In this FDD Talk post, you’ll learn the following:

• Section I – Background information on the Pizza Hut franchise opportunity, including relevant news updates

• Section II – Estimated initial investment for a Pizza Hut franchise, based on Item 7 of the company’s 2019 FDD

• Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for a Pizza Hut franchise, based on Items 5 and 6 of the company’s 2019 FDD

• Section IV – Number of franchised and company-owned Pizza Hut outlets at the start of the year and the end of the year for 2016, 2017, and 2018, based on Item 20 of the company’s 2019 FDD

• Section V – Presentation and analysis of Pizza Hut’s financial performance representations, based on Item 19 of the company’s 2019 FDD, including information on the:

• 2018 average gross sales, cost of sales, cost of labor, cost of advertising, semi-variable costs, other semi-variable costs, other fixed costs, rent, and EBITDA for the 6 mature company-owned system restaurants of the Dine-In, RBD restaurant concept type

• 2018 average gross sales, cost of sales, cost of labor, cost of advertising, semi-variable costs, other semi-variable costs, other fixed costs, rent, and EBITDA for the 16 mature company-owned system restaurants of the Delivery/Carry-Out Delco restaurant concept type

• 2018 average, low, high, and median gross sales for the 2,797 mature franchised system restaurants of the Dine-In/Red Roof and RBD restaurant concept type

• 2018 average, low, high, and median gross sales for the 2,889 mature franchised system restaurants of the Delco Delivery/Carry-Out restaurant concept type

Section I – Background Information

29 Things You Need to Know About the Pizza Hut Franchise

Plans to Start Shedding Underperforming Restaurants

1.  In July 2019, during Pizza Hut’s quarterly review, Greg Creed, CEO of YUM! Brands (Pizza Hut’s parent company), discussed the brand’s future and the challenges Pizza Hut faces as the brand tries to turn things around.

2.  According to a press release, Pizza Hut’s footprint doesn’t align with its operational investments or where the customer is headed. Creed added, “And following the tremendous recent improvements in operations and technology led by Artie Starrs and the Pizza Hut leadership team, we plan to lean into and accelerate the transition of our Pizza Hut U.S. style to a more modern delivery and carry-out focused asset base.”

3.  YUM! Brands said it expects its U.S. Pizza Hut store count to drop to as low as 7,000 locations as it morphs into a modern, delivery, carry-out friendly fleet. Pizza Hut closed the second quarter of fiscal 2019 with 7,449 restaurants. Roughly 6,100 of those are traditional units and 1,350 are express locations. In that first pool, close to half are dine-in venues.

4.  Creed said YUM! couldn’t estimate how quickly stores would shutter and when a replacement might open. Gaps could form and one might not pop up after a closure, although the company will try to minimize those, he said. “Ultimately, we know that the economics of building a modern delivery asset work quite well for us,” Creed said. “And, for the most part, any trade area where a store closes, there should be the opportunity to rebuild the store in that area or somewhere nearby.”

5.  Pizza Hut remains committed to an asset-light model and 98 percent franchised path, meaning the economics of building a new unit stand on their own, and YUM! should have little trouble getting existing or new franchisees to rebuild in those markets. Case by case, YUM! could also deploy some capital in the short term to flip a market and get it in the hands of another operator, and take its capital back out.

6.  As Pizza Hut changes direction, expect a deceleration in the pace of new unit development. International expansion will be offset by a near-term decline in the absolute number of U.S. restaurants.

7.  Currently, 90 percent of Pizza Hut’s business is off-premises. U.S. and international locations see roughly seven and six point differentials between the off-premises and dine-in, respectively (dine-in representing the lagged mix).

8.  Close to 90 percent of Pizza Hut’s new units are built to its “Delco” model, which focuses on take-out and delivery. The model is also smaller and requires a lower investment point. Pizza Hut is even testing a cubby-style pick-up concept in California right now.

9.  Also, according to COO David Gibbs, there are some restaurants built in trade areas that fit 30 or 40 years ago. But those spots today are not ideal for modern delivery models. “And if we can get those stores closed and then put in the right spot in the trade area for delivery, obviously there is going to be upside to sales for those units and better economics for the franchisee, better system sales, and a better image to our consumer,” he said.

10.  Gibbs said the short-term financial impact should be minimal since the closures will feature lower-volume, underperforming stores. Eventually, it should significantly improve Pizza Hut’s system sales and profitability as those units get replaced with stronger restaurants.

11.  Pizza Hut’s recent performance supports the shift as well. The chain reported Q2 same-store sales growth of 2 percent in the U.S., year-over-year, with system sales up 4 percent. Unit growth was flat. Transactions, however, upped 3 percent, which Creed credited to “the result of continued compelling value, ops execution, and our growing loyalty program, Hut Rewards.”

12.  Earlier in 2019, Pizza Hut said it improved the number of orders delivered in less than 30 minutes by 3 percentage points. Additionally, Pizza Hut recently updated its $5 Lineup value offering to the $5 and Up Lineup. The change allowed franchisees to address local economic factors, particularly in higher wage markets, by offering the same items at more flexible price points.

13.  Returning to the asset base transition, Creed said, “We are excited about collaborating with franchisees who are capable, well-capitalized, committed to the brand, and who have the growth mindset to accelerate the closure of underperforming dining stores and replacement with new delivery of fast casual delivery assets. By the same token, we also know we’ll need to directly address franchisees who are burdened with too much debt, don’t have access to capital or aren’t committed to the long-term. 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, particularly, those franchisees with greater dine-in exposure.”

Relaunches Original Pan Pizza with Improved Recipe

14.  Near the end of May 2019, Pizza Hut announced that after a three-year innovation process it has accomplished the inconceivable: improving upon its famous pizza offering, the Original Pan Pizza. Originally debuting on Pizza Hut menus nationwide nearly four decades ago, the Original Pan Pizza forever changed the pizza-eating experience for America by introducing a pizza that was crispy on the outside and soft and chewy on the inside.

15.  The updated Original Pan Pizza is baked in a newly-engineered pan, which perfects the golden-brown, crispy, buttery crust, and is topped with a new blend of cheese and sauce to enhance the flavor and complement the chewy center. The finished product is the result of a lengthy innovation journey Pizza Hut embarked on, focused on combining art, science, and culinary expertise to bring the taste of the Original Pan Pizza to the next level.

16.  Marianne Radley, chief brand officer of Pizza Hut, said, “Pizza Hut has a rich history of things we’re known for, and creator of the Original Pan Pizza is certainly at the top of the list. Re-inventing our most iconic Pizza Hut menu item is just another way we’re showing our customers that as a company we’re about the pizza first and will never become complacent when it comes to taste.”

17.  The reformulated Original Pan Pizza was rolled out system-wide in the U.S. The pizza was also added to the Everyday Low-Price Deal for a limited time at participating Pizza Hut locations across the country, giving customers the opportunity to indulge in a large 2-topping Original Pan Pizza for the unbeatable value of $7.99 when ordering online.

18.  Penny Shaheen, senior director, culinary innovation and strategy, Pizza Hut, added, “We know that taste is king for our customers, so we’re excited to roll out this new, state-of-the-art pan technology, combined with our perfected blend of cheese and sauce ratio. We’ve put a lot of energy and love into refining this beloved pizza and are eager for customers to taste the unbelievable difference first-hand.”

Testing Plant-Based Pizza Topping and Round Pizza Box

19.  In late October 2019, Pizza Hut introduced a limited-time test of a plant-based pizza topping served up in a game-changing round pizza box. The test of both innovations will take place exclusively at one Pizza Hut location in Phoenix where the company introduced the new Garden Specialty Pizza topped with Incogmeato™ by MorningStar Farms Italian sausage.

20.  Marianne Radley, chief brand officer, Pizza Hut, said, “We innovate for human’s sake and we’ll win on taste – PERIOD. At Pizza Hut we don’t do anything halfway and improving the customer experience and delivering a better tasting pizza is our core mission. When we talk about feeding more possibilities we mean it – and I can’t wait to share these two new industry-changing innovations with our customers.”

21.  Pizza Hut partnered with Zume, a company pioneering the shift to a more sustainable future of food, to design a way to put a round pizza in a round box. Not only does the round box contain less overall packaging compared to a typical square pizza box, it’s also industrially compostable (where available) and interlocks easily to ensure a smoother delivery. In other words, no pizza insurance policy needed and freed up space in the fridge for leftovers.

22.  Following the event in Phoenix, Pizza Hut will look at ways to roll the box out more widely in the near future. Alex Garden, chairman and CEO of Zume, Inc., said, “Pizza Hut is an undisputed leader in its use of technology to deliver on its promise of hot, fast and reliable food. We’re thrilled to support Pizza Hut’s packaging efforts to provide its fans with a great pizza-eating experience.”

23.  According to Nicolas Burquier, chief customer and operations officer, Pizza Hut, “This revolutionary round box – the result of a two-year journey – is the most innovative packaging we’ve rolled out to date. The round box was engineered to make our products taste even better – by delivering hotter, crispier pizzas. This box is a win, win – it will improve the pizza-eating experience for our customers and simplify the operating experience for our team members.”

24.  Hot off the heels of September’s Stuffed Cheez-It Pizza launch, this limited-time test run of the plant-based Italian sausage topping marks the second venture for Pizza Hut and Kellogg. The new Garden Specialty Pizza will feature Incogmeato™ Italian sausage, onions, mushrooms, and banana peppers and will be served exclusively on Pizza Hut’s large, hand-tossed crust.

25.  “Incogmeato™ is a new-to-the-world brand created to challenge convention on delicious plant based food,” says Wendy Davidson, president of Kellogg Away from Home. “Pizza Hut is the innovation leader in its category and we are excited to partner with them to develop a tasty, first-ever plant-based pizza to satisfy what flexitarians are seeking today.”

Company History

26.  Pizza Hut was founded in 1958 by brothers Dan and Frank Carney in Wichita, Kansas. The Carneys, who were Wichita State University students at the time, borrowed $600 from their mother to start their pizza business. At the time, pizza parlors weren’t common so Pizza Hut was a hit. A year later, the Carneys started franchising the Pizza Hut concept and the first franchise was opened in Topeka, Kansas by Dick Hassur.

27.  Throughout the 1960s Pizza Hut grew aggressively and the brand’s iconic red-roofed restaurants made their debut at the end of the decade. Over the next few decades Pizza Hut continued to grow – domestically and internationally – and introduced items that are now Pizza Hut staples, including Pan Pizza, Hand Tossed Traditional, and the Stuffed Crust.

28.  In 1977, PepsiCo acquired Pizza Hut, which was spun off into its own company that eventually changed its name to YUM! Brands in 2002. YUM! Brands also owns KFC, Taco Bell, and WingStreet, resulting in co-branded locations with Pizza Hut. Today, there are Pizza Hut restaurants all around the world and in terms of locations, Pizza Hut has become the world’s largest pizza chain.

Entrepreneur’s Franchise 500

29.  Pizza Hut ranked No. 10 on Entrepreneur’s 2020 Franchise 500 list.

Section II – Estimated Costs

• Please click here for detailed estimates of Pizza Hut franchise costs, based on Item 7 of the company’s 2019 FDD.

Section III – Initial Franchise Fee, Royalty Fee, Marketing Fee, and Other Fees

• Please click here for detailed information on Pizza Hut’s initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2019 FDD.

Section IV – Number of Franchised and Company-Owned Outlets

Franchised

2016

• Outlets at the Start of the Year:  5,780
• Outlets at the End of the Year:  5,885
• Net Change:  +105

2017

• Outlets at the Start of the Year:  5,885
• Outlets at the End of the Year:  6,021
• Net Change:  +136

2018

• Outlets at the Start of the Year:  6,021
• Outlets at the End of the Year:  6,087
• Net Change:  +66

Company-Owned

2016

• Outlets at the Start of the Year:  514
• Outlets at the End of the Year:  319
• Net Change:  -195

2017

• Outlets at the Start of the Year:  319
• Outlets at the End of the Year:  96
• Net Change:  -223

2018

• Outlets at the Start of the Year:  96
• Outlets at the End of the Year:  24
• Net Change:  -72

Section V – Financial Performance Representations (Item 19, 2019 FDD) and Analysis

• Set forth below are historical data for certain domestic traditional Pizza Hut outlets owned and operated by Pizza Hut or its affiliates (“Company-Owned System Restaurants”) and certain domestic traditional Pizza Hut outlets owned and operated by franchisees (“Franchised System Restaurants”).

Part 1 – Mature Company-Owned Restaurants

• The financial performance representations below provide certain information regarding Company-Owned RBD and Delco System Restaurants that were open and operating for at least one year as of December 31, 2018 and that were situated on leased real property (“Mature Company-Owned System Restaurants”).

• RBD stands for Restaurant-Based Delivery System Restaurants from which Pizza Hut pizza and other products approved by PHLLC (“Approved Products”) are sold for dine-in and carry-out consumption, and may be delivered for off-premises consumption.

• Delco stands for Delivery/Carry-out System Restaurants from which Approved Products are sold for carry-out and are delivered, all for off-premises consumption.

• Specifically excluded from Mature Company-Owned System Restaurants are System Restaurants for which PHLLC or its affiliates owned the real property; carry-out only System Restaurants; seasonal System Restaurants; Express Restaurants (for which licenses are offered under a separate disclosure document); or any type of System Restaurant other than traditional RBD and Delco System Restaurants.

• As of December 31, 2018, there were 22 Mature Company-Owned System Restaurants, which are reflected in the subset information provided below.

A.  2018 Average Performance – Mature Company-Owned System Restaurants of the Dine-In, RBD Restaurant Concept Type

Number of System Restaurants in Sample Set:  6