Yum Brands finally announced the sale of Pizza Hut this week, months after announcing plans to do so, and weeks after a buyer, LongRange Capital, was publicly identified in media reports.
The ultimate agreement looks a lot different from one in which Yum sells the chain to a private-equity firm. LongRange is buying Pizza Hut everywhere outside of China. Yum China is buying the brand in China. The total price is $2.7 billion, for 20,000 stores, or about a third of the price that was paid two years ago for the much smaller Jersey Mike’s.
But that’s the going rate, apparently, for a legacy pizza chain facing long-term growth issues and major question marks about the segment in which it operates.
As we’ve covered ad nauseum, Pizza Hut has struggled in the U.S., losing market share to rivals Domino’s and Little Caesars. System sales fell more than 8% last year alone. It also operates with the lowest unit volumes, by far, in its sector, meaning that the chain faces major problems down the line, absent a turnaround.
But its international business, even with China, has also shown signs of stress. Pizza Hut outside of the U.S., including China, accounted for 13,677 of the chain’s 19,974 global locations. That number did not grow last year.
Indeed, China has accounted for 83% of Pizza Hut's international unit growth since 2019, and more than all of it the past two years as the chain outside of that country closed more units than it opened.
Yum has been a unit growth story for years and its executives have received bonuses based on restaurant expansion. That Pizza Hut could not accomplish that, even when accounting for the U.S. decline, spoke volumes.
The bigger issue for Yum, which probably necessitated its sale, is the simple questions about the pizza business.
The pizza business is fundamentally problematic because it no longer has the market cornered for delivered meals. Pizza chains have been losing sales over the past three years, even in a market in which consumers are dining on deals. Given the fundamental value that pizza provides—there are fewer, better values than pizza—that is a major red flag.
If you’re Yum Brands, and you haven’t been able to fix your pizza chain for decades, and now there’s international struggles, and you want investors to focus on your growth brands Taco Bell and KFC international, and you see these long-term questions, the sale of Pizza Hut then makes sense.
For LongRange Capital, however, Pizza Hut isn’t necessarily a bad bet, but we might have advised they buy the whole chain and not leave the China operations to Yum China. At $1.5 billion, plus a modest earnout, the price was cheap for a chain with about 15,000 global locations.
Pizza Hut does have a path for a post-deal evolution.
Consumers still like pizza. They just get a lot of it. Much of the pizza out in the world is of similar quality. A consumer doesn’t see much quality change, whether they get their products from Pizza Hut, Domino’s, Little Caesars, Papa Johns, Casey’s, Costco or the grocery store.
Evolving requires pizza chains to find something that can resonate with consumers in a way that will get them to opt for those brands over everything else they can get. That has been the fundamental problem with the sector. It’s long been way too similar, all competing on price and ease while enjoying its delivery dominance.
Pizza can no longer compete simply on delivery. Price is not enough in the current environment, as consumers want something for their money that isn’t simply the basic stuff.
That means a future Pizza Hut must find a way to get customers in the door. And perhaps more than its major competitors, the chain has a way to do that, by tapping into nostalgia for those old “red roof” restaurants. The company has done a lot of that already, with marketing of its “Book It” program and some random efforts to resurrect the old red roofs through Pizza Hut Classic.
Nostalgia is big for consumers today. LongRange would be smart to find a way to tap into that nostalgia in a more complete, chain-wide way, while giving them something that keeps bringing them back for their actual products.
Regardless, any step that LongRange takes will require heavy investment, both for franchisees and the new owners. And it will likely require a complete rethink of what it means to be a pizza delivery chain, both in the U.S. and elsewhere.