After 13 years in Israel, Domino's Pizza is giving up. Yesterday, the Tel Aviv District Court appointed a receiver for the chain, and if a buyer isn't found in the next few weeks, the franchise will close down.
Domino's has joined a growing list of internationally known brand names, including Wendy's, Dunkin Donuts and Starbucks, that have failed in the Israeli market.
But Domino's was different from the other international giants. The chain managed to enter the Israeli public's consciousness, change consumption habits and even set new levels of service - while actually making money at first. The real reasons for the chain's demise are to be found elsewhere.
Erez Ofer, along with a number of other investors, founded the Israeli Domino's franchise 13 years ago. The first branch was opened on Arlosoroff Street in Tel Aviv and was a great success - America had arrived. The pizza came directly to your home in less than 30 minutes, hot and fresh. The company set new standards for service, and all its competitors copied them.
The chain's fall was the result of the recession and its high property rental costs, according to Bernardo Belajovich, the owner of competitor Pizza Meter. "They paid a huge amount of money for location, when location is not important for the chain. The most important thing is the phone number," Belajovich explained.
Most of the revenues come from deliveries, and the delivery business was hurt enormously by the recession and the drop in consumer spending. Competition in deliveries grew enormously due to the security situation, since consumers prefered to stay at home and order in instead of going out. "The delivery business was flooded," Belajovich said. "Almost every restaurant started making deliveries, and anyone who depended on the delivery market suddenly had thousands of competitors."
The entire Israeli fast-food sector had problems because of the recession, but the pizza business was hit much worse. It is cheap and easy to enter the pizza business, compared to hamburgers. The equipment is relatively inexpensive and barriers to entry are low. The large pizza chains had to contend with lots of small neighborhood pizzerias.
The fierce competition increased even more when Pizza Hut entered Israel. Pizza Hut introduced special deals, such as buy one and get one free - and everyone else had to follow suit.
A surprising competitor also appeared in the form of the supermarket freezer. Frozen pizza sales are now NIS 165 million a year.
A large part of the losses of Omni Food Brands, the owners of the Domino's Pizza franchise in Israel, came from investments in fast-food chains that were closed very soon after opening. The company started selling Haagen-Daz ice cream in 1995 and even opened a number of ice cream stores and coffee houses, which lost money. In 2000, Omni opened a falafel chain; in 2002, it closed all three of the branches, after the Israeli public showed its preference for the local falafel stand over "gourmet" falafel restaurants. In the third quarter of 2001, Omni wrote off NIS 1.2 million on its falafel investment.
Domino's Pizza has been losing money for a number of years - NIS 2.3 million in 2001, NIS 7 million in 2002, and another NIS 3.8 million in the first half of 2003. Sales have been dropping steadily since 2000. From NIS 65 million in 2000, revenues dropped to NIS 60 million in 2001 and NIS 50 million in 2002. In the first half of this year, sales plummeted to only NIS 19 million, a 30 percent drop from last year.
But Domino's did not give up without a fight. CEO Assaf Greenberg implemented a recovery plan for the chain in February. The company's headquarters was cut back and it closed its national call center at the end of October, hoping for annual savings of NIS 500,000. Greenberg expected his plan would narrow the drop in same-store sales and leave the chain with only profitable branches. Sources close to Greenberg said that whoever buys the chain without its debts could enjoy a very profitable business.
But the owners of Omni are tired of watching their money burn up in the pizza ovens. They decided it was time to call it a day.
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