Domino’s strategy day addressing its Australia/NZ and Asia segments reinforced its long-term ambition for growth. While Australia/NZ is performing well, Japan has challenges because too many stores have been opened too quickly. The issue of franchisee profitability was raised and structural challenges in Japan, Taiwan and France acknowledged by management. As a result, investors should brace for lower store growth including a lowering of the medium-term targets. Store growth of 4%-6% is more realistic than the current 7%-9% target.

Price rises for raw materials have been significant over the past year. In Issue 1 of Price Watch, we analyse these input cost pressures. We look at shipping, sugar, vegetable oils, cotton and semiconductors. While observers see the cost pressures as transitory, the length and extent of the path back to normalisation will significantly impact retailer and manufacturer profits. We expect it will take another 9-18 months for prices to normalise. As a result, retail inflation will rise and there will be profit margin pressure on some, mainly manufacturers, that fail to fully pass through the cost increases.