Domino's Pulls the Plug on 4 European Markets -Capital Investment Decisions

4 days ago

Key words and Definitions

Capital budgeting - the process of determining a firm's long-term investments that will increase shareholder wealth.

Forecasted cash flows - an estimate of future cash inflows and outflows, and the timing of those cash flows.

NPV - net present value. NPV is a project evaluation tool where you compute the present value of a project's future cash flows and subtract the initial cost to determine whether the project is worth pursuing.

Summary: Key Points in the Article.

Domino's Pizza abandoned its current expansion into several European markets. The chain announced it would suspend its plan to add new stores and sell approximately 100 existing stores in Switzerland, Sweden, Iceland and Norway. The decision came after stores in these four countries failed to make a profit for several years.

Investors applauded the decision and pushed UK division of Domino's Pizza's stock price up by more than 5% after the announcement. The chain indicated it would focus future efforts on the UK and Ireland and rebuild relationships with franchisees. These relationships were damaged over time as Domino's Pizza failed to respond to issues of rising food costs and higher wages.

The UK and Irish outlets were very profitable for years but have been hurt by competition from online delivery such as Uber Eats and Deliveroo. Domino's is no longer "the only game in town" and the chain needs to help franchisees compete in the new market. The firm failed to invest enough in IT infrastructure to help them compete with these new sources. Franchise owners registered their displeasure by refusing to participate in proposed marketing campaigns until the issues are addressed.

Thinking Critically Questions:

1. Why is the decision to pull out of these four nations a capital budgeting decision?
2. What other capital budgeting issues does Domino's management need to address?
3. How did Uber Eats affect cash flows?