quite sure about whether we will be hit with high inflation, or a global recession in the years end.

But that's just my somewhat naive and quite probably ill-formed view!

Matt

Yes, a PER of 18 seems to be about the going rate currently but mainly because the price of quality shares has been reducing since the autumn. I agree it makes sense to accumulate at lower prices in the knowledge things could still get cheaper, especially if interest rates continue rising. If you're working then you can afford to keep putting money into the market for the long term. However, I don't consider the effect of inflation on cash in my investment accounts.

[TheMotorcycleBoy]

Hi folks,

However, I'm now wondering how much of it's flour does it and other firm get from countries from Ukraine? I can't imagine harvests will be that good this year; with a large amount farmland probably destroyed, most of the farm labourers holding a Kalashnikov instead of driving a tractor. And personally I wouldn't exactly want to be sat in a tractor in Ukraine right now - the term sitting duck springs to mind.

Matt

Undoubtedly wheat prices will rise but what percentage of the sale price of a pizza is flour? I'd be more concerned about the cost of energy to cook the pizzas than the cost of flour and probably lower footfall as people's disposable incomes gets hit. Doesn't necessarily mean than Dominos is a bad investment though, just that I wouldn't personally be too concerned about the cost of flour.

RC

You make a good point!

Curiosity got the better of me:

Country        | Wheat Production (million metric tons)
China          |                                  134.3
India          |                                   98.5
Russia         |                                   85.9
United States  |                                   47.3

https://lisbdnet.com/where-does-flour-c ... _The_World

(Yet more dependency on Russia and India and China, who seem somewhat "neutral" in stated views on Russia)

[TheMotorcycleBoy]

Hi folks,

When Mel and I first started investing (2018) the first stock we bought was Dominos (LON:DOM). Unfortunately this was at the time that David Wild was at the helm. Sadly we sold out after David, seriously "cheesed" off the franchisees and the price dropped.
I'm now trying to diversify into lower PE shares, and I'm considering opening another position. However, I'm now wondering how much of it's flour does it and other firm get from countries from Ukraine? I can't imagine harvests will be that good this year; with a large amount farmland probably destroyed, most of the farm labourers holding a Kalashnikov instead of driving a tractor. And personally I wouldn't exactly want to be sat in a tractor in Ukraine right now - the term sitting duck springs to mind.

Matt

I would take the view that anyone making and selling pizza will be in the same boat, and Domino's would be better placed to cope than most smaller operators. All in all, I'd say it is pretty irrelevant to the investment case tbh. I'm more concerned that you consider a forward PER of 18 as being low

All the best, Si

Ok. Relatively low! I've got several holdings which are still a lot higher than 18. E.g. Croda, Spirax-Sarco, Nvidia. Isn't 18x pretty cheap these days still for a decent quality share?

My concern now is that, even though the markets are very uncertain, because I'm still earning, I want to keep up my current pace of equity investment, because I want to protect my savings against inflation. But I'm also aware of my current portfolio, being quite overweight in a few firms which whilst I do consider them "quality shares", they are high PE, nothing is without risk, and no one seems to be quite sure about whether we will be hit with high inflation, or a global recession in the years end.

But that's just my somewhat naive and quite probably ill-formed view!

Matt

Yes, a PER of 18 seems to be about the going rate currently but mainly because the price of quality shares has been reducing since the autumn. I agree it makes sense to accumulate at lower prices in the knowledge things could still get cheaper, especially if interest rates continue rising. If you're working then you can afford to keep putting money into the market for the long term. However, I don't consider the effect of inflation on cash in my investment accounts.

re. Dominos. I just went over their Financial Statements for the past 6 years. Whilst they appear to be quite cash generative, and have high margins+ROCE, they seem to have been negative equity for past 3 of those years.

It seems due to a combination of them disposing of Northern European assets from their failed attempt hit overseas markets, and from IFRS-16 making them need to put their lease liabilities down as debt.

So I'm a bit kinda dubious of re-opening a position in them now!

Matt

[Hallucigenia]

Curiosity got the better of me:

Country        | Wheat Production (million metric tons)
China          |                                  134.3
India          |                                   98.5
Russia         |                                   85.9
United States  |                                   47.3

https://lisbdnet.com/where-does-flour-c ... _The_World

(Yet more dependency on Russia and India and China, who seem somewhat "neutral" in stated views on Russia)

But most wheat stays inside the country of production, the USDA is estimating that exports from Russia and Ukraine will be reduced by 7 million tons- which is less than 1% of global wheat production - and will be offset in part by 3.5m tons more exports from Oz and India.

As others have said - I'd be more worried about the energy side of things, but the margins on pizza are so high that flour is not going to be that material to Domino's margins. But I'd be more worried about demand - what the effect of higher utility bills etc has on discretionary spending.

[TheMotorcycleBoy]

Curiosity got the better of me:

Country        | Wheat Production (million metric tons)
China          |                                  134.3
India          |                                   98.5
Russia         |                                   85.9
United States  |                                   47.3

https://lisbdnet.com/where-does-flour-c ... _The_World

(Yet more dependency on Russia and India and China, who seem somewhat "neutral" in stated views on Russia)

But most wheat stays inside the country of production, the USDA is estimating that exports from Russia and Ukraine will be reduced by 7 million tons- which is less than 1% of global wheat production - and will be offset in part by 3.5m tons more exports from Oz and India.

Interesting. Ta!

As others have said - I'd be more worried about the energy side of things, but the margins on pizza are so high that flour is not going to be that material to Domino's margins.

Indeed.

But I'd be more worried about demand - what the effect of higher utility bills etc has on discretionary spending.

Problematic for my foli now. And probably other ppls.

e.g. I guess that criteria includes:
Visa
Paypal
Macdonalds
Diageo
Next
Burberry
Louis Vuitton
Adidas
Intel (people will replace PCs less)
Nvidia (people will replace video cards less)

My thoughts now are (for my portfolio going forward) do I add different firms to my foli, or keep buying the above, but be mindful that my purchases should at commensurately lower prices - due the squeeze in sales to which you alluded.

Matt

[ADrunkenMarcus]

When Mel and I first started investing (2018) the first stock we bought was Dominos (LON:DOM). Unfortunately this was at the time that David Wild was at the helm. Sadly we sold out after David, seriously "cheesed" off the franchisees and the price dropped.

Failed international expansion and neglect of the core UK and Ireland market weighed heavily on DOM from about 2016 through 2021. However, I've held since March 2010 and the overall performance remains pretty strong.

But I'd be more worried about demand - what the effect of higher utility bills etc has on discretionary spending.

Problematic for my foli now. And probably other ppls.

e.g. I guess that criteria includes:
Visa
Paypal
Macdonalds
Diageo
...

Swings and roundabouts. Rising fuel costs impact everything, ultimately.

Domino's has proved fairly resilient before in terms of strained consumer spending power. They did OK when UK wage growth was sluggish and we must remember that UK 'real wages' seem to be on course for a horrific 2007-2022. I think some people order pizza in rather than going out, so they're comparing to restaurant prices. They have also started adding a delivery fee for smaller orders which seems to absorb some costs without altering the headline 'deal' prices on the menu. You don't pay the delivery fee once your order is above a certain amount...an odd incentive, I know, but apparently (like the £1.99 deals) it works.

Diageo certainly has materials costs but then it is a firm with pricing power IMHO.

Visa and PayPal actually benefit from inflation in one sense, because they take a percentage cut of the total expenditure. (I do wish my PayPal investment of April 2020 had simply been directed instead at topping up further Mastercard!)

Best wishes


Mark.

[TheMotorcycleBoy]

When Mel and I first started investing (2018) the first stock we bought was Dominos (LON:DOM). Unfortunately this was at the time that David Wild was at the helm. Sadly we sold out after David, seriously "cheesed" off the franchisees and the price dropped.

Failed international expansion and neglect of the core UK and Ireland market weighed heavily on DOM from about 2016 through 2021. However, I've held since March 2010 and the overall performance remains pretty strong.

But I'd be more worried about demand - what the effect of higher utility bills etc has on discretionary spending.

Problematic for my foli now. And probably other ppls.

e.g. I guess that criteria includes:
Visa
Paypal
Macdonalds
Diageo
...

Swings and roundabouts. Rising fuel costs impact everything, ultimately.

Domino's has proved fairly resilient before in terms of strained consumer spending power. They did OK when UK wage growth was sluggish and we must remember that UK 'real wages' seem to be on course for a horrific 2007-2022. I think some people order pizza in rather than going out, so they're comparing to restaurant prices. They have also started adding a delivery fee for smaller orders which seems to absorb some costs without altering the headline 'deal' prices on the menu. You don't pay the delivery fee once your order is above a certain amount...an odd incentive, I know, but apparently (like the £1.99 deals) it works.

Diageo certainly has materials costs but then it is a firm with pricing power IMHO.

Visa and PayPal actually benefit from inflation in one sense, because they take a percentage cut of the total expenditure. (I do wish my PayPal investment of April 2020 had simply been directed instead at topping up further Mastercard!)

Best wishes


Mark.

Hi Mark,

Was listening to R4 this morning. Apparently lots of cooking oil and similar products are from Ukraine. Alas more price increases + more inflation due difficulties moving crops and products out.

Also in WSJ
https://www.wsj.com/articles/ukraine-wa ... 1649239342

[Mike4]

Was listening to R4 this morning. Apparently lots of cooking oil and similar products are from Ukraine. Alas more price increases + more inflation due difficulties moving crops and products out.

Also in WSJ
https://www.wsj.com/articles/ukraine-wa ... 1649239342

Another thing affecting vegetable oil demand I can see heaving into view is as a vehicle fuel. Old diesel engines run on it just fine apparently, and given a litre of cooking oil in tesco is now substantially cheaper than a litre of diesel, I can see this use for it getting more common. Also on building sites to run the JCBs, dumper trucks etc as they are now banned from using red diesel.

Yes it's illegal as the fuel duty has not been paid on it, but chances of getting caught are low as the chemical marker added to red diesel is also (presumably) missing from cooking oil.

[TheMotorcycleBoy]

Was listening to R4 this morning. Apparently lots of cooking oil and similar products are from Ukraine. Alas more price increases + more inflation due difficulties moving crops and products out.

Also in WSJ
https://www.wsj.com/articles/ukraine-wa ... 1649239342

Another thing affecting vegetable oil demand I can see heaving into view is as a vehicle fuel. Old diesel engines run on it just fine apparently, and given a litre of cooking oil in tesco is now substantially cheaper than a litre of diesel, I can see this use for it getting more common. Also on building sites to run the JCBs, dumper trucks etc as they are now banned from using red diesel.

Yes it's illegal as the fuel duty has not been paid on it, but chances of getting caught are low as the chemical marker added to red diesel is also (presumably) missing from cooking oil.

Yes. You can easily run diesel vehicles on veg. oil.

Living out in the Fens we meet all sorts of "interesting" characters. There's a guy 1.5 miles up the (dead straight) road, who sometimes picks up (for free!) any hardcore rubbish from us. He (somewhat illegally!) runs his old Audi TDIs on waste engine oil. If you see and smell the happenings when he pulls away from our driveway, you'll see what I mean.

[stevensfo]

Was listening to R4 this morning. Apparently lots of cooking oil and similar products are from Ukraine. Alas more price increases + more inflation due difficulties moving crops and products out.

Also in WSJ
https://www.wsj.com/articles/ukraine-wa ... 1649239342

Another thing affecting vegetable oil demand I can see heaving into view is as a vehicle fuel. Old diesel engines run on it just fine apparently, and given a litre of cooking oil in tesco is now substantially cheaper than a litre of diesel, I can see this use for it getting more common. Also on building sites to run the JCBs, dumper trucks etc as they are now banned from using red diesel.

Yes it's illegal as the fuel duty has not been paid on it, but chances of getting caught are low as the chemical marker added to red diesel is also (presumably) missing from cooking oil.

I think that only the old diesel engines will run on veg oil, and even then, you may have to dilute it with normal diesel. I was once very much into this sort of thing and a colleague at work suggested we start a small Biodiesel project. Just need sodium hydroxide (lye/caustic soda) and a few other things. Biodiesel is not as thick as oil and can be used in all diesel engines. Unfortunately, the price of veg oil shot up -c. 2002 - and we dropped the idea, though I did make a few litres just out of interest.
Not sure how true it is, but I heard stories of police catching people using veg oil due to a smell of 'fish 'n chips' from the exhaust.

Steve

PS The truth is that if tomorrow we all used only veg oil and electricity, the governments around the world would lose so much tax that they'd simply tax something else.

[tjh290633]

The Big Yellow bus company in Brighton run their diesel buses on recovered vegetable oil. They are gradually moving to electric buses, at least for local services. Somebody locally does the collection of the oil.

TJH

[GrahamPlatt]

Not sure how true it is, but I heard stories of police catching people using veg oil due to a smell of 'fish 'n chips' from the exhaust.

This is likely to be true, having smelled (smelt?) the odour myself whilst following certain vehicles. It’s pretty unmistakeable.

[ReformedCharacter]

I think that only the old diesel engines will run on veg oil, and even then, you may have to dilute it with normal diesel.

IIRC the 'rubber' seals on older car diesel engine fuel systems degraded with biodiesel and only vehicles maufactured post c. 2000 were safe for biodiesel. But really old diesel engines without such seals would be fine I expect, Rudolph Diesel's engines ran on peanut oil, amongst other fuels.

RC

[westmoreland9]

the price of making pizza is minimal, you're probably talking about 15-20% at most of the average selling price, and the biggest cost for a pizza is the cheese.

as marcus says, most people don't think about domino's about cheese on toast for £10-15 or whatever, they think £30 between 3 people is a hell of a lot cheaper than eating out.

it's a very successful businesses model. they compete on brand, breadth and reliability of delivery, and product quality / consistency. the volumes they do on a friday / saturday evening have to be seen to be believed (i had a short stint in delivery in my youth) and it's no surprise why both them and their franchisees (as well as domino's inc in the US who get a cut for doing nothing at all) make such huge profits.

as for the stock itself, they have proven themselves woefully incompetent at running anything other than their UK / ireland base. they've probably destroyed hundreds of millions in shareholder value there, though domino's pizza enterprises of Australia took over most of the german franchise, and domino's pizza group's 30% is worth upwards of £100m now.

[TheMotorcycleBoy]

the price of making pizza is minimal, you're probably talking about 15-20% at most of the average selling price, and the biggest cost for a pizza is the cheese.

as marcus says, most people don't think about domino's about cheese on toast for £10-15 or whatever, they think £30 between 3 people is a hell of a lot cheaper than eating out.

it's a very successful businesses model. they compete on brand, breadth and reliability of delivery, and product quality / consistency. the volumes they do on a friday / saturday evening have to be seen to be believed (i had a short stint in delivery in my youth) and it's no surprise why both them and their franchisees (as well as domino's inc in the US who get a cut for doing nothing at all) make such huge profits.

as for the stock itself, they have proven themselves woefully incompetent at running anything other than their UK / ireland base. they've probably destroyed hundreds of millions in shareholder value there, though domino's pizza enterprises of Australia took over most of the german franchise, and domino's pizza group's 30% is worth upwards of £100m now.

Given the remark I've emboldened do you believe that LON:DOM is not really a "growth" business? I assume your mentioned domino's pizza enterprises of Australia are part of a separate company.

thanks Matt

[ADrunkenMarcus]

Given the remark I've emboldened do you believe that LON:DOM is not really a "growth" business? I assume your mentioned domino's pizza enterprises of Australia are part of a separate company.

I think DOM remains a growth business insofar as there is still significant room for growth in their core UK and Ireland market. DOM is also a very cash generative business model, which leaves scope for share buybacks and dividends. We should not underestimate the scope for growth in EPS/DPS even as toppling growth slows, due to a mix of more moderate topline growth and ongoing reductions in share count.

Their ill-fated overseas expansion since 2012 turned out to be pretty disastrous and I think they did neglect their core market (which they're now rectifying). Yet, as a holder since 2010, I have still enjoyed pretty strong returns. And it has de-rated. It is currently trading on a 5.1 percent free cash flow yield, rising to 6.6 percent on 2024 forecasts.

It will be interesting to see what happens as regards their German interests.

Best wishes


Mark.