Essentially, Pizza Hut will emerge in 2021 as a very different organization not just from a model standpoint, but also from an operator one.
Creed added that some franchisees were saddled with debt that made it hard to relocate restaurants, “and that’s where we’re working through with those parties to get the stores in the hands of the right partners that are well capitalized to grow and build this business.”
It’s not the majority of Pizza Hut franchisees, he said. It is enough, however, to push bad debt up and lag the system’s overall performance.
“As you know, the [quick-service restaurant] category is facing a lot of wage pressures right now, and that is pressuring unit-level economics and franchisee’s economics,” Creed said. “But as we always remind people, building a new Pizza Hut is a good investment.”
The question was quickly becoming, was running an old store one?
“This is more about working through with a select group of franchisees that may have more debt on their business than they should, to get those stores capitalized properly and in the right hands of the right partners,” Creed said.
It’s a key piece in Pizza Hut’s plan to morph its system as opposed to simply trimming it. Creed said in Q2 the economics of building a modern delivery asset “work quite well for Pizza Hut,” meaning, for the most part, any trade area where a store closes, there should be an opportunity to rebuild in that market or nearby. Gibbs said some older boxes were erected in spots that made sense 30 or 40 years ago. Today, they just don’t work for delivery.
The goal for Pizza Hut then, with many of these restaurants, is to take a dine-in store in a dine-in market and move it to a trade area that fits off-premises-minded customers. The result, as its current fleet proves, would be more upside, less costs (important as wage pressures burden the bottom line), better system sales, franchisee economics, and an overall image to the consumer that mirrors Pizza Hut’s evolution instead of its history.
And, ultimately, Pizza Hut expects significant top-line improvement and profitability to result from removing low volume, underperforming stores and replacing them with stronger restaurants.
Not to mention, better-capitalized franchisees who have growth on the mind, as Creed alluded to.
That last note is really the present pain point. A worthy one to tackle, however, Gibbs said. “Of course, we know that when we have great franchise operators running first-class assets that are well positioned in trade areas to serve customers, we win in the marketplace and the Pizza Hut U.S. team is working hard to accelerate this transition.”
He added Pizza Hut’s U.S. business also decelerated in Q3 as changes to its value offerings helped franchisee margins, but had a negative impact on transactions.
Pizza Hut also expanded its Grubhub partnership pilot to 700-plus restaurants. Gibbs said the chain is “well positioned to leverage being listed on the Grubhub marketplace. But by fulfilling delivery orders through our own delivery network, this gives us better control of the customer experience.”