Rising costs dent Domino's Pizza margins

The US firm said operating profit margins had slipped by a whisker 0.2 per cent in the first quarter due to higher food costs, despite a near 14 per cent rise in global sales to $370m (€293m).

The main culprit was cheese, which increased in price from around $1.34 per pound in the first quarter of 2004 to $1.54 in 2005.

International operating margins also decreased due to Domino's operating a disproportionately large number of company-owned stores compared to its more profitable franchise format.

The firm claims royalty revenues on its franchise stores.

Domino's Chairman David Brandon refused to dwell on margin pressures, instead highlighting the firm's strong sales growth, driven by the launch of 42 new stores worldwide during the quarter.

Brandon said significantly higher marketing investment was also crucial in achieving double-digit same-store sales growth at home and abroad.

Domino's had a tough time on the domestic scene last year with same-store sales slipping 0.2 per cent after a poor performance from company-owned outlets in the fourth quarter.

Brandon, nevertheless, defended a robust Domino's performance: "The ultimate test of any company is how it performs in a tough business environment. We generated almost $88m in free cash flow in 2004, despite extraordinary cost pressures and significant competitive challenges."​

Now, Brandon hinted the firm was planning more store openings after a strong start to 2005. "These strong quarterly results contribute to our growing cash flow and put us in a strong position to grow our business,"​ he said.

Domino's net profits increased $6.6m to $25m during the first quarter of 2005 compared to the same period last year.

Pizza remains big business throughout the world, valued at around $30bn in the US alone, though Domino's and other suppliers will have to monitor a potential threat from consumer health trends over the next few years.

A recent study by Penn State Diabetes Center in the US said pizza's high-carb crust and high fat content could increase consumers' risk of developing diabetes.

Domino's moved to cut fat in its pizzas by launching mozzarella with a quarter less fat in Australia at the end of 2003.

Rival chain Pizza Hut also announced it would slash fat in 2003, but the industry inevitably faces growth challenges both from health-conscious consumers and government pressure.

In a potential sign of things to come, the mayor of Detroit this week announced proposals to introduce a fast-food tax.