Question

Domino’s Pizza abandoned its current expansion into several European markets. The chain announced it would suspend its plan to add new stores and sell approximately 100 existing stores in Switzerland, Sweden, Iceland and Norway. The decision came after stores in these four countries failed to make a profit for several years.

Investors applauded the decision and pushed UK division of Domino’s Pizza’s stock price up by more than 5% after the announcement. The chain indicated it would focus future efforts on the UK and Ireland and rebuild relationships with franchisees. These relationships were damaged over time as Domino’s Pizza failed to respond to issues of rising food costs and higher wages.

The UK and Irish outlets were very profitable for years but have been hurt by competition from online delivery such as Uber Eats and Deliveroo. Domino’s is no longer “the only game in town” and the chain needs to help franchisees compete in the new market. The firm failed to invest enough in IT infrastructure to help them compete with these new sources. Franchise owners registered their displeasure by refusing to participate in proposed marketing campaigns until the issues are addressed.

Thinking Critically Questions:

1. Why is the decision to pull out of these four nations a capital budgeting decision?
2. What other capital budgeting issues does Domino’s management need to address?
3. How did Uber Eats affect cash flows?

Answer 1

1) The major reason behind closing of existing stores in these four nations are totally based on the inflow and outflow of cash during a particular time. This means the stores in Switzerland, Sweden, Iceland and Norway did not produce that much profit comparing to its working cost their. A capital budgeting decision is evaluates the potential major project or investment in a particualr area for over a period of time. The assessing of cash inflows and outflows in the future time period indicating that these stores are not benefited to the entire chain. Here the outflows like expendicture is more than the inflows like profit. The Domino's Pizza is in correct track for their future operations. The food chain company also identifies that their potential markets ie, in UK and Irish. Focusing on these markets will helps the firm to yield the best return over a period of time.

2) By using the capital budgeting model of analysis the Domino's Pizza may face to address some other issues also. First, with the help of this investment appraisal method the firm can financially analyses its status and to ensure the appropriate stepts need to boost profits of UK and Irish based stores.

Second, Taking the decision to selling four country based stores declines the firms cash inflow drastically. so the firm should incease long term customer base and create innovative idea to expand the existing chain to another countries.

Third, Due to the fast escaping from major markets, firm will face large shortage of working capital. adequate capital is essential to working new stores and existing stores in different countires.

Fourth, Focusing to the UK and Irish based market increases the share value of the Domino's Pizza leads to good market strength at the same time increases the burden on dividend and other legal requirements like tax also.

Fifth, the food chain should ensure long term high rate of return in UK, Irish and new markets for the further developments and for attracting more investments in future.

Sixth, Due to the sudden withdrawal from major four markets may hit the interest of existing investors, the firm should communicate its investors and to gain confidence in their investment. prime importance is to protect the interest of investors in long term.

At last every investment is a financial commitment, securing the commitment is the most important task infront of the business.

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