Pizza Hut memo warns of cut in driver reimbursements, hints at sales declines

March 16, 2003

Pizza Hut "area coaches" in and around Kansas City, Mo., are being instructed to reduce delivery driver reimbursement rates to 50 cents per run effective Dec. 24, four days before the end of the company's 13th and final accounting period for 2002.

In a one-page Dec. 5 memorandum obtained by PizzaMarketplace, Pizza Hut area coach Tim Henry wrote that all restaurants "throughout the (Kansas City) region and the company" that are reimbursing drivers 75 cents to $1 per delivery must lower the rate to 50 cents.

Though no official announcement has been made to the Dallas-based chain's rank and file, word of the change leaked and traveled quickly to message boards and chat rooms on Web sites such as the Association of Pizza Delivery Drivers' (APDD) and the Pizza Driver Homepage.

APDD treasurer Tim Lockwood, a delivery driver in Nashville, who does not drive for Pizza Hut, called the change Pizza Hut's attempt to cut expenses during a challenging fiscal year.

"It sounds to me like they're trying to win their money back by nickels and dimes and on the backs of the drivers," said Lockwood, referring to the 50-cent delivery charge instituted at its corporate stores. "In the past year and half, they've added the delivery charge, but they never changed what they're paying the drivers. This makes me wonder if they're trying to get out of paying drivers altogether."

Pizza Hut spokesperson Julie Hildebrand said she was not aware of the memo or precisely which stores and regions would be affected by the rate change. She did say she was confident the change was not a national event, but rather a regional adjustment of the reimbursement rate to 50 cents, the company's standard fee.

For more than a year, Hildebrand said, Pizza Hut has made some exceptions to its national standard in selected regions, where reimbursement rates ranged from 75 cents to $1 per delivery. The higher rates, she said, were provided to offset 2001 fuel price spikes and as an incentive to keep drivers during staff shortages.

"Now neither of those two reasons still holds true; we're not seeing driver shortages and gas prices have gone back down," said Hildebrand. "Those driver reimbursements are now coming to our national policy of 50 cents."

A Pizza Hut driver who asked not to be identified said the reimbursement rate has fluctuated between 75 cents and $1 per run for several years, not just since last year.

"So now they're saying, 'Hey, we want to put you back six years,' when they should go even higher," the driver said. "Why would they step back when not one thing in this world has gotten cheaper in the past few years?"

While the memo was addressed to Kansas City Region RGMs (restaurant general managers), Hildebrand said that neither she nor Pizza Hut COO Mike Miles knew precisely what Henry meant in writing that the rate change will include drivers in "the company." Asked whether Henry meant drivers in other regions can expect rate cuts, Hildebrand said, "All I can tell from this is that it mentions one region."

Paid as they go

In the memo, Henry instructs the area coaches to help drivers understand that the rate reduction "is not a decrease in pay," but a reimbursement standardization. He wrote that drivers earn their income from their Pizza Hut hourly wages plus customer tips.

"Driver reimbursement has never been considered compensation but rather reimbursement for use of their personal vehicle," Henry wrote. "By standardizing the driver reimbursement rate across all restaurants in the company we are ensuring that everyone is fairly reimbursed for their vehicle expenses."

Hildebrand said that during a busy evening, drivers can accumulate a sizeable reimbursement total to compensate for the use of their cars.

"The opportunity to make more money is there because our volume is so high," said Hildebrand, adding that the average round-trip delivery is fewer than eight miles.

At Ann Arbor, Mich.-based Domino's Pizza, whose business is some 95 percent delivery, drivers are reimbursed between 60 and 75 cents per run, according to spokesperson Holly Ryan. Where delivery areas are larger, however, she said drivers are paid as much as a dollar per run.

Rene Kesterson, spokesperson for Louisville, Ky.-based Papa John's, said the company doesn't release details on driver reimbursement rates. And spokesperson Laura Burgess said since the majority of Detroit-based Little Caesars' business is carryout, she wasn't certain whether the company had a standard driver reimbursement rate.

According to research conducted by the American Automobile Association (AAA), providing a personal vehicle for company purposes can be costly to pizza delivery drivers.

By AAA's calculations, a four-cylinder 2002 Chevrolet Cavalier LS costs 53.4 cents per mile to operate if driven 10,000 miles per year, 43.1 cents a mile if driven 15,000 miles, and 39 cents a mile if driven 20,000 miles a year.

According to the unidentified driver, round trip delivery runs average four miles. Applying AAA's lowest-cost numbers to that standard, the driver's auto absorbs $1.56 in wear and tear with each delivery. Costs run even higher for drivers of six and eight cylinder cars (see sidebar).

During a seven-hour shift (5 p.m. to 12 a.m.) averaging a conservative two runs per hour, the same four-cylinder car would absorb $21.84 in wear, but its owner would be reimbursed just $7 if paid 50 cents per run.

Count the Cost of Driving

According to the American Automobile Association, driving a personal vehicle for an employer's purposes can be costly.

* Driving a four cylinder 2002 Chevrolet Cavalier LS 10,000 miles a year costs its owner 53.4 cents per mile in wear and tear. Fifteen thousand miles annually costs 43.1 cents, and 20,000 miles costs 39 cents.

* For a six-cylinder Ford Taurus SLE Deluxe:
    10,000 = 60 cents/mile
    15,000 = 49.8 cents/mile
    20,000 = 44.9 cents/mile

* For an eight-cylinder Mercury Grand Marquis:
    10,000 = 73.6 cents/mile
    15,000 = 57.7 cents/mile
    20,000 = 51.4 cents/mile

APDD treasurer Lockwood said drivers can offset that shortfall somewhat by keeping good records. Throughout the year drivers should record all their work mileage, and come tax time, they can multiply that number by 36 cents per mile (the amount allowed by the Internal Revenue Service), subtract their reimbursements and claim the difference on their taxes.

"That's a really good way to reduce my tax liability," said Lockwood. "Otherwise (what I'm paid) is too low to cover my costs."

"What's their motive?"

Lockwood, the unidentified driver and several other drivers posting messages on driver Web sites admitted they were confounded by Pizza Hut's decision to lower reimbursement rates. Some suspected the move was an effort to boost profits, and others surmised the company wants to pressure long-term drivers to leave.

"They do not mind at all if we quit," said the unidentified driver. "In so many places companies are laying people off or shutting down, so (Pizza Hut) has more than enough people available who will do anything to make some money."

The driver added that if long-term Pizza Hut drivers quit to drive for other companies, their starting hourly rates elsewhere would be much lower than their current rates, and that potential bonus opportunities such as maintaining a streak of "accident-free hours" would be forfeited.

"It's a lose-lose situation for us," the driver said. "If we quit, we're screwed. If we stay, we're screwed."

Lockwood and the unidentified driver pointed to Henry's mention to coaches in the memo of lowering "your growth plan for the next year by an equitable amount," as cause for concern.

The memo stated, "For example, if you lower your rate from $0.75 to $0.50 and have a WPRA (weekly projected revenue average) of $19,000 then I will lower the sales growth plan for next year by about 1.5 percent. (This is just an example. Your restaurant's sales growth adjustment will be determined by your restaurant's sales, number of deliveries, and decrease in driver reimbursement rate)."

The mention of lowered sales growth made Lockwood uneasy, he said.

"If they're decreasing reimbursement rates, I don't see how that relates to sales," Henry said. "Are they assuming that service is going to go down the tubes because they're not paying drivers enough? Do they expect delivery times will go up and that (customers) will get mad and not order as much?"

Hildebrand said she could not explain what Henry meant either, and added she was unable to contact him for an explanation. She insisted, however, that the company does not want to lose good drivers.

"This, like any of our changes, is so we can give our customers pizza at a fair price," she said. "We are keeping the customer in mind while also treating our drivers in a fair manner. They are very valued at Pizza Hut. Without them, we're nothing if we can't get our pizzas to the customer."

Topics: Financial Management

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