ANALYSIS: Will Yum! Brands' multibrand strategy help or hurt Pizza Hut?

July 17, 2003

Pizza Hut just posted a 4 percent U.S. same-store sales gain for the four-weeks ended July 12.

Congratulations, Red Roofers. You've made the long, hard push from running negative comps since December to crossing into positive territory. You've done it in the trenches of a bloody price war in a tough economy. And if Yum CFO Dave Deno is right, you'll average 2 percent positive comps for the rest of '03. (If only you'd report your franchise store sales numbers so we could have a clearer picture of your performance ... well, that's another issue.)

A July 16 investor conference call from Yum HQ in Louisville revealed Pizza Hut has weathered other storms favorably, too, namely the late spring outbreak of severe acute respiratory syndrome (SARS) in China and the South Pacific. Though sales coughed and wheezed for

Steve Coomes, Editor

about two months, the company reported that traffic has rebounded well now that the spread of the disease is under control.

What lies ahead?

During the call, Yum CEO and Chairman David Novak cited two keys to the company's future success: international expansion -- aggressive growth in China, Korea, Mexico and the UK for the near term, and Holland France and Germany for the longer term -- and multibrand stores. The company remains on pace, he said, to open 1,000 new international units this year.

It also plans to add 400 multibrand sites (many of which will be converted from single-brand sites) to its U.S. system this year. According to Yum, sites converted to multibrand (its other brands are KFC, Taco Bell, Long John Silver's, A&W All American Food and Pasta Bravo) operations from a single brand enjoy double-digit comps upon conversion.

Sound frightening, competitors?

Maybe not.

No question such comp-sales increases benefit Yum sales overall, but that doesn't guarantee Pizza Hut's sales rise in step.

And whether a multibrand option means customers would choose tacos or chicken instead of your pizza -- or even Pizza Hut's, for that matter -- remains to be seen. Personally, I don't think it's cause for alarm. If a customer's got a hankering for pizza, that's what he'll get.

What should make the rest of the pizza industry sit up and take notice, however, is Pizza Hut's new marketing plan. In the conference call Novak said echo boomers (Americans age 5 to 25) are no longer at the center of Pizza Hut's target. Now dear ol' Mom is in its crosshairs because, according to Novak, she's the decision maker when it comes to meal time.

"We've launched a new advertising campaign ... which is very focused on 'Mom' being the primary purchase influencer," Novak said.

I agree with Pizza Hut's hucksters: American matriarchs pull more weight than teens at meal times. Sure, Junior gets a handsome allowance, but he still wants Mom to pony up the dough at dinnertime so he can buy CDs later.

Pizza Hut deserves another pat on the back for its decision to hedge one-third of its cheese purchases this year by investing in milk futures and/or options contracts. (For a detailed explanation of how this underutilized tool can help control your cheese costs, see "Hedging On Price"). Whether hedging just a third of the hundreds of millions of pounds of cheese it buys annually is courageous or cowardly, I don't know, but the fact that it did it shows shrewd initiative that can be duplicated by any pizza company with 10 or more stores.

Lastly, not to be overlooked is the company's successful product innovation, namely it's pizza cum calzone, the P'Zone. Novak said such items are key to its family-focused initiatives because it gives groups options. "You get the core pizza quality you want and then you can get a

Atlanta-based RTR Restaurant Group operates 1,071 Arby's, Del Taco, Lee's Famous Recipe, Mrs. Winner's, Sbarro and T.J. Cinnamons units, and has tried the multibrand approach for eight years. Now, however, the company is abandoning its pioneering effort.

pizza (the P'Zone) that nobody else has and at a good price."

For $3.95, the P'Zone feeds two, which led Novak to add, "We now are playing much more significantly in the value game, but we're doing it on our terms."

But is it enough?

How long can Pizza Hut maintain this positive momentum? Novak and Deno were cautiously optimistic the Pizza Hut ship is back on course, but they admitted some turbulent waters lie ahead; chief among them are store-level challenges.

"We continue to make progress operationally at Pizza Hut -- not as much as we'd like -- but we're steadily moving the ball forward," said Novak. "(W)e've fixed some of our executional weaknesses, and we expect to see continued good performance for the balance of the year."

Novak didn't elaborate on those weakness, but it's likely they're the same suffered at KFC: customer service and product quality.

The troubles aren't limited to the home front, either. CFO Deno said, "We've got to work on our Pizza Hut business in Australia."

Truth is the stores down under have produced very mixed results, including some double-digit negative comps in recent reporting periods (see related story Aussie Pizza Hut sales drag down Restaurant Brands' Q1 '03 numbers).

Additionally, Jim Collier, president of Restaurant Brands, Australia's master franchisee for Pizza Hut and KFC, stepped down two weeks ago (see related story Restaurant Brands boss steps down.) Though Collier hasn't said much about his departure or his new job running a movie theater chain, sources tell me both brands' Australia stores were very poorly operated, Yum had had enough and Collier got the blame.

Additionally, Pizza Hut is expected to get a wake-up call in New Zealand, now that Domino's Pizza has entered the market (see related story Restaurant Brands' stock slide blamed on Domino's Pizza's arrival). Pizza Hut has all but had its way with that market for some time, but within only two weeks of Domino's arrival, a price war between it, Pizza Hut and the Australian Pizza Haven brand is underway (see related story Domino's Pizza lands in New Zealand, ignites price war).

How a 12,000-unit international company corrects such ills quickly is a mystery to me, especially when its workforce is young and highly transient.

The challenge to change intensifies when you understand that Pizza Hut truly isn't it's own company; it's one spoke on the wheel of Yum. And I would imagine that, just as in a triage situation in which medical attention is given to the worst first, Yum's surgeons are operating on KFC. The chicken chain's most recent U.S. comps dropped 7 percent (which likely ended Jason Alexander's run as its marketing spokesman).

I know each Yum brand has its own teams to address every aspect of every operation, but the fact remains that change is slow and burdensome in large corporations -- not to mention a company juggling six food concepts.

So does Yum have too many plates spinning at once? While a broad brand portfolio safely diversifies a company's interests, just how many brands can that one company manage?

According to a story in the July 14 issue of Nation's Restaurant News ("RTM roasts co-branding, beefs up Arby's concept"), multibrand concepts are not only challenging to manage, customers don't automatically come running, either.

Atlanta-based RTR Restaurant Group operates 1,071 Arby's, Del Taco, Lee's Famous Recipe, Mrs. Winner's, Sbarro and T.J. Cinnamons units, and has tried the multibrand approach for eight years. Now, however, the company is abandoning its pioneering effort.

RTM chairman Dennis Cooper told NRN, "We're shifting our focus from dual-branding to expanded core-branding." Translation: We'll refocus on our 800 Arby's units and leave our multibrand count at 74.

"We found that we just couldn't execute the delivery our guests wanted," RTM spokesman John Gray told NRN. "There were too many moving parts."

Granted, RTM is no Yum, Del Taco is no Taco Bell, and Mrs. Friendly's isn't even a wingtip on the bird of KFC, but the micro-macro comparison between Yum and RTM is hard to ignore.

If Yum's multibrand strategy ultimately succeeds, I predict it will happen overseas rather than in the U.S. There, new customers apparently don't have a problem seeing Pizza Hut and KFC under the same roof, which is the opposite of what RTM believes is acceptable in the U.S.

"By sending out a dual-brand message, you begin to confuse people," RTM President Tom Garrett told NRN.

Yum obviously believes it has the infrastructure to handle any problem facing any of its brands, and for its sake, I hope it does. Whether that means it can cure Pizza Hut's ills, only time will tell. But one thing seems clear, the pizza industry's giant's slumber is over, and he's back on his feet.

Topics: Commentary , Operations Management

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