Cheese is a significant cost for Domino’s Pizza, accounting for approximately 25% of the market basket purchased by its owned stores.
A significant amount of the company’s annual food spend is with suppliers with whom it has longstanding partnerships.
In any case, its supplier partners must meet strict quality standards to ensure food safety.
Domino’s Pizza reviews and evaluates these partners’ quality control programs through (among other actions) on-site visits, third-party audits, and product evaluations designed to ensure compliance with their standards.
From its angle, the company believes that the length and quality of its relationships with external suppliers provide priority service and quality products at competitive prices.
So cheese is our biggest food cost. The price Domino’s Pizza charges its U.S. franchisees for cheese is based on a formula, with the price of the Chicago Mercantile Exchange block of cheddar cheese as the main component, plus a supply chain markup.
As cheese prices fluctuate, the company’s revenue and margin percentages in its segment of the supply chain also fluctuate.
However, the real dollar margins of the supply chain remain unchanged.
The company currently purchases its pizza cheese from the United States from a single supplier.
Under their September 2017 agreement, their U.S. supplier agreed to provide Domino’s Pizza with an uninterrupted supply of cheese, and Domino’s Pizza, in turn, agreed to a seven-year price schedule to purchase all of its U.S. pizza cheese from this provider.
While Domino’s Pizza expects to comply with the terms of this agreement, if you do not, you will be required to repay certain negotiated cost savings as provided in the agreement.
On the other hand, the majority of our meat dressings in the United States come from a single supplier under a contract that expires in June 2022.
Domino’s Pizza has the right to terminate these agreements for quality failures and for certain uncured violations.