Tom Monaghan, Founder of Domino's

Copied from Fortune Magazine.

HOW WE GOT STARTED
Tom Monaghan: Domino's Pizza
The pioneering pizza-delivery chain I started almost didn't make it out of the oven.
By Tom Monaghan

(Photo: Greg Miller) Tom Monaghan

Tom Monaghan sums up his life as a "great Horatio Alger story," and he's not being boastful. Monaghan's father died on Christmas Eve when he was 4. His mother, not up to single parenthood, sent him to a Michigan orphanage run by Polish nuns, and he later went to a series of foster homes. Unable to pay for college, he bought a single pizza place in 1960 in Ypsilanti, Mich., that would ultimately grow into the Domino's Pizza empire—now with more than 7,000 locations and some $4 billion in annual sales. Along the way Monaghan managed to buy himself a few treats, including an enormous collection of classic cars, several Frank Lloyd Wright houses, and even the Detroit Tigers baseball team. But after renouncing such worldly pleasures, he cashed out of Domino's in 1999 for a reported $1 billion to focus on religious and philanthropic work. A devout Catholic who attends mass daily, the ex-CEO has already helped found a religious college called Ave Maria, and last month he unveiled plans to build the largest Catholic church in the U.S.

From his office at Domino's Farms in Ann Arbor, Mich., Monaghan tells his story, a tale with all the toppings.
—Julie Sloane

I determined I was going to be a priest from the time I was in the second grade. I entered the seminary in tenth grade but got kicked out—I think probably because I was more rambunctious than most kids. I got into pillow fights in the dorm. I got caught talking in study hall. The rector told me when I packed my bags at Easter to pack them for good. I floundered during the rest of high school and graduated last in my class. They weren't even going to graduate me, but I pleaded with a nun. She said, "Well, you got good marks in the seminary, so I'll let you graduate. But don't ever ask me to recommend you for college."

I saved up enough money driving a truck to attend Ferris State College in Big Rapids, Mich., where I went for a quarter, earned good marks, and got accepted at the University of Michigan. But I didn't have any money. I ended up joining the Marine Corps in 1956, which was the best experience I could have had. It gave me a sense of confidence. When I was in the Marine Corps, I was aboard a ship in the Pacific doing something I've always done a lot of: daydreaming. I was thinking about my future, the lifestyle I was going to have, all the cars and the beautiful home and the yachts and the airplanes. I wasn't sure it was going to happen, but it wasn't any fun doing this daydreaming if it wasn't possible. I saved half the money I made in the Marine Corps, but it went to a con artist with an oil-drilling scheme. Then I found a job supervising newspaper boys for the out-of-town papers. I started a New York Times home-delivery route that I did myself on Sundays and bought a newsstand on the main corner in downtown Ann Arbor. Twice I enrolled at Michigan, but with no money for tuition or books, I dropped out both times after three weeks.

One day in 1960, my brother told me about a pizza shop in Ypsilanti, Mich., called DomiNick's, that a friend of his was selling. My brother was interested but afraid to do it on his own, so he asked if I'd do it with him. I was having problems paying my way through school, so I said yes. It was $500 down, and we borrowed $900. I got a 15-minute lesson in making pizza from Dominick, and I was off. We opened up without an attorney. I didn't even collect sales tax—didn't know I had to. The plan was for me to work half the night and my brother to work the other half. But it didn't work because he didn't want to leave his full-time job as a mailman. Within about eight months he wanted out, and I bought him out by giving him the Volkswagen we used for deliveries.

For the first year I was busy all the time, but I wasn't making any money. I couldn't pay the bills. My life was going down the tubes. I had all this debt. College was out of the picture. One Sunday night most of my employees didn't show up. That was our busiest night—we were on campus then, and the dorms didn't serve meals on Sundays—and I didn't know whether to open or not because we had only half our help. Someone said, "Why don't you just cut out the six-inch pizzas?" We had five sizes, but most of our business was the six-inch. It took just as long to make as the big one and just as much time to deliver but cost less. I decided we would try that, and if we got behind, we'd pull the phones. That was our plan. We never got busy, and yet we made 50% more money that night than we ever had. All of a sudden I was making money, just like that. The next night I cut out the nine-inch pizza, and all the bills caught up. I learned then that keeping things simple could be more profitable.

I bought another place and then another. All three were in the same county, and I wanted to get them all under the same name, but I couldn't use "DomiNick's" because Dominick wouldn't let me. So we had to come up with something else. One day an employee came back from delivering a pizza and said, "I've got our name! Domino's!" I said, "That's great!" I'd never heard of a Domino's pizza before. It was Italian, and we could use a domino logo. I decided we'd put three dots on the domino because we had three stores, and every time we added one, we'd add a dot. You can see I wasn't thinking of a national chain back then.

But I started getting big ideas. My pizzerias at the University of Michigan and Michigan State and in Ypsilanti were probably the busiest in the country. We sold about 3,000 pizzas a week at each store. The Ypsilanti store got up to 5,000 per week. I was there from opening to close, and I made everyone else work hard. I was fanatical about preparing for the rush, saving time and motion. I was constantly trying to improve the pizza. I did man-in-the-street interviews. I even hired blind people to taste-test the pizza. The crew really responded. I had great people. I was the best man at just about every wedding for an employee who got married.

In the late '60s I attended a franchise seminar at Boston College, and that's when I started getting inspired. I met Ray Kroc. I met John Y. Brown from KFC. These guys flew in on their Learjets and had their Rolls-Royces outside. I said, Wow, what I've got with this concept of pizza delivery is just as good as what they have; I just don't have as many stores. Delivery at the time was pretty minimal, so I decided to focus on that, and it was the best thing I've done. Nobody thought you could make money on delivery. Most places just delivered to get some volume before they could afford to cut out the delivery. But I thought I could do it. It was a challenge. I just had to figure out how.

After meeting all these national-chain people, I decided that what I had to do was go public. I met a broker in Detroit, and he told me I needed to get more professional. He said, "You can't be a seat-of-the-pants operation like you are now. You've got to hire more guys with MBAs and degrees. You've got to computerize your accounting." And the main thing he said is that we had to grow. I did everything he said.

In 1969, I went from 12 stores to 44 in ten months. But I had all these employees around, and I didn't know what they were doing. I had a computer. I'd financed all these franchisees, but they weren't doing any business. It wasn't that they were doing poor business—they weren't doing any business. I had the busiest pizzerias in the world and the slowest pizzerias, all in the same chain. Instead of stores near universities, we got into residential areas around Detroit, and the stores got lost. I kept selling the franchisees food they couldn't pay for, and they weren't paying royalties. I kept them going because I thought they would be all right. I couldn't believe a Domino's store could do so badly.

I ended up losing 51% of the company to the bank, which brought in a so-called expert and made things even worse. He ran roughshod over the franchisees—raised prices on the food, cut back on service, cut back on the quality. He had the stores use cheaper cheese, with nondairy cheese mixed in. There was nothing I could do. After ten months the franchisees hired an attorney and were ready to file suit. They accused us of overcharging for food and forcing them to buy from the company commissaries. (We did require them to buy from the commissary, but not at a profit, because we wanted to continue quality and make it easier for stores to focus on the rush.) The company was in such bad shape that the bank actually handed it back to me. I returned to a disaster. The bank hadn't paid a supplier in all the time it was there unless it absolutely had to to keep the doors open. But I was thrilled to get Domino's back, and I thought for sure the franchisees who hadn't yet filed suit wouldn't because they had me back.
Well, they sued. Their attorney had them worked into a lather. That killed me. I actually did a fair amount of crying—I couldn't believe it. But I worked my way out. It started with some franchisees pulling out of the lawsuit and beginning to pay royalties again. One at a time, I won them back. Finally we "parted company" with the last few—they changed their store names and were no longer Domino's franchisees.

I still had the debt to pay off, though. It took me about two years of going day to day, thinking each day would be the end. I had well over 1,000 creditors, and I got lawsuits from about 150 of them. I was on the phone every day, telling them all the same thing: "All I can do is pay for my food and pay my rent so I can stay open so I can get caught up and pay you." From 29 employees, we were down to three in the home office, two of whom were me and my wife.

I couldn't declare bankruptcy. I thought there was a more than likely chance that someone would force me into bankruptcy, but I wasn't going to be the one who did it. I remember how exciting it was when we were growing, and I wanted to get that feeling back. All the lawsuits I got, I defended them myself. I couldn't afford an attorney. I was living in a house with no furniture and driving old delivery cars. I got to know the judge really well, and he saved my shirt, usually working out terms where I paid creditors a few dollars a week over a long, long period. I had some checks printed up with the name Operation Surprise. Most of the creditors had written off the debt. I wrote letters thanking them for being patient and said, "Here is the first check—I hope there will be more." In about a year I paid everyone off.

Within a few years all the problems were behind me. I was financially strong. We had about 300 stores that were doing well. Same-store sales were climbing like crazy. A lot of people wanted to franchise, and we'd worked out a successful system. After the franchisee lawsuit, I wasn't willing to do it in the usual fashion anymore, so I came up with a better way. We waived the initial franchise fee, but anyone who wanted a franchise had to spend at least a year as a successful manager of one of our stores before applying. We set up a company to finance them. I was saving money in that I didn't have to spend time with attorneys negotiating franchise deals. It's the best franchise system in the industry. And Domino's took off. By the fall of '83, we had around 1,100 stores.

I was finally getting my act together and could do a lot of things I really wanted to do. We designed incentive programs for managers and franchisees. We started having national conventions and advertising on a larger basis. The 30-minutes-or-free guarantee was as responsible for our growth as anything. Delivery times improved, and that's the whole key to our success. It was also a great management tool, because it put the emphasis where it should be—on handling the rush. Delivering pizzas fast is not a matter of driving fast; it's a matter of getting the pizzas in the oven fast. That's where you get behind. But then I had to stop it in 1993 because of a big lawsuit. [A St. Louis jury ordered Domino's to pay $79 million to a woman struck by one of its drivers who ran a red light.]

I was making money like I never had in my life. There were more stores all the time, sales were going up, the system was really clicking. I think something happened to me because of the success and the media attention. After all those years of making wish lists, I went a little overboard in buying material, worldly things. It started with the Detroit Tigers in 1983. I had been a fan since childhood, but owning the team was a far-off dream. I decided to do it after I went to a meeting where Fred Wilpon, who bought the Mets, gave a talk. He said that before he owned the Mets, he went into business meetings and spent about 55 minutes establishing his credibility, and then had maybe five minutes to work out a deal. After he bought the Mets, he said, he spent 55 minutes answering questions about baseball. "What's Steinbrenner like? Ted Turner?" Then, in the last five minutes, they'd say, "Where do we sign?" After that I was ready to buy the Tigers. The team created pride within the company, especially with the kind of year they had in 1984, winning the World Series.

I also built Domino's Farms [a 1,700-acre complex in Ann Arbor, where Domino's has its corporate headquarters] and bought 244 collector cars. I bought the largest Frank Lloyd Wright collection in the world, including a couple of Frank Lloyd Wright houses. I justified it by saying it was an investment. The cars—I'd been a car buff my whole life, and I knew what would go up in value and what wouldn't. Cars tied in with delivery, so I thought a Domino's car collection made sense. Domino's Farms would attract top help. The airplanes were timesavers—time is money.

At the same time I had been getting more involved in religious work. I started a foundation in 1983, because I saw needs out there and I wanted to fill them. I started Legatus, an organization for Catholic CEOs. I built a cathedral in Managua, Nicaragua. I also did some promotion for the pro-life cause. As a result, Domino's ended up with a national boycott from the National Organization of Women. After that, I realized I couldn't just do the things I wanted to. I couldn't jeopardize the franchisees and employees. Yet I thought these things were important. So in 1989, I decided to sell the business and spend the rest of my life serving the Catholic Church.

I announced I was stepping aside as president to show a buyer that the company could get along without me. I thought Domino's would be sold in a matter of months, but that went on for 2c years. Meanwhile, the company deteriorated. Pizza Hut got into the delivery business and took over our lead. Little Caesars took off. We showed others how to do it, and they did it better. I didn't have any choice but to come back. We were half-a-billion dollars in debt. The turnaround took longer than I thought it would. It was just a day-by-day thing, getting back to basics—trying to run the stores better, get the delivery times down.

In that time I made another change. I read a book by C.S. Lewis called Mere Christianity. There's a chapter in there on pride, and it hit me right between the eyes. It basically said that sometimes when you work harder than other people and set higher goals than other people, you do it for the wrong reasons—so you have more than other people. And that's pride. I was taught pride was the greatest sin, and I realized, my gosh, I thought those things were virtues. I'm probably the biggest sinner in the world. So I changed. I took a millionaire's vow of poverty and sold most of my big possessions. I don't drive luxury cars, I don't fly first-class, I don't own yachts, airplanes, any ostentatious things. It was a tremendous sense of freedom. I even sold the Tigers.

We didn't find a buyer for Domino's until 1999—Bain Capital—but once we did, I sold the company in 14 weeks. A lot of people thought I couldn't live without Domino's, but I do not miss it. What I'm doing now has so much more meaning to me. The idea of founding a Catholic college had been brewing for years in my mind, so we started Ave Maria College here in Ypsilanti in 1997. We bought an old, abandoned schoolhouse and had probably a dozen full-time students that first year. And then in 1999 we started Ave Maria Law School.

My goal now is to have the finest Catholic university and law school in the world. We were going to move the campus to Domino's Farms, but we couldn't persuade the township to buy the idea of a university here. So I prayed about it a lot, and my answer was to put it in the Naples, Fla., area. I'd vacationed there many times and enjoyed it. Naples has great weather, and there are few Catholic universities in Florida, or even in the Southeast. We have an interim campus down there now, and the permanent campus will open in 2006 with architecture in the style of Frank Lloyd Wright. The main chapel on campus will have the largest seating capacity of any Catholic church in the U.S.

I'm thankful that I have my faith, because I couldn't have gotten through Domino's without it. I don't think anyone in business had a tougher time than I had. My faith sustained me when we had internal problems with franchisees, when the media would write nasty things. I've lived by my faith as well. I've always tried to be fair in everything that I've done. When I got into trouble, there were always suppliers who trusted me, had faith in me. I've always been able to attract good employees. And I'm lucky.

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