Pizza Hut’s U.S. business is in for a tough ride over the next couple of years as the company works to shift the brand further away from its traditional dine-in locations toward more takeout and delivery units.
Domestic same-store sales declined 3% in the quarter ended Sept. 30, parent company Yum Brands said Tuesday.
Yum executives warned that such results could be common in the near-term because of the state of many of its franchisees. Many operators are struggling with weak finances or high debt loads, and the company wants to shift stores into the hands of franchisees with the wherewithal to close struggling units and open new ones.
“While we strongly believe that these are the right strategies to build the business for the longer term, these moves will introduce some uncertainty in the business performance over the short term,” David Gibbs, Yum’s president who will become CEO in January, said on the company’s third-quarter earnings call. He said the company expects results “to continue to be choppy.”
“We could see a continuation of soft sales and unit contraction throughout 2020 in the Pizza Hut U.S. business,” he said.
Pizza Hut has said it needs to dramatically shift its U.S. business to adapt to consumers’ shift to more takeout and delivery. The brand operates 7,400 locations domestically, many of which are still dine-in locations. The company would like to close the older dine-in locations and replace them in the same market with restaurants that focus on takeout and delivery.
Those franchisee economics are a problem, however. One such operator facing challenges is NPC International, Pizza Hut’s largest franchisee, with 1,200 locations in the brand—16% of the system.
But company commentary suggested other operators are struggling, too, as wage costs in many cities increase and the brand’s own sales have struggled.
“We know that some of our franchisees’ economics are pressured, particularly in higher-wage markets,” said Greg Creed, Yum’s outgoing CEO. “At the same time, others are overleveraged, and some simply aren’t the right operating partner for us to grow this brand.”
Closing existing units and opening new locations can be “an enormous distraction,” Gibbs said, which can hurt sales and traffic in the short term.
He said the company would not likely step in and purchase stores to keep them temporarily, as some systems have done. Gibbs said there are plenty of operators willing to step in and acquire locations.
“The great thing about the Pizza Hut U.S. business is we have plenty of people that want to get into it and are eager to buy stores and invest capital into fixing those stores and relocating them,” Gibbs said. “We see our role as more of a facilitator.”
That said, he would not rule out the possibility of the brand purchasing stores.
Debt is a potential problem for many franchisees in the Pizza Hut system—and operators in many other systems are also loaded with debt after years of acquisitions and expansions and remodels.
“Unfortunately, a lot of franchisees have some debt that makes it hard to relocate those assets,” Gibbs said. “That’s where we’re working to get stores in the hands of the right partners that are well-capitalized to grow and build the business.”
He noted that it’s “not the majority of franchisees.” And the company defended Pizza Hut’s business, saying that it works well in the hands of well-capitalized operators with locations in the right trade areas.
“The majority of our franchisees are good partners doing a nice job,” Gibbs said. “But the QSR category is facing a lot of wage pressures right now, and that is pressuring unit-level economics and franchisees’ economics.”