Financing

Pizza Hut is warring with one of its largest franchisees

Operator EYM Pizza closed 15 locations in Indiana amid a lawsuit from the pizza chain franchisor over unpaid royalties and poor performance.
Pizza Hut
Pizza Hut wants one of its largest franchisees out of the system. | Photo: Shutterstock

Pizza Hut and one of its largest franchisees are doing battle in court over the operator’s performance and payment record on royalties.

The pizza chain has filed a lawsuit against EYM Pizza, the operator of 140 locations in Indiana, Illinois, Georgia, Wisconsin and Texas. Pizza Hut in its lawsuit is accusing EYM of underperformance and for not paying royalties on time.

That lawsuit comes as EYM apparently closed 15 locations in Indiana, according to the Times of Northwest Indiana.

EYM itself had sued Pizza Hut in March, trying to keep the franchisor from terminating its franchise agreements. A judge dismissed that lawsuit in April, ruling in favor of Pizza Hut and ultimately paving the way for the franchisor’s lawsuit.

But the dispute highlights issues in the Pizza Hut system. Once the country’s largest pizza chain, the concept has struggled to perform consistently for years and has lost momentum it generated during the pandemic, leading to an overhaul of its domestic executive leadership.

And the issue also shows the difficulty some restaurant companies have had since inflation hurt franchisee margins and slowed the market for restaurant acquisitions.

EYM was started by Eduardo Diaz, a former president of McDonald’s Mexico. He started EYM Group in 2008 and in 2015 decided to jump into the Pizza Hut business. He spent $10.9 million for locations in Illinois in 2016 and $8.8 million for locations in Indiana. In 2017, EYM bought the Georgia and South Carolina markets for $9 million. He spent about $8.4 million in 2018 for restaurants in Wisconsin in two separate deals.

During that growth period, according to EYM’s lawsuit, the franchisee received awards from the company, and Diaz served on committees for the brand. But at some point by 2021, the operator’s fortunes turned.

That year, EYM decided to sell its restaurants and according to court documents had an $89 million offer to purchase the restaurants in 2021. But by October that year, the buyer withdrew the offer and returned with what was described as a much lower offer with conditions, ending the deal talks.

That year, inflation was beginning to show an impact on profit margins, and led to rising interest rates and slowed mergers and acquisitions to a crawl. The cost of tomato sauce increased 40% from 2021 to 2022 while the cost of dough increased 35% to 45%.

COVID resulted in delays of new restaurant projects from 2020 to 2021 and 2022, and inflation drove up the cost of those projects by up to 80% in that period, according to EYM’s lawsuit.

EYM in its lawsuit was critical of Pizza Hut, management changes and its long-term performance. “Pizza Hut has no distinct identity like others,” the franchisee said in its lawsuit. “Pizza Hut has no image or identity that sticks with patrons.”

According to Pizza Hut, however, EYM’s sales underperformed the system since the pandemic.

Pizza Hut’s same-store sales increased 7% between 2019 and 2023, according to documents. EYM’s same-store sales declined 10% over that time.

EYM also fell behind on development commitments, Pizza Hut said in its lawsuit.

And the franchisee’s track record on operations has also been poor, according to the lawsuit. More than 12% of its restaurants failed inspection between February 2023 and February 2024, according to Pizza Hut, four times the average failure rate, according to the lawsuit.

“Their performance is among the worst of all large Pizza Hut franchisees,” the lawsuit says.

By September 2022, EYM had fallen behind on royalty payments and was $3 million behind on such payments by December of that year. EYM ultimately paid.

But it would fall behind on royalty payments multiple times since then. In August of last year, Pizza Hut gave EYM more time to make its royalty payments to give the franchisee time to find a buyer. EYM put itself on the market and had a pair of letters of intent to buy the restaurants, one of which was for $25 million, but neither resulted in a deal.

Pizza Hut then canceled an agreement to delay the royalty payments and is now moving to terminate the restaurants.

Among EYM’s charges in its failed lawsuit against Pizza Hut was that the company wanted the operator to sell those 15 stores in Indiana for $1.5 million. “That is $100,000 a store,” the operator’s lawsuit said. “It costs at least $600,000 to open a brand-new store from the ground up.”

EYM has spent $46.6 million to buy and renovate Pizza Hut restaurants, according to court documents. As of March, it had bank debt of $23 million.

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