After fulfilling his mother’s wish and becoming a chartered accountant, Stephen Hemsley went on to become chief executive of Domino’s Pizza. He is now on an acquistion spree with latest venture, Franchise Brands
The news that Stephen Hemsley had been appointed chief executive of Domino’s Pizza in 2001 received a mixed response from his nearest and dearest. Whilst his three kids reckoned it was “the coolest job”, his mother was horrified. “She said, ‘What are you doing darling? Running a pizza company? You’re a chartered accountant.’”
Hemsley’s sterling financial background certainly stood him in good stead when it came to taking the reins at Domino’s. Trained as a chartered accountant, his first job was at professional services firm Stoy Haywood, now known as BDO. While the auditing side of the job bored him rigid, he enjoyed conducting due diligence on companies that were about to float on the stock market.
He went on to take a job in New York with Saracens, a small investment bank, and after a year wound up at investment titan 3i. “Working for a private Swiss bank, investing a tiny proportion of the funds they had under management, wasn’t that thrilling,” explains Hemsley, from the boardroom of his Knightsbridge house. “I wanted someone with deeper pockets and 3i certainly fitted the bill.”
His time at 3i was a steep learning curve – it was a chance for him and his peer group to apply all the theory they’d learned up until this point. “It taught us how to negotiate. We were young guys in our mid-20s negotiating with these crusty old businessmen in order to invest in their companies, so you needed to be taught how to do that,” he says. “Quite a few people teach you how to sell but not many actually teach you how to negotiate.”
Hemsley flourished at 3i and became investment director before being reposted in Jersey. He and his family loved the island lifestyle and when his three years were up, he was told he’d be working in Guildford, Surrey. “‘That’s not very thrilling,’ I thought.”
After being back in the UK just a few weeks, he accepted a partnership at a chartered accountancy firm in Jersey and shipped the family back to the Channel Islands – he and wife Sherron had three children by this point. But, unfortunately, the quality of the new job didn’t match the quality of the lifestyle. “Sadly, I realised why I’d left the profession ten or 12 years before that. I hated it.”
Once he’d served a year, the family moved back to the UK for good. As he contemplated his next move, the chief executive of a company Hemsley had invested in during his time at 3i got in touch. “I’d done quite a number of stock market flotations on the junior markets whilst I was at 3i and the company wanted to float on the AIM market, which was just being launched at that time.”
He became financial director of Meltech, which “repaired the bits that go into computers”, for three years. “Then I had a difference of opinion with the chairman about the direction of travel and we decided to part ways.”
It was onwards and upwards for Hemsley, who then joined Domino’s Pizza, which he describes as being in its “embryonic” stages in 1998. Though the pizza delivery company had opened its first UK store in 1985, “the master franchisee effectively went bust and the Americans took it back in the late 1980s,” he says. “They ran it themselves from [the HQ in] Ann Arbor in Michigan, which wasn’t very good.”
They decided to take a chance on a second franchisee, Colin Halpern, who bought the master franchise in 1993. Domino’s was a far cry from the leviathan it is today, says Hemsley. “There were 50 or 60 stores, it was losing £1m a year and it was run out of a very modest shed in Milton Keynes. But it clearly had potential.”
Domino’s needed to grow quickly in order to shore up the balance sheet. “Like in all franchise businesses, you need a certain critical mass of stores to cover the fixed central overheads,” explains Hemsley. Halpern had installed his brother, Gerry, as CEO and in 1997 raised some money from Nigel Wray, now Hemsley’s business partner in Franchise Brands.
“One of the things that Nigel did then and still does now with every business he invests in is to improve the management,” says Hemsley. Under his steer, Domino’s floated in 1999, at which point it became more apparent that a new leader was needed. “We still had this 65-year old chief exec. I said, ‘We need a younger, more dynamic leader.’ It’s a young person’s business, or at least it was then. Students and under-25s comprised a huge part of our market. It’s no longer the case: the biggest market segment is now young families,” adds Hemsley.
After candidates brought forth by headhunters failed to meet the grade, Hemsley found himself in the frame for the top job. “I’d said that I didn’t think any of them were up to it and Nigel and Colin said, ‘Alright then – you do it.’” It was a big decision. Though it’s common for financial directors to transition to CEO, this hadn’t previously appealed to Hemsley. “I didn’t expect to be running a pizza company. I do all this financial stuff and I got companies ready to float. And I always took a shareholding so I was making some fairly decent money floating these companies. Once I’d done one, I moved on to the next.”
He struck a deal with Wray and Halpern and got to work finishing the to-do list he’d started tackling as FD. “One of the issues with stores in the early days was that they were capacity constrained. They’d been built to handle a certain volume and the problem with a pizza business is that you do half your business on a Friday and Saturday night.
“I put in place a programme we called Dambusters, where we did an analysis of the things that were constraining the volume.” This included things like installing additional phone lines and the extra employees needed to man them. He also persuaded the oven manufacturer to make stackable, wider ovens.
Though he was reasonably new to the franchising world, the skills he’d learned during his time as an investment director proved invaluable. “My financial background and an understanding of business modelling helped but the other thing that helped is coming from a private equity background. In private equity or venture capital, you’re in charge until the moment you put your money in. The day after, the management’s in charge. You can have as many agreements as you like on what they’ll do after you invest but really you can only get them to do what you want them to do or what needs to be done by persuading them. That’s exactly the same relationship as you have with a franchisee,” Hemsley explains.
“You have a franchise agreement, they’re bound to comply with all the brand standards, do this, that and the other. If they don’t want to do it, you have got only one ultimate solution which is to sling them out. But you don’t want to do that because you’re trying to build a business and your franchisees are the lifeblood.”
A key challenge for Domino’s around the turn of the millenium was getting to grips with the birth of the web. “The internet was starting to get some traction but nobody was really using it that much for ordering stuff so we decided we wanted to be the first,” says Hemsley. There were some inherent problems in this noble aim.
“We had a point-of-sale system in the store that obviously wasn’t designed with the internet in mind. No one was capable of providing the infrastructure we needed and even less so in a timely way.”
They came up with a ramshackle solution: once customers placed their order on the website, this generated a fax which was then sent to the relevant store. The Domino’s employees would then manually enter the order before it went through the usual systems. It was rough and ready but left other takeaway companies flummoxed. “None of the competitors could work out how we’d gone from zero to hero in such a short space of time. It was like a state secret how we were doing it.”
It’s a far cry from Domino’s modern-day digital strategy, which has been credited with helping boost revenue to £294m last year. Its latest financial results, released in February, revealed that customers’ increasing tendencies to order online had helped deliver a whopping £54m in profits last year. Hemsley suggests that the figures look even better because the previous year’s results had been diluted after some major write-offs in Germany; still, by anybody’s reckoning, the UK’s number one pizza company is looking rosy.
But whilst the P&L may be nice and healthy, how wholesome are Domino’s products? “There’s nothing wrong with pizza in terms of healthy eating,” he starts. “Healthy eating is all to do with a balanced diet. If you eat a pizza every night, you’ll get fat. If you eat it once a month, it won’t do you any harm at all.” Hemsley, whose favourite is the firm’s best-selling Pepperoni Passion, admits he now tucks into a pizza “probably less than once a month”.
It was a different story when he was in the company’s head office full-time. Now, as chairman, he spends just a day a week on Domino’s business. His other main business interest is Franchise Brands, which he set up with Wray in 2008. “Nigel and I like the franchise model as a way to organise and build a business and there was a public company called Myhome, run by an Australian guy,” he explains. “When we first invested, it probably had half a dozen brands and was expanding by acquisition. Nigel and I ended up owning 20% of it.”
But all was not what it seemed. “The chief exec turned out to be a crook; the company went into receivership and he did a runner back to Australia.” The receivers called Hemsley and revealed that as the biggest shareholders they could double their investment and prop up the business or walk away and lose everything they’d put in so far. “We bought it, completing the deal at the beginning of September 2008.”
Their timing couldn’t have been worse. “The world came to an end. Lehman’s went bust. We were aware at that stage that we now owned 12 businesses and probably only three of them were generating any cash – the rest of them were too small, growing or had negative cashflow.” It fell to Wray and Hemsley to make some difficult decisions. “I rang up Nigel and said, ‘I’m afraid we’re going to have to perform some fairly radical surgery here because I can’t risk carrying on with the business as it’s currently structured, a. because the overheads are too high and b. because we’ve got too many businesses bleeding cash.’”
One of the franchises was sold, and others were effectively shut – the businesses were handed over to franchisees, which was both a blessing and a curse. “We said to the franchisees of eight brands, ‘We’re not going to continue as franchisor, you can have the business for nothing, which basically means you’re not going to be paying any more royalties or anything to us but equally you’re not going to get any support.” Two other franchises were merged and sold, leaving behind just Chips Away, a car scratch repair company, and Ovenclean.
“We battened down the hatches to get through the recession,” says Hemsley. “We knew that we weren’t really going to be selling many new franchises because the banks were out of business for two or three years. It was a case of hanging on to what you’ve got, supporting the franchisees to get through some fairly difficult times and then having another look to see what we’ve got in a couple of years’ time.”
It’s an approach that’s served him well: both businesses continued to be profitable throughout the downturn and generated “a reasonable amount” of cash, which was repaid to shareholders. Then, a couple of years ago, both brands begun aggressively expanding again. ChipsAway and Ovenclean now have around 350 franchisees apiece.
Hemsley and Wray are looking further afield for opportunities too. They are aiming to spend around £10m bringing some new franchises under the Franchise Brands banner in the next year. “They will have reached critical mass, so maybe they’ll have 25-plus franchises, but they probably won’t be making much money for their existing owners,” says Hemsley. He says the expertise and central services that Franchise Brands can offer franchises entering the fold include marketing, financial and legal expertise.
While not perusing the franchise world looking for acquisition targets, Hemsley can either be found in his study working on the family’s property interests or, more likely, on his classic boat, which he raced in the Mediterranean last year. He and wife Sherron also travel a lot, taking at least one ‘adventure’ holiday a year – they’ll shortly be off hunting Komodo Dragons in Indonesia.
One place you’re unlikely to find Hemsley, if he can help it, is the boardroom. “It’s not my favourite place. I’m more of a doer than a talker, really. I’m far happier being out with the franchisees or in the stores than I am sitting in the boardroom talking about corporate governance.”