Pizza Hut 'not competitive enough on value'

Feb. 4, 2014 | by Alicia Kelso
Pizza Hut 'not competitive enough on value'

Yum! Brands executives spent much of today's earnings call outlining recovery initiatives from the lingering chicken supply chain and avian flu crisis that hit its flagship KFC China brand last year. CEO David Novak said the efforts are taking hold and all signs are pointing to a "strong bounce back" this year.

"2014 needs to be a show me, don't tell me year," he said.

Conversely, Pizza Hut Casual Dining, is having a field day in China, delivering Q4 same-store sales increases of 5 percent on top of 7 percent during the same period a year ago. The brand opened 247 new restaurants during the period, surpassing the 1,000-unit milestone — a 6:1 ratio over its nearest competitor.

Novak said Pizza Hut Casual Dining has grown AUVs by more than 30 percent and has "achieved home-run economics with margins of over 20 percent." Contributing the bottom line is Pizza Hut's breakfast success, which was expanded into more than 120 restaurants during Q4. The daypart will further be rolled out to 200 more units this year. The concept is also testing a late-night program that includes liquor sales.

"The (Pizza Hut) brand has never been more powerful. We have very little competition and we're in the space pretty much by ourselves," Novak said.

Complementing that business is the growing Pizza Hut Home Service, which now has more than 200 units in 25 cities. Novak said it's the only "all-meal replacement delivery brand in China," with more than 55 percent of the menu consisting of Chinese food.

Pizza Hut U.S.

Things aren't as solid on the domestic side of the Pizza Hut business, with a same-store sales decline of 2 percent on the year, and a decline of 4 percent for Q4.

Novak said the brand "simply wasn't competitive enough on value," like its biggest competitors.

"We're aligning with our franchisees to tackle this issue and bring even more innovation to marketplace. After slow start of the year we expect to fair much better with competitive values," he said.

Pizza Hut will introduce WingStreet via national advertising for the first time this year, with a focus on chicken wings and chicken strip meals.

Digital initiatives

Yum! Brands executives underscored digital technology as a top strategic priority. Novak said in China, 70 percent of delivery orders come from online platforms.

And, in the U.S., online ordering at Pizza Hut accounts for about 40 percent of orders and more than $1 billion in total annual volume.

"Make no mistake, technology is among the highest priorities that we have in our company and all of our businesses are focused on ways that they can harness the power of digital technology to further differentiate our experiences for our customers," Novak said.

Emerging markets

Finally, Yum! Restaurants International turned in solid results — same-store sales growth of 2 percent in the quarter, including 3 percent growth in emerging markets such as Russia, Southeast Asia, Africa and Latin America. In 2013, YRI entered four new emerging markets — Tanzania, Ukraine, Argentina and Mongolia. The company said emerging market economies are expected to grow at almost three times the rate of developed market economies for the foreseeable future.

"We recognize that emerging markets will have their ups and downs. They are still going to be growing their GDP and we're on the 5 percent rate in the foreseeable future almost three times more than the developed countries. What we're focused on doing in emerging markets is providing affordable everyday value making our brands more accessible, more affordable to the emerging classes as the incomes rise. The big story that we have for emerging markets is just development opportunity," Novak said.

He adds that Yum! currently has about four restaurants per million people in China, compared to 60 in the U.S. Other investment markets include Turkey and Africa.

Read more about operations management.

Topics: Franchising & Growth, Marketing / Branding / Promotion, Online Ordering, Operations Management, Pizza Hut

Alicia Kelso
Alicia has been a professional journalist for 15 years. Her work with, and has been featured in publications around the world, including NPR, Good Morning America, Voice of Russia radio, and Franchise Asia magazine. View Alicia Kelso's profile on LinkedIn

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