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

The decision to pull out of these four nations is a capital budgeting decision because :

• It involves winding up capital investments in these nations
• Dominos feels its capital can be deployed more efficiently in other markets
• Dominos' decision to pull out is due to lack of value generation for investors
• Dominos' decision to pull out is due to the rate of return earned on the capital investment being adequate

The other capital budgeting issues Domino’s management need to address are :

• Evaluate the return and value creation in other markets worldwide
• Evalute the reasons why the investments in these four countries failed, and use the learnings to improve its operations in its other markets

Uber Eats affected cash flows because it is hugely popular with consumers. Consumers using Uber Eats have a wide variety of choice of cuisines and restaurants. Before Uber Eats and Deliveroo, consumers were mostly limited to calling individual restaurants to place orders. Dominos with its efficient delivery system was able to capture a huge part of the delivery market. However, this changed completely after Uber Eats and Deliveroo started operating. As a result, Dominos' revenue fell, and as a result its cash flows decreased.