Close to 90 percent of Pizza Hut’s new units are built to its “Delco” model, which focuses on take-out and delivery. The model is also smaller and requires a lower investment point. Pizza Hut is even testing a cubby-style pick-up concept in California right now.
Here was the issue facing YUM! before it made this call to replace units: While the vast majority of its business flows through delivery and carry-out channels, close to half of its assets remain of the dine-in variety.
Also, there are some restaurants, COO David Gibbs added, built in trade areas that fit 30 or 40 years ago. But those spots today are not ideal for modern delivery models. “And if we can get those stores closed and then put in the right spot in the trade area for delivery, obviously there is going to be upside to sales for those units and better economics for the franchisee, better system sales, and a better image to our consumer,” he said.
Gibbs said the short-term financial impact should be minimal since the closures will feature lower-volume, underperforming stores. Eventually, it should significantly improve Pizza Hut’s system sales and profitability as those units get replaced with stronger restaurants.
Pizza Hut’s recent performance supports the shift as well. The chain reported Q2 same-store sales growth of 2 percent in the U.S., year-over-year, with system sales up 4 percent. Unit growth was flat. Transactions, however, upped 3 percent, which Creed credited to “the result of continued compelling value, ops execution, and our growing loyalty program, Hut Rewards.”
Earlier in the year, Pizza Hut said it improved the number of orders delivered in less than 30 minutes by 3 percentage points.
The chain recently updated its $5 Lineup value offering to the $5 and Up Lineup. The change allowed franchisees to address local economic factors, particularly in higher wage markets, by offering the same items at more flexible price points. Starrs was also announced as the brand division’s CEO.
Returning to the asset base transition, Creed said, “We are excited about collaborating with franchisees who are capable, well-capitalized, committed to the brand, and who have the growth mindset to accelerate the closure of underperforming dining stores and replacement with new delivery of fast casual delivery assets.”
“By the same token,” he added, “we also know we’ll need to directly address franchisees who are burdened with too much debt, don’t have access to capital or aren’t committed to the long-term. Thus, in a few cases, some of these businesses will need to be restructured in the near-term to address capital structure and leverage issues, particularly, those franchisees with greater dine-in exposure.”
Pizza Hut ended Q2 with more than 300 locations on GrubHub and plans to expand further. Customers place their orders via GrubHub, but Pizza Hut drivers still complete the delivery.