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Pizza Hut has a dine-in problem

The chain is doing well with delivery and carryout, but it has an awful lot of dine-in locations.
Photograph: Shutterstock

Pizza Hut is generating good sales and traffic with carryout and delivery, which should be a good thing for a pizza chain, except for this: Many of its locations, both in the U.S. and internationally, specialize in dine-in visits.

In international markets, about half of the company’s sales come through casual dining locations.

That number is only 10% in the U.S., but half of the company’s domestic locations have wait staff.

The result: Disappointing same-store sales growth. Global same-store sales declined 1%, including a 3% decline in markets outside of the U.S., parent company Yum Brands said on Wednesday. U.S. same-store sales increased 1% in the quarter ended Sept. 30.

Yum CEO Greg Creed said the company was “disappointed” by Pizza Hut’s results. “We have work to do around same-store sales growth,” he said on the company’s third quarter earnings call Wednesday morning.

The results serve as a microcosm for the restaurant industry in the second half of 2018: Consumers are increasingly taking their food with them and are less likely to eat at a restaurant.

Pizza Hut developed as a casual dining restaurant chain before shifting to delivery and carryout. That shift is still going on at the chain’s nearly 17,000 global restaurants.

“The challenge Pizza Hut faces is it has a large dine-in business,” CFO David Gibbs said on the earnings call. “The drag dine-in is having on reported same-store sales masks the relative health of delivery and carryout.”

Most of the company’s new units are delivery and carryout locations.

Still, the shift is happening slowly, executives said. In the U.S., the dine-in restaurants “are in the wrong part of the trade area, haven’t been remodeled and need to go away,” Gibbs said.

In international markets, however, that’s a different scenario. “Our international dine-in stores are in fairly good shape,” Gibbs said. “They’re good assets and good locations and many countries have a good dine-in business.”

Pizza Hut is clearly working to improve its international business. The company recently named Vipul Chawla to president of Pizza Hut International. The former managing director of Pizza Hut Asia-Pacific will take over Dec. 3 and will report to Creed.

Chawla will have to figure out a way to balance the system’s dine-in focus with the growing trend toward delivery and carryout. “Dine-in is waning in relevance,” Gibbs said. “It complicates our pricing decisions.”

In the U.S., the challenges are a bit different. While the company’s same-store sales grew in the third quarter, Creed acknowledged that the chain’s messaging “was not distinctive enough to attract new customers.”

The company recently upgraded its $5 value menu. And executives have hopes that the chain’s partnership with the NFL will generate sales.

But they also acknowledged some challenges convincing every franchisee on the right price point.

“Do we have all the franchisees on the right price points? No we don’t,” Creed said. “Are the stores on the right price points doing better? Yes they are. We have to do a better job communicating better value.”

But executives have long warned that Pizza Hut’s full turnaround in the U.S. would take time. And they said that the foundations are in place for that turnaround.

“The foundations for Pizza Hut in the U.S. is in a much better place,” Creed said. “Delivery times, quality of food, price points. The foundations are definitely in a better place.”

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