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  • Iceland is a notoriously tough market for international fast food

  • chains to break into.

  • McDonald's, Dunkin' Donuts and Burger Kingthey've all tried and

  • failed in Iceland. But there's one American fast food chain that

  • Icelanders are obsessed withDomino's.

  • Of the three big international chains with significant presence in

  • Iceland, the pizza chain has the biggest market share in fast food by

  • far. Domino's also has a huge footprint for the small island nation.

  • There is a Domino's restaurant for every 14,000 people.

  • Its owner says Icelandic Domino's are some of the best performing

  • Domino's around the world by weekly sales.

  • So Domino's decided to try to expand into Iceland's neighbors.

  • In 1997, Domino's opened in Denmark and then in Norway and Sweden in

  • 2014 and 2016.

  • But other parts of Scandinavia just aren't buying what Domino's is

  • selling. In early 2019, Domino's Danish business went bankrupt and in

  • October of 2019, UK-based company Domino's Pizza Group, which owns

  • stores in Sweden, Iceland and Norway, announced it would exit those

  • markets. Its business there just isn't profitable.

  • And now the company is looking for a buyer.

  • And you know, I think the sale is a preferred option.

  • But if they don't find a buyer, you know, let's not forget these are

  • sort of sustained loss-making businesses.

  • They might not find a buyer for all of the markets, in which case

  • they simply have to close them down.

  • Closing those restaurants would be the last resort for Domino's Pizza

  • Group, considering the chain's track record of success in the UK and

  • other parts of Europe, why is it that Domino's failed to deliver in

  • most of the Nordics?

  • Two Irish-American brothers Tom and James, Monaghan opened the first

  • Domino's in Michigan in 1960, and by 1967, Domino started opening

  • franchise locations across the U.S.

  • By 1978, it had grown to 200 stores.

  • Domino's first international store opened in Canada in 1983, and as

  • of 2019 there are 16,500 Domino's in more than 85 countries.

  • And more than half of its sales come from outside of the U.S.

  • Domino's has spread around the world thanks to franchising.

  • The U.S.-based Domino's Pizza partners with master franchisees and

  • international markets who in turn can subfranchise.

  • The company looks for partners who have knowledge of the local

  • market. That model lowers the risk of entering international markets

  • for Domino's Pizza. Domino's presence in the Nordic region started in

  • Iceland in 1993 and the brand was a hit.

  • The local operator thought it could do well in Denmark, too, where it

  • arrived in 1997.

  • Domino's opened up shop in Norway in 2014 and expanded to Sweden in

  • late 2016. But the brand doesn't have a presence in Finland.

  • The business in Denmark went bankrupt after a TV network exposed poor

  • hygiene and expired food at the restaurant.

  • Another franchisee, Australian company Domino's Pizza Enterprises,

  • paid about 2.8

  • million dollars to buy stores in April 2019.

  • The Australian company now operates in six European locations, plus

  • Japan, Australia and New Zealand.

  • Of all those European markets, Domino's Iceland is a standout.

  • Its owner says restaurants there have clocked higher average weekly

  • sales than any other Domino's on the planet.

  • But Iceland can't prop up the entire bloc.

  • In the first half of fiscal year 2019, Domino's Pizza Group's

  • international markets, which includes Norway, Sweden and Iceland, had

  • operating losses of 8.1

  • million dollars.

  • In fiscal year 2018, Sweden had the lowest average weekly sales per

  • store for Domino's Pizza Group in the Nordics.

  • Based on Domino's success in Iceland, the chain seemed poised to work

  • well in other Nordic countries.

  • The Nordic bloc is a region of northern Europe that includes Denmark,

  • Norway, Sweden, Finland and Iceland and their associated territories

  • like Greenland. They're all independent countries, but they share key

  • things in common. The Nordic economic model has strong labor unions,

  • high taxes and provide services like education and healthcare, making

  • them expensive places to live.

  • But the five Nordic countries are also wealthy.

  • Their GDP per capita, a metric that breaks down the country's GDP per

  • person, ranks within the top 10 in Europe.

  • The Nordic countries take pride in their culinary traditions.

  • After a period of industrial food production that brought processed

  • food to the Nordics, in the early 2000s there is a shift toward more

  • organic and locally produced food.

  • Eating habits in the Nordic countries put strong emphasis on families

  • eating together at home.

  • Responses to a survey conducted in 1997 and then again in 2012 showed

  • that family meals hadn't decreased in Nordic homes, despite the fears

  • that introduction of fast food in the 1990s would drastically reduce

  • the number of families opting to eat at home.

  • In the Nordic countries, health and wellness are also important

  • values. A survey of Nordic people predicted that some of the biggest

  • Nordic food trends in 2019 will be meat free proteins, holistic diets

  • and baking pastries with beans.

  • So where does fast food fit in?

  • Nordic consumers haven't embraced global fast food chains as fully as

  • other countries, and when they do opt to eat on the go, more often

  • than not, they're opting for local chains rather than global fast

  • food restaurants. Consumers tend to prefer local chains for a couple

  • of different reasons. Part of it has to do with loyalty and trust.

  • In both Sweden and Norway, global brands have a stigma of being

  • unethical and consumers perceive them to be prioritizing profits

  • above all else as opposed to local brands.

  • In terms of competition,

  • these two countries are quite interesting because they have very,

  • very strong local brands as evidenced, for example, by case of Sweden

  • and the burger competition in this country.

  • So there is a big local brand called Max and quite successfully

  • manages to challenge established players like McDonald's due to local

  • appeal, local expertise in the market.

  • Nordic consumers also take pride in supporting local brands.

  • Analysts say local restaurants have more market knowledge in fast

  • food than international chains do, and they are faster adapting menus

  • to local tastes.

  • Take, for example, the meat free trend in Norway.

  • Swedish burger chain Max jumped on the trend early, offering

  • meat-free burgers. It set off a domino effect and McDonald's

  • ultimately introduced a veggie McSpice and two vegetarian wraps in

  • 2017. In both Sweden and Norway, the pizza market is highly

  • fragmented, with local and independent chains making up more than

  • half of the market in the two countries.

  • The biggest pizza chain in Norway is locally run Peppes Pizza, which

  • has 39.1 percent of the market as of 2018.

  • Domino's tried growing quickly in Norway by buying another Norwegian

  • chain called Dollie Dimples in May 2017.

  • It was a massive expansion of Domino's footprint, but analysts say it

  • presented some problems, too.

  • So I think when they acquired the business, they thought it would be

  • a very simple you're buying a pizza operator, you kind of change the

  • logos, change the product a bit and suddenly the store goes from

  • being a local pizza restaurant to a Domino's Pizza restaurant.

  • Instead, what they didn't realize was that this business wasn't

  • really set up in the same way as a classic pizza takeaway company.

  • Analysts say Dolly Dimples wasn't particularly efficient and Domino's

  • didn't have enough demand to keep up with its new large footprint.

  • Converting Dolly Dimples stores into Domino's, increase order counts

  • and sales for the chain, but the stores weren't profitable.

  • Plus converting them took time and money, which was especially

  • problematic in an expensive country like Norway.

  • In the U.S., Domino's won the pizza wars with delivery, but the

  • Nordic countries are among the smallest markets for food delivery.

  • That was a big part of the problem in Norway when Dolly Dimples was

  • taken over by Domino's.

  • Dolly Dimples was more about dining in rather than taking out for

  • delivery. Pretty much the opposite of Domino's typical strategy.

  • The market for delivery in Scandinavia is small.

  • That's partly due to the fact that population density of the Nordic

  • countries is low, so delivery drivers have to travel further

  • distances. It also didn't help that Domino's entered Norway and

  • Sweden just as the delivery wars were heating up.

  • While the market for delivery is relatively small there, are a

  • handful of companies compete for the market share.

  • If in the past, Domino's Pizza was unique because not many other

  • restaurants would deliver food to consumers, nowadays, almost every

  • restaurant — a vast majority of restaurants in Norway and Sweden

  • are working with delivery services, which means that their

  • competition is much wider than it was in the past.

  • On a call with analysts, the CEO of the local franchise running

  • Domino's in Iceland, Sweden and Norway said it was considering

  • eliminating delivery entirely from certain stores at lunchtime in

  • Norway. Analysts say that this is likely due to lack of demand.

  • Frozen pizza is also huge in Scandinavia.

  • Instead of ordering delivery, some people might choose frozen pizza

  • instead, especially in Norway, which has the highest spending per

  • person on frozen pizza of any country.

  • Norwegians spend almost $56 dollars per person on frozen pizza each

  • year. One frozen pizza brand estimates Norwegians eat approximately

  • 47 million frozen pies every year.

  • Living in the Nordic countries is relatively expensive compared to

  • the US. There's a lot to do with higher taxes to pay for social

  • welfare system and higher costs of goods and services.

  • Domino's Pizza Group, the franchisee in the Nordic countries, cited

  • high labor costs as one of the reasons its business was unprofitable.

  • In Iceland, Norway, Sweden and Denmark, there is no national minimum

  • wage, but there are very powerful trade unions.

  • These unions and other employee groups negotiate fair wages by

  • industry, experience and age.

  • I mean, even despite the fact that these countries don't have a

  • minimum wage the basically labor laws, the bargaining power of

  • workers is very, very strong.

  • In Nordics, equality are quite strongly embedded their culture

  • so it's quite hard to optimize and cut down on labor costs.

  • In the case of Norway, workers above the age of 20 in hotel,

  • restaurant and catering industry must be paid at least $18 an hour.

  • That's almost double what minimum wage employees in the UK are paid.

  • Minimum wage in Britain dictates a worker between the age of 21 and

  • 24 years old must earn just above $10 an hour.

  • When part of what makes pizza attractive to customers is its

  • affordability, high labor costs can drag down a business.

  • You know this model works if you've got relatively cheap labor where

  • you can get people just to churn out pizzas and you make then quite a

  • nice margin on that, so they want to sort of pitch it as a as a

  • mid-market take away or delivery option.

  • But if the cost of the labor producing that is prohibitive and your

  • margins get squashed, that I think that is probably one of the big

  • contributors to the fact that it was loss-making in recent quarters.

  • Domino's may feel more of a squeeze from high labor costs as the

  • Nordic economies slow.

  • Global trade tensions and a variety of domestic problems are causing

  • a slowdown in the Nordics, according to a 2019 Reuters poll.

  • Particularly in Iceland, where Domino's has been the strongest, the

  • chain is struggling due to weak macroeconomic conditions.

  • While Domino's still makes money there, it's not as profitable as the

  • market once was.

  • In the third quarter of fiscal year 2019, same store sales in Iceland

  • were down 8.2 percent.

  • Company executives cited a decline in tourism and a weak market

  • overall. It also shut down one of its locations that quarter.

  • If you look at the macro data in Iceland, it's certainly not as good

  • as it's been in previous years.

  • All of these places, as I said, there's high operating cost markets,

  • those costs increase every year and you need to be generating more

  • sales in order to compensate for that.

  • Domino's Pizza Group, the UK-based chain that owns Domino's in the

  • Nordics, also has problems at home.

  • Shares of Domino's Pizza Group have fallen about 25 percent from

  • their peak in 2016.

  • It's fighting with sub-franchisees over how it shares the profits and

  • facing weak consumer confidence as Brexit looms.

  • Domino's Pizza Group was unable to comment due to the ongoing

  • transaction, but even its management has said they just weren't the

  • right ones to be running a business in Sweden, Norway and Iceland.

  • The CEO of Domino's Pizza Group, which is the master franchisee of

  • the US Domino's, said that his company was not the best owners of

  • these businesses. Now Domino's Pizza Group is in the midst of selling

  • its international business.

  • That includes Domino's stores in Iceland, Sweden and Norway, as well

  • as its business in Switzerland.

  • Analysts say that these restaurants could be sold as a group of four

  • or individually.

  • In Sweden, I think there's a possibility of finding someone who might

  • be willing to just buy that outright, because while it's making a big

  • loss, it's very early stage business.

  • It's not got the same kind of potential structural problems that sort

  • of Norway and Switzerland have.

  • Domino's unprofitability in parts of the Nordic bloc may make finding

  • a buyer difficult.

  • And flat out closing those restaurants would be the last resort.

  • But there is hope for the American chain.

  • Even Domino's in Denmark found a buyer after the local Domino's

  • franchisee went bankrupt in 2019.

  • Domino's has been successful in other European markets.

  • That shows that the Nordic countries probably aren't a lost cause.

  • Analysts say acquisition by U.S.-based

  • Domino's or the Australian-based Domino's is possible for the

  • business in Iceland, Sweden and Norway, or a local operator could

  • take over. With little to no competition from global pizza chains,

  • Domino's should have been in prime position to succeed in

  • Scandinavia. But the big question nowwill Scandinavians ever give