Domino’s returns $4.5 million in unpaid wages

DOMINO’S has sought to calm investors at its half-year results update, revealing that it has returned $4.5 million in unpaid wages to staff.

Domino’s chief executive Don Meij. Picture: Steve Pohlner

DOMINO’S has sought to calm investors at its half-year results update, revealing it has returned $4.5 million in unpaid wages to staff over the last three years following internal audits.

It comes as the embattled pizza chain posted an 8 per cent increase in continuing operations half-year profit to $50 million, after record network sales breached the $1 billion mark during the six months to December 31.

The company has also upgraded its full-year guidance, expecting net profit and underlying earnings to increase by 32.5 per cent in 2016/17. It will pay a partially franked interim dividend of 48.4 cents a share, up 39.5 per cent from the same period a year earlier.

In a statement to the ASX, Domino’s chief executive Don Meij again hit back at claims the franchise business model relied on underpayment of wages, saying it had “zero tolerance” for unethical behaviour, including underpayment of wages or under-reporting of sales.

“I make no apologies for expecting the highest standards from our franchisees,” Mr Meij said. “We work collaboratively with the Fair Work Ombudsman, and our compliance program has been independently audited by Ernst & Young and, as a result, we are confident that our compliance program is industry-leading.

“Due to our investment in proactive compliance we have identified some franchisees who have wilfully breached their obligations to their team members.”

Domino’s said over the past three years, it had conducted 456 store spot checks, completed 102 store audits via a third-party audit process, with 42 ongoing, and investigated 88 individual complaints, with 25 ongoing.

It said that process had recovered a total of $4.5 million in unpaid superannuation and wages owed to team members by franchisees, representing 0.8 per cent of the labour costs in the franchise network for the period.

“I would prefer all of our franchisees lived up to our expected standards, and I am disappointed some individuals have tried to take advantage of our business, and team members. But I am proud that our proactive team has uncovered this wrongdoing and corrected it.

“Our priority is to ensure team members receive their correct entitlements, and our efforts to prevent, identify and address any breaches of this expectation are unrelenting.”

Domino’s said it had removed four franchisees operating seven stores for wilful breaches of their employment obligations. It said a further 22 franchisees chose to leave after IR compliance audits.

“Our franchisee profitability figures clearly show there is no reason, nor excuse, for this behaviour,” Mr Meij said. “The findings from our compliance program demonstrate no correlation between store profitability and underpayment of wages.”

Domino’s said franchisee profitability remained a key focus for the company. The company said average weekly sales records had driven same-store franchisee profitability to “record levels”, with average same-store earnings increasing 31.7 per cent to $137,000 over the past two financial years.

Mr Meij said Domino’s expects franchisee profitability to increase to somewhere between $138,000 and $145,000 — after management fees are taken out — this financial year, and the average store payback was three to five years.

“What’s really important to note is the average franchisee operates 1.8 stores, meaning they are making somewhere between $240,000 and $250,000 in EBITDA (earnings before tax, depreciation and amortisation) after a fully managed store.”

He also maintained the $5 pizza was “profitable in its own right”, but that the average order was $17.45, “which is a profitable order for our franchisees”. He said break-even could be as low as $10,000 a week in sales for some regional stores, but was generally somewhere between $15,000 and $25,000. “The average store [turns over] $28,000,” he said.

Mr Meij said there were only 21 unprofitable franchisees in the network last financial year, and they had been provided with various kinds of assistance including rent relief, marketing, operational and loyalty support.

“We have been acutely aware of the likely impact of a new enterprise agreement and have been implementing changes to our business to prepare for this,” Mr Meij said. “These include improving our menu and product offering, including sides, volume purchasing, and appropriate pricing models,” Mr Meij said.

“Each change has been extensively tested and endorsed by our customers and franchisees and we are confident these solutions will more than offset the impact of the Modern Award. We are seeing average order prices increase because of these initiatives, ensuring continued growth in SSS as well as increased profits at the store level.

“As a sign of the success of this approach, most of our new franchisees are now internal rather than external, a trend we expect to continue as more of our successful franchisees become multi-unit owners.”

Domino’s said 87 per cent of new stores in the first half were opened by either existing franchisees or store managers.

Asked about analysts’ fears that the latest wages scandal may hurt Domino’s public image and impact its ability to attract new franchisees, Mr Meij said he “can’t comment on things that I can’t measure today”.

“But what I can measure is that our system sales are very strong, [and] most of our growth is from internal franchisees who do understand the profitability model,” he said.

On the threat of competition from a resurgent Pizza Hut, said Mr Meij while “we take all of our competition seriously”, there had been “no effect on like-for-like sales to date on our business”. “We have independent research that Pizza Hut declined in customer traffic in the last quarter,” he said.

“So adding new [Eagle Boys] stores, closing down and reducing others, the net effect in the market is they’re both smaller than they were separately. That’s the actual fact.”

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— with AAP