Businessweek Archives

`God, Family, And Domino's That's It'


People: Entreprenuers

`GOD, FAMILY, AND DOMINO'S-THAT'S IT'

Even during the wild 1980s, the heyday of executive ostentation, pizza baron Thomas S. Monaghan stood out. The founder of Domino's Pizza Inc. didn't just indulge his three passions--God, Frank Lloyd Wright, and buying things--he did so with a singular blend of gaudiness and eccentricity.

For a headquarters, he spent $150 million on a half-mile-long copper-and-brick tribute to the Wright Prairie style in Ann Arbor, Mich. Plans called for a 35-story tower cantilevered 15 degrees to the east--a leaning tower of pizza--that was never built. On surrounding farmland, he installed a petting zoo and let loose herds of cows and buffalo. Inside, were a $40 million collection of Wright artifacts and drawings, a mime center directed by Marcel Marceau, and a two-story personal office suite with silk ceilings and leather tiles on the floor. He bought everything from the Detroit Tigers to an island in Lake Huron. A Word of God Catholic, he decried abortion and built a cathedral in Nicaragua.

Then, he disappeared from sight. Since 1992, Monaghan has avoided the limelight while Domino's veered into deep financial trouble and back. As his banks pressured him to sell his playthings at fire-sale prices, rivals Pizza Hut Worldwide and Little Caesar Enterprises Inc. gained valuable ground. Domino's has finally recovered, but only after write-offs totaling $117 million. In 1994, the company says its earnings hit $30 million while revenues, including franchise sales, inched up 5%, to $2.5 billion (charts).

ADIEU, PERKS. What happened is a classic case of a CEO intoxicated by his own success. And Monaghan knows it. Never one for meek gestures, the pizza baron is as zealous in his penitence as he was in his spending. His office now is a small, windowless closet of a room situated just off the two-story suite. He flies coach and hasn't had a bodyguard in years. He insists he doesn't read newspapers or watch TV--too distracting. He has even given up his prized architectural journals. "I don't even look at 'em," he says. "I decided those things aren't important. God, family, and Domino's--that's it."

The company's 1,200 franchisees are just happy Monaghan has relaxed his management style. Many say that the company's biggest problem during the crisis was the chairman's autocratic insistence that Domino's stick to its 32-year formula of hawking only pizza and Coke, while rivals sold an array of popular items like breadsticks and salads. At the prodding of a former Little Caesar's executive who lasted at Domino's just 20 months, Monaghan has allowed the first new products in decades. Hits like thin-crust pizza and buffalo wings have fueled the sales rebound. "What we needed," says franchisee Glenn Mueller, "was a willingness to listen to customers."

Despite his excesses, Monaghan comes across as likeable and forthright, almost naive. Sitting in his tiny office, sipping from a bottle of water, he gladly explains how he ran into so much trouble. The buying that so tantalized him, he says, was a direct result of "going without" as a child. After growing up in a Catholic orphanage and foster homes in Michigan, "I liked luxuries and was willing to work for them," he says. "Everything I bought, I thought I could justify: It was good PR [for Domino's]."

The one thing he couldn't justify in terms of business was a $3 million home designed by famed architect Faye Jones. It was to anchor another Monaghan megaproject: a housing development near Ann Arbor featuring a Robert Trent Jones golf course and a requirement that all homes be built by one of 30 top architects chosen by Monaghan. "It would be the architectural showcase of the world," Monaghan says. But "with a Catholic upbringing, you're not supposed to enjoy things that much."

In late 1989, Monaghan happened to read a book called Mere Christianity by C.S. Lewis. Chapter 8, on pride, floored him. "It was a rude awakening," he says, "I realized pride was the biggest of all sins." He halted the house and swore off the buying binge. He left day-to-day operations at Domino's and put the company up for sale.

CRIPPLING FEES. Trouble was, Monaghan's finances were so commingled that potential buyers couldn't figure out what they were buying. The Wright-inspired headquarters was also an albatross. It was so expensive to build, says one Michigan real estate expert, that rents couldn't cover the mortgage. Even now, says Chief Financial Officer Harry Silverman, Domino's loses money on it.

After 21/2 years and no sale, Monaghan decided to retake the helm. Sales were slipping, and money-losing assets were crimping cash flow. Executives were preoccupied by the incessant talk of a sale and were hog-tied by Monaghan's absentee decision-making. Pizza Hut, meanwhile, had begun a huge assault on the delivery market, and Little Caesar's was snagging business with clever marketing and budget pies.

By 1992, Monaghan fell into technical default on nearly $200 million in debt. Domino's was generating cash, but declining sales alarmed a global web of 30 bankers. Because personal and corporate debt were cross-collateralized, one default caused, well, a domino effect. Asset sales cut costs, but bank fees from ongoing technical default were crippling.

"There was lots of liquidation, and it happened very fast," says one Ann Arbor real estate investor. Monaghan sold the Tigers to Little Caesar's founder Michael Ilitch for about $85 million. That was $32 million more than he paid in 1983, but failed to cover his total investment in the team. He also lost money unloading more than 100 expensive autos. An $8 million Bugatti Royale cleared only $5 million. He had invested $28 million in Drummond Island, the Lake Huron resort, but sold it for $3 million. It was a bloodbath.

Monaghan did better restructuring the company. He computerized the stores to improve flow of market information. And he separated the accounting for company-owned stores from franchises so he could see how profitable they were. "You find out you weren't making as much money as you thought," Monaghan says. So, he closed or sold to franchisees 1,000 company stores and axed 600 administrative jobs.

The main chore, however, was restructuring the debt. Twice, in 1992 and 1993, Domino's failed with bond offerings. The first time, Salomon Brothers Inc. couldn't find enough buyers. The second flopped when Domino's lost a $78 million judgment in St. Louis after one of its drivers allegedly ran over a woman in his rush to deliver a pizza. That forced Domino's to give up its trademark 30-minute delivery guarantee.

Finally, after the new-product push generated a full year of better results, Domino's was able to put together a new bank syndicate last May. The new financing featured just eight primary banks and a 20% drop in interest expense, according to CFO Silverman.

IN LIMBO. Whether Domino's is out of the woods isn't clear. The new-product boost is good news. So is the fact that in 1994, Little Caesar's sales were flat, while Merrill Lynch analyst Allan Kaplan estimates Pizza Hut profits declined 18%. Unfortunately, value pricing in the hamburger business is clobbering pizza as a whole. And Domino's sales are under pressure from a franchisee cooperative that is selling cheese, dough, and other ingredients to Domino's stores in competition with the parent company. Commissary sales make up a full 40% of the parent's revenues of $850 million.

For the time being, Domino's will ride on its recent success. But fast-food consumers are fickle, and Monaghan's company has never been adept at product development. Larry Sheehan, the ex-Little Caesar's executive who fathered the new-product push, is long gone after a bitter pay dispute with Monaghan. His replacement, fast-food veteran Anthony M. Lavely, has yet to earn his stripes in pizza.

John H. Schnatter, founder of pizza purveyor Papa John's International Inc., insists that "Domino's is in a reactive state." Monaghan, however, is as sanguine as ever. "We were in limbo," he says. "Now the word I use--and it doesn't excite anybody--is `focus."' A little focus goes a long way. Domino's has had enough excitement.By Michael Oneal in Ann Arbor, Mich.


Ebola Rising
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus