Alan Kohler: Don, obviously the shares fell a fair bit yesterday, and I guess investors seem to be worried about to what extent your cost structure is underpinned by poor work practices. Can you assure them that that’s not the case?
Don Meij: Yes, I can assure them that’s not the case. But you’ve seen from the numbers that we came out with yesterday, where we try to be as transparent as possible, that when you look over the last three years since we set up our compliance program. We’ve done 450 spot checks, we’ve now, over that time we exited four franchises from the system, another 22 have voluntarily left the system, and when you put that into perspective, we’ve been able to get back 0.8% of wages and 1.7% of franchisees have left the system over the last three years. Now, we’re obviously embarrassed that those individuals chose to do the wrong thing in our business, but they don’t reflect our business, in that the majority of franchisees, as you can see from those numbers, are not part of this, that they are doing the right thing, and they do run profitable businesses.
AK: Can we just drill into those numbers a bit, so that seems to be a total of, what, 26 have left, is that right?
DM: Yes, that’s right. 26 franchisees, and it actually makes up 30 stores, so when you put it in total, it’s averaged about 10 stores a year for the last three years.
AK: How many audits does that come from? Are those franchises who have left a result from an audit by you?
DM: That’s correct, by an audit from us.
AK: It’s really a question of what percentage of the audits has resulted in the franchisees leaving?
DM: Well we’ve done 450 spot checks. We only go into audit if the spot check highlight something. So, as you can understand, an audit process is quite intense, and it’s quite lengthy, when you go back over a year of a store’s payroll there’s a large number of team members, so we’ve done 450 spot checks and ended up exiting from the system on average of 10 franchisees a year.
AK: But how many audits?
DM: The number of audits was a hundred and…. yeah, I think it’s 150 audits.
AK: Right. So does that mean that something like 20%, or is it 25% of the audit…
DM: That would be misleading statistic because when you’ve got 450 stores, we’ve exited 26 people. The audits is for us just to go through and see if there’s some questions here. Then when we look into that, we did, over the three-year period, exit 26 franchisees from the system. So that’s the problem, the sensationalism around this at the moment is very misleading and people want to tie statistics together that say ‘Oh it’s 20% of the system’, no it’s not, it’s 1.7% of franchisees, that have done the wrong thing. That is the facts.
AK: Look, I mean obviously Don these things have come out in the last week or so and burst into the public arena, but it sounds like you’ve been onto it for some time. Can you just take us through what the history of this is? I mean why have you been conducting audits? Did you first hear about problems of underpayment of workers a while ago and respond to it? Is that what happened?
DM: Yes, correct. So back in 2011, more modernization started to kick in and wages were rising quite rapidly in Australia. We started to get some queries through our business. And so when we looked at those, we did uncover that some people were getting underpaid, so we decided to set up our own compliance program, inside the business, very similar to our food safety audit program. We audit our stores on an ongoing basis for food safety, and we’ve also exited people from our system for food safety issues, over the, I’ve been here for 30 years next month, and that’s been a constant thing in our business. So as we identify, we start to see the trend, we started to act. The biggest thing that I want to make absolutely clear, because the most unfortunate thing from this, is that the clear majority, the absolute majority of our businesses are doing the right thing, and these sort of comments in the media are being overshadowed. Can you imagine those hard working franchisees and managers are being made out as if they’re criminals, when they’re not. We’ve had 1.7% of people that have been criminals, and that’s unfortunate, but unfortunately in a cash business, a small business, some people are greedy and do the wrong thing.
AK: But the suggestion is that the reason that franchisees are underpaying people is because they can’t afford to pay them the full wage, because of the pressure that they’re getting from Head Office on profits…
DM: That’s just not true.
AK: What you’re not happy to address that at all?
DM: We once again shared our profitability this fall, franchisee’s profits are up 32% over the last two years. They’re going to have another record year this year. While we’re all going through the final stages of award modernization, which in small businesses throughout Australia, in retail Australia, you cannot underestimate how significant that has been. The wage growth in Australia has been very high, so despite that, our franchisees are going to make more money this year than they did last year and every year they’ve made money over the last three years. Let’s be honest here. Some of the people we exited from the business, are not taking responsibility for their actions and decisions. They came to us when we were asking for that money to be back paid, they blackmailed us that we’re going to go to the media, I said well go to the media, you’ve done the wrong thing. We have a zero tolerance here, you will exit the system and this money will be paid back to team members. So you’ve still taking to a handful of franchise owners here, that are going out there and making all this noise. And that is not the actions of the majority of franchisees in our business, and we have a profitable system. Franchisees are getting a three to five year payback, that is quite strong by any measure in Australia. So this distortion is just really cruel on all of the really high quality people we have in our system, and at some point it’s got to stop. These people that are making these allegations are the ones who have done the wrong thing. Why are they being made out as if they’re the victim. They’re the ones who actually created the damage in those stores. I mean it’s unbelievable in Australia that we would make them out to be almost heroes and victims, whistle-blowers as such, when they’re the guys who went and did the wrong thing. I just can’t believe that that’s how we act in Australia, when a corporation’s doing the right thing to remove this sort of element from its system, be it the smallest element.
AK: Separate to the discussion about underpayment of workers, there’s also some consumer advocates saying that there’s not a level playing field for franchisees themselves, that there’s a sort of, some sort of favouritism going on, that some franchisees are discriminated against, is that correct?
DM: Absolutely not correct. So if you’re being exited from the system because you’ve done the wrong thing, then of course you can say you’re being bullied, because you don’t want to have to pay things back, you don’t want to have to necessarily leave the system, you’ve had maybe this little scheme you thought you were getting away with. You can call that bullying, but we just call that doing the right thing and zero tolerance and removing people from the business doing the wrong thing. Now when we go to the clear majority of franchisees, it is absolutely natural in any business that we would want the right franchisees in those stores, being the ones who are doing the right things: that’s not called favouritism, that’s just called running a system properly. So these are just once again misleading allegations. This is sensationalism that’s completely out of control, and it’s just absolutely not true.
AK: So returning to the numbers now, and just on a related issue I guess, in terms of the numbers, what sort of increase in wage costs are you forecasting for this year and the next year?
DM: So this year we’re in the final phases of award modernization, and so the remaining piece is 1-2% of sales. So, we’re really at the end of award modernization. Another area that’s been sensationalized that we won’t be able to recover that at the store level, once again, not true. We’ve just stated over and over that we’ve been working on initiatives for eight years, we’re rolling those initiatives through, and the evidence will be through the results. We’ve reported results yesterday, we’ve made it really clear that our franchisees are more profitable and we believe will be more profitable at the end of the award modernization. And then that’s the end of it. Next year it’s just then the minimal wage increases that flow through, as in Australian society that happens every year.
AK: What are those initiatives, Don?
DM: We highlighted yesterday that we’ve got productivity initiatives in the business, we’ve got a new scheduling system, Tanda, it uses AI in the backend, so we’re rolling that this year. We’re rolling out pitchstakes at the moment, which have less than one-year payback and are very profitable, we’ve had a number of pricing initiatives that are running through the business, other product initiatives, more technology initiatives. So some of these things, you can understand, they are competitive simply. This is an industry wide, retail wide, challenge, and Dominos, we believe, is the best positioned, well one of the best positioned coming out of this. So, we’re not going to go into all the fine detail, but you can see from the profits that we declared yesterday, franchisee profitability continues to grow and that’s a fact. And that will continue in this year with a lot of these sort of initiatives.
AK: Some analysts have told me that you shouldn’t think of Domino’s as a pizza company or a food business, it’s more a technology company, and I think you’ve kind of confirmed that over the years. And I just wonder to what extent that’s a response to competition from UberEATS.
DM: Yeah, look the businesses do contracting, so you’ve got nearly every one of our major competitors including the aggregators, all do contracting. That particular model who is definitely something that is very different. I mean we pay by the hour, and then we also reimburse by the delivery if someone uses their own vehicle and in many cases we provide the vehicle. So yes, they are to some degree they our competitors, but still our main competitors are still mainstream fast food. In the normal mainstream fast food if you get rid of the pizza category in the aggregate most people do pay by the hour like we do.
AK: I just wonder how much further you can go with pizzas. I mean I have also heard talk that you’re looking at other products such as hamburgers.
DM: I think people are extending it to say things like hamburgers, I can’t quote what we’re going to be doing next, once again, for competitive reasons, but yes we’re extending our menu, and yes, some of these sort of comments are a little bit far-fetched, but yes we are working on extending our menu.
AK: And I suppose the question is, with the share price where it is, and the very high PE still even after yesterday’s fall, investors are going to inevitably ask where’s the growth coming from. Is it fair to say that it’s both menu extension and geographical expansion?
DM: Well it’s… by and large the first thing… and this needs to be my last question, I do apologize… the major thing is that we are the leaders in the internet of food. The internet of food is growing at 30-40% a year.
AK: What do you mean by the internet of food? Do you mean apps, just delivery apps and so on?
DM: All online retail food purchasing. So where food retail purchasing happens, online, then that is the internet of food. And that’s growing at 30-40% year, and makes up today approximately 70% of our sales for example in Australia. So we are… we mostly exist in internet of food today, and in the offline, the analogue world, which is the making, the previous fast food industry, we are only 2.8% of that. But in the internet of food we’re 44% of that today, and that particular category is growing at 30-40% a year, compounding. It’s our view, that that’s going to go on for more than a decade and game if you can look beyond that. I mean it’s a disruptive world we live in. So that’s one of the biggest fundamental reasons why Dominos is outperforming every other food retailer in the market place today, as you’ve seen from our numbers. The second thing is that to access that, we need to put more and more stores on the ground. There are still large parts of Australia and around the world where we just need to get closer to the customer. In Australia’s case, we need to get to 1,200 stores. And that’s customer demand today, that’s not demand that’s going to come, we can service that demand today. And then finally yes, in the internet of food there’s certain proprietary things, differentiated products, we believe in the internet that we can bring to customers in a very Dominos way. So between, just the digital, and the way that we’re going at digital, and we’ve got some extraordinary technology rolling this year, and accessing through store count, and accessing with better and expanded menus, we believe we’ll still continue to grow at a strong rate.
AK: Thanks, very much, Don.
DM: Thank you Alan.