Poland’s pace of economic growth is starting to feed through to DP Poland (LON:DPP), reckons Peter Shaw, chief executive of the Domino’s Pizza franchisee.
Backed by rising consumer spending power, Poland’s economy - the only one in the European Union to gain every year through the global financial crisis - registered a 3.3% rise in gross domestic product (GDP) in 2014.
It’s no surprise then that DP Poland, with the master franchise it holds in the country, served up a 35% increase in full-year sales last year with total takings reaching £3.96mln – up from £2.9mln the year before.
Overall though, the group still posted a full-year EBITDA loss of £2.4mln and has some way to go before it can emulate the success of Domino’s UK operation.
The model of getting royalties from franchisees, and, in exchange, maintaining a strong brand has worked wonders in the UK.
The number of UK stores have grown, the advertising pot has got bigger and sales have soared. Last year, the UK operation sold 75mln pizzas and profits jumped by 15.1% to £54.8mln.
It’s still early days for Domino’s in Poland but Shaw, who helped market Polish chain coffeeheaven before it was sold to Whitbread subsidiary Costa Coffee in 2009 for £36mln, sees no reason Domino’s can’t enjoy the same popularity it has in the UK in Poland.
“There are five cities in Poland with a population of at least 500,000, and 39 towns and cities of at least 100,000 people,” he said.
“With this population base and the increasing urbanisation of Poland, we believe that there is significant potential for expansion.”
“In the past twelve months, we’ve started to see consumer spending accelerate. That’s been a big shift.”
He also notes the improving infrastructure and ease of doing business in the country.
The European Commission has started to pump its second tranche of €82bn of funding into Poland, which will be delivered in parts up until 2020 and used to invest in innovation. Previous funding has been used to develop roads and railways across the country.
One sore point, you’d think, would be Poland’s proximity to Ukraine and the country’s ongoing tensions with Russia.
Even here though, Shaw claims the tit-for-tat sanctions between Russia and the EU have helped reduce food prices, particularly cheese and meats – pizza topping favourites.
“We’ve had a number of things coming together in our favour in the past twelve months,” Shaw admits.
“There’s been a positive macro-economic consumer uplift, lower ingredients costs and improving volumes.
“DP Poland’s focus now is to continue improving store performance while regaining momentum in store roll-out.”
The business currently runs 12 outlets across Warsaw and Krakow and six-sub franchises in the capital.
Given the improving economic picture, Shaw believes more than ever that Poland has the right ingredients for a successful Domino’s Pizza roll-out.
Its first Polish pizzeria launched in Warsaw back in 2011 and delivered a positive underlying earnings (EBITDA) figure (£34,000) last year – the first store to do so.
Like-for-like system sales, which include total sales from corporate and franchised stores, were up 18% in January and 17% in February.
Peel Hunt expects the group to hit breakeven at the EBITDA level in 2018.
"There is still much to do, but we believe the risk profile has reduced and this leads us to upgrade our fair value to 35p,” said the broker.
Investors are optimistic too; shares in the company have risen 127% since January and currently trade at 16.5p.
“We have a compelling consumer offer and strong operations, as assessed by our franchisor, DPI, and as such we anticipate 2015 to be another year of significant progress,” said Shaw.
Effective marketing is also a key focus. Currently the businesses use a mixture of leaflet promotions, radio and online advertisements – around 60% of delivery sales are ordered online.
TV advertising will be an option, Shaw claims, once the company branches out from Warsaw and Krakow and eventually sets up in several cities around the country.
“We have to take small steps,” added Shaw. “But I believe Poland could end up being home to over 300 Domino’s Pizza stores.”