Pizza Hut to Start Shedding Underperforming Restaurants

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.

A robust quarter

YUM! sailed Wall Street expectations in several key areas. Adjusted earnings per share of 93 cents beat calls of 87 cents. Revenue of $1.31 billion came in well above estimates of $1.28 billion. YUM! posted global same-store sales growth of 5 percent. System sales rose a healthy 10 percent, anchored by 7 percent net new unit growth.

KFC had a particularly strong period. Eight of its 13 international markets reported at or above 6 percent same-store sales growth. Japan was 18 percent. Africa 10 percent.

In the U.S., the chicken chain’s comps lifted 2 percent thanks to a continued focus on core menu items balanced by an accelerated pace of promotion. Chicken and Waffles returned in Q2, followed by Cinnabon Biscuits. And KFC launched a new channel for a la carte menu items with its 2 for $6 Mix and Mix setup.

The new value proposition drove transactions for the quarter, Creed said, and allowed guests flexibility to build their own meals—a demand KFC recognized whitespace in. Additionally, the chain plans to introduce a branded web experience by year’s end to capitalize on delivery sales. There are now 2,300 KFCs offering the service and 3,500 available for “click and collect.”

Taco Bell speeds it up

Taco Bell boosted system sales 10 percent in the quarter, with same-store sales of 7 percent and net new unit growth of 3 percent. The chain opened 55 gross new restaurants in 12 countries.

Taco Bell has reported positive same-store sales in 17 of the last 18 quarters, including 12 consecutively.

Creed pointed to the chain’s focus on value and innovation, especially the Grande Nachos Box, which ran $5. Its sales mix peaked at 10 percent.

Notably, Creed provided an update on Taco Bell’s “All Access,” strategy meant to create a frictionless experience for customers. Taco Bell currently has kiosks in more than 4,900 restaurants and expects to have the full U.S. rollout finished this year (there are 6,629 domestic locations).

Delivery is live in 4,500 units. Taco Bell has more than 11 million registered users for its mobile and online ordering system.

Gibbs provided some interesting drive-thru figures, too. He said, in the U.S., 6 million more cars drove through Taco Bell drive thrus compared to Q2 2018. Customers also received an experience that was on average 7 seconds faster.

“This attention to improve speed, customer satisfaction and running great restaurants help the Taco Bell system break two weekly sales records just one week apart,” Gibbs said.