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Financing

Pizza Hut owner Yum Brands could bring in new operators

The fast-food chain operator is working to help struggling franchisees but suggests outside investors could step in, too.
Photograph: Shutterstock

Yum Brands is working to help its franchisees navigate the coronavirus with a variety of assistance, including grace periods on royalty payments and deferred capital spending requirements.

Those efforts also involve helping a “small number” of franchisees around the world, including some U.S. Pizza Hut operators, who were in financial distress entering the crisis, problems made much worse by a weekslong shutdown.

One of the company’s options could include something else: bringing new franchisees on board.

“We’re fielding some inbound requests from outside capital partners who would like to put money to work in our system,” Yum CFO Chris Turner said on the company’s first quarter earnings call Wednesday. “That gives us a multilayered approach to bolstering the health of our store network.”

The comments suggest that Yum could steer some of its struggling operators to sell their units to outside investors if they can’t make it through the next few months.

“It starts with the primary focus on working with our existing franchisees, in particular those who are suffering the most distress,” Turner said. “But we do have backup plans with partners who could step in, if needed, in certain parts of the globe.”

Yum operates four brands: KFC, Taco Bell, Pizza Hut and the recently purchased Habit Burger Grill.

All of them have seen steep decreases in sales in recent weeks. Globally, Yum Brands’ same-store sales have fallen 7%. But those same-store sales were down 30% in the second half of March and into April, including declines of 20% to 25% at Pizza Hut, 30% at Taco Bell and 35% at KFC.

About 10,000 of Yum’s more than 50,000 locations worldwide are closed.

Pizza Hut in particular has struggled in recent years, as many of the brand’s U.S. locations are still reliant on dine-in service as part of its old casual-dining model. The chain has also lagged behind competitors such as Domino’s Pizza.

Its largest franchisee, NPC International, was teetering on the edge of bankruptcy heading into the coronavirus crisis. NPC is also the largest franchisee of Wendy’s.

In the first quarter, Yum Brands said, “bad debt expense” from franchisees more than tripled, to $28.5 million. While some of that is related to the COVID-19 crisis, about $17 million is due to “franchisee-specific situations,” including some KFC operators in Europe and Latin America and “a handful of Pizza Hut U.S. accounts.”

Most of that, the company said, is coming from eight Pizza Hut operators in the U.S.

The crisis “is a really unprecedented situation, and the pandemic is causing strain on our franchisees, particularly in markets where stores are closed, and we’re working hard to help bridge to the other side,” Turner said.

Challenges with the U.S. Pizza Hut system have thwarted the brand’s efforts to turn itself around, and the coronavirus crisis is only exacerbating those challenges. Executives on the earnings call said they were pleased with the brand’s performance recently under Kevin Hochman, who earlier this year was given control of the chain’s U.S. business.

Pizza Hut has generated strong growth with digital and delivery orders in recent weeks, as well as contactless carryout orders.

The company recently set a digital sales record, doing more business on a typical Friday than during either of the past two Super Bowls.

“This three-month period we’re in right now is basically going to have three years’ worth of changes to our business,” CEO David Gibbs said. “It’s accelerating the plan that we had for Pizza Hut in getting us to be this truly digital-delivery-carryout business.”

Getting franchisees in the right state, however, is important to that goal. Company executives stressed that the vast majority of its operators were in strong financial health going into the crisis. 

The company is giving grace periods to franchisees that need the excess capital, but Yum is also ensuring that the operators who receive such breaks are “in good standing.”

The grace periods give operators an additional 60 days to make two of their royalty payments. “One of the qualifications for being able to take advantage of those grace periods for the franchisees who need it is they are in good standing,” Turner said. “That’s something we’ve been managing carefully as we go through this.”

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