Pizza Hut plans to shake more dine-in locations out of its U.S. system in the coming years as it pushes operators to close weaker, underperforming restaurants and replace them with newer, more economical delivery units.
The strategy will result in the closure of hundreds of units across the country, culling 400 or more locations from the pizza chain at any one time as the company works to convert its restaurants to takeout and delivery.
About 3,000 of the chain’s more than 7,400 locations are primarily dine-in “red roof” locations, but the company is planning to replace only the underperforming dine-in restaurants with takeout units. Not all dine-in locations are set for replacement.
Executives said the U.S. chain’s restaurant count could drop to “as low as 7,000” over the next 24 months, but that the number of restaurants would quickly rebound to normal levels as units are replaced.
Exactly how many stores are set to be replaced is uncertain.
“We have a lot of stores that were built in the right spot when they opened 30 or 40 years ago,” David Gibbs, chief operating officer for Pizza Hut parent company Yum Brands, said on the company’s second quarter earnings call Thursday. “But they are not in the right spot today for a modern delivery asset.
“If we can get those stores closed and put in the right trade area for delivery, obviously there’s going to be upside to sales for those units and better economics for the franchisee, better system sales, and a better image to our customer.”
Pizza Hut’s U.S. same-store sales rose 2%, largely on transaction growth, in the best performance for the chain in more than a year.
But Yum Brands executives said that its same-store sales can expect to be “choppy,” largely because of that asset base. “We understand more clearly than ever that same-store sales growth in the U.S. will continue to be choppy without transforming the asset base,” Yum CEO Greg Creed said.
Yum has been noting more directly in recent quarters that its Pizza Hut locations represent a problem as consumers shift more of their dining toward takeout and delivery.
The company has been working gradually to convert its assets to delivery and takeout. But on Thursday, executives said they plan to “lean in” to franchisees to convert those assets more quickly.
“We plan to lean in to accelerate the transition of our Pizza Hut U.S. estate to a more modern delivery- and carryout-focused asset base,” Creed said. “This will ultimately position the Pizza Hut brand for many years of faster growth in the U.S.”
Executives said that the “short-term financial impact should be minimal” because the restaurants are lower volume and have weaker overall sales results. They also said they will work with operators to reduce the “gap” between when a restaurant is closed and a new one is opened.
Because Pizza Hut is largely franchisee-owned, the franchisor has a limited amount of control over the process.
Gibbs said the economics of conversions should be enough of a catalyst to get many operators to replace aging units without assistance. “We think the economics of building a new unit stand on their own,” he said.
Yet some of the company’s operators have been struggling of late, which could also be a problem. While the economics of conversions might be good, if an operator is struggling financially, they won’t be able to make the investment.
In particular, large franchise NPC International has faced financial challenges recently amid a heavy debt load—it has faced bond downgrades, and its debt is trading at distressed levels. NPC operates about one out of every six Pizza Hut locations in the U.S.
Executives did not mention NPC on the call. But they did note the need to work with operators that have a heavy debt burden to ensure they can undertake the conversion. “We’ll need to address franchisees who are burdened with too much debt, don’t have access to capital or aren’t committed to the long-term,” Creed said. “Thus, in a few cases, some of these businesses will need to be restructured in the near-term to address capital structure and leverage issues.”
Gibbs noted that the company could in some cases buy and flip restaurants in some markets to get them into the hands of franchisees who are able to make the conversions.
“As we get into the specific situations and sort them out, there may be some situations where we deploy a little capital in the short-term to flip a market and get it into the hands of somebody else and take our capital back out,” Gibbs said.