Yum Brands executives, on their first quarter earnings call Wednesday morning, rightly boasted about the progress that Pizza Hut is making in its turnaround in the U.S.—progress marked by 4% same-store sales growth in the first three months of the year.
Executives noted that the chain added cheese to its pizzas, improving the product, and that it hired more drivers, added members to its loyalty program and is converting old dine-in units to delivery and takeout locations. All of these are important elements in a brand’s turnaround.
But they also said this: Over the past 18 months, 2,000 of the chain’s domestic restaurants have changed hands.
That is an astounding level of turnover, representing more than a quarter of the brand in the U.S.
On the earnings call, executives said these new operators are coming on board with some excitement for the brand. And they’re getting results.
“Some of the new franchisees are delivering our best operating metrics,” Yum CEO Greg Creed said. “As new franchisees come on board, they embrace” what the brand is doing and “jump to the top of operating metrics.”
Franchisee turnover has quietly been one of the most significant trends in the restaurant space over the past five years.
Many legacy brands—and Pizza Hut certainly counts as a legacy brand—have a lot of older operators who bought their restaurants in the 1970s, ’80s or early ’90s. These operators are hitting retirement age.
While some of these franchisees could pass their restaurants on to sons or daughters, second generations often don’t want a part of those businesses.
As some of these franchisees face remodels or rising labor costs, they seek to get out of the business and sell to other operators. Many of the acquiring operators are larger franchisees with the financial wherewithal to handle the industry’s many changes.
Wendy’s is among the more aggressive. The company has been using what it calls a Franchise Flip strategy, in which it uses its power as a franchise to buy restaurants that are for sale. It then flips those restaurants to franchisees it prefers. Sometimes it keeps real estate in the deal. It did 540 of these deals last year alone.
“We view this as healthy turnover,” Wendy's CEO Todd Penegor said in February. “It allows us to strengthen our system by ensuring restaurants are in the hands of strong operators with access to capital that are committed to growth with a long-term focus.”
What’s notable about the Pizza Hut strategy, however, is the speed of the turnover. Turning over that many stores in just 18 months is remarkable, even in this day and age.
And it shows that sometimes these franchise systems have to change their franchisees to execute a true turnaround.
Ownership turnover can help reinvigorate a brand. New, better financed blood comes in, spruces up stores and energizes a concept.
These franchisees can make changes necessary to get a concept going. In Pizza Hut’s case, this means replacing older, dine-in stores with delivery-only restaurants—or the fast casual-like model that the chain is quietly adding in many areas.
Operators are vital to a restaurant brand’s performance, especially these days, as so many systems have put their stores into the hands of franchisees. New operators can do a lot to make a brand seem new.
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