Pizza Hut, Inc.

Case Report By Randy Clark Overview

By 1986, Pizza Huts leadership of the overall pizza market is being hallenged by !ominos, a delivery"only hain# $he delivery segment a ounts for only %&' of the (1%#) billion pizza market, but it is gro*ing rapidly, *hile the eat"in segment has re ently seen very slo* gro*th# + hange in onsumer preferen es has led to the in reased pur hases in the delivery segment# +fter years of resisting entry into the delivery segment for fear of annibalizing its e,isting eat"in restaurants, Pizza Hut has de ided it is ne essary to move into the delivery segment# -ts attempt to attain system"*ide a eptan e has not been *ell re eived by its fran hises# Pizza Hut fran hisees are predominantly large po*erful organizations, t*o"thirds of *hi h o*n more than 1& restaurants ea h# $he fran hises are divided on their assessments of the value of the delivery business, and most do not agree *ith Pizza Huts spe ifi plans for rea hing this segment# +fter finding little initial su ess onvin ing the fran hises to parti ipate, Pizza Hut must find a *ay to .sell/ its on ept to the fran hises#

Key Decision Points

0hould Pizza Hut enter the delivery segment of the pizza market in an attempt to ombat !ominos gro*ing popularity and market share from this segment1 -f Pizza Hut does pursue the opportunity to move into the delivery segment of the pizza market, *hat operational approa h should they use1 -f Pizza Hut does pursue the opportunity to move into the delivery segment of the pizza market, ho* do they onvin e their e,tensive fran hise system to parti ipate *ith them1 -f Pizza Hut does pursue the opportunity to move into the delivery segment of the pizza market, *hat *ill be the overall effe ts on their eat"in restaurant business and their fran hise relationships1

Industry Trends
$*o distin t trends *ere evident in the food industry of the 198&s2 food preparation *as moving out of the home, and onsumption of restaurant"prepared food *as moving ba k into the home# $hese trends *ere even more pronoun ed in the pizza market# -n 198%, delivery a ounted for only 1#3' of all pizza sales# By 1986, ho*ever, it had gro*n to %&' and ontinued to gro* at 61' per year# $he arryout segment *as gro*ing at 1%' per year, and rea hed 39' of all pizza sales in 1986# $he eat"in segment *as gro*ing at only 4#%5' per year# +lthough the pizza market *as e,perien ing stronger gro*th in 1986 than any other fast"food segment, it *as e,pe ted over the ne,t four years that the delivery segment *ould a ount for 48' and the arryout segment *ould a ount for 43' of the overall pizza market# Pizza Hut had dominated the pizza market sin e 19)1, but it *as lear that the market *as hanging and the ompetition 6!ominos in parti ular7 *as *ell"positioned for the hange#

Consu er Purc!ase Be!avior

$he ase indi ates the in reasing importan e of onvenien e to onsumer in the 198&s# $he baby"boom generation had gro*n up and many had their o*n hildren# $he desire for a more rela,ed onvenient life style is e,pe ted to e,pand the market for home" delivered food# -n the pizza market, hannel stru ture played a signifi ant role in the 198&s# $he t*o prin ipal ompetitors, Pizza Hut and !ominos, have distin tly different hannel operations# Pizza Hut has predominantly been an eat"in pizza restaurant, *hile !ominos is a deliver"only operation# $hese differen es play an important role in determining the importan e of Pizza Huts de ision to enter the delivery segment of the pizza market# 8igure 1 demonstrates the relative importan e of onsumer preferen es by hannel# "i#ure $ Consu er %e# entation &y C!annel Bene)it Price %ensitivity De o#rap!ic Pro)ile 'at(In +tmosphere, 9uality :o*est <on"families Carryout $ime ;odest 8amilies, time" starved Delivery $ime fa tors Highest 8amilies, onvenien e

Pizza Hut has dominated the market sin e 19)1 by providing its ustomers *ith a =uality produ t together *ith a pleasant family dining ambien e in its restaurants# ;ean*hile !ominos has fo used on the segment of the market that is seeking onvenien e over dining ambien e# -n the past, Pizza Hut had served this onvenien e"

seeking segment through its arryout hannel# +lthough more onvenient than eat"in, arryout still re=uires the onsumer to visit the restaurant to bring the food home# $he added onvenien e of home"delivery *ould normal be a servi e that ustomers *ould pay more for, but !ominos provided the servi e at no additional harge to its ustomers# -n fa t, !ominos delivery pri e had proven to be slightly belo* Pizza Huts pri es in its traditional eat"in restaurants# $hese fa tors, *hile hurting Pizza Huts eat"in business, appear to be parti ularly troublesome for their arryout business# $here are t*o possible e,planations for the gro*th of the delivery business# 8irst, it is possible that the delivery operations are bringing ne* ustomers into the pizza market and the gro*th is due to these ne* ustomers# $he se ond, more likely option, is that many of the traditional eat"in ustomers are moving to*ards the onvenien e of the delivery option# +lthough data may suggest other*ise, Pizza Hut management believe that !ominos delivery operations do not signifi antly impa t Pizza Huts eat"in operations# ;anagers believe that the delivery ustomers are either different from the eat" in ustomers, or the ustomers may be the same people, but they are pur hasing for different meal o asions# !ominos management believes the delivery segment ompetes most losely *ith the arryout operations of Pizza Hut# >ven if the previous arguments are orre t, losing signifi ant arryout business *ill have a dramati impa t on Pizza Hut# -n 1986, arryout business a ounted for 4&' of Pizza Huts dollar volume# !ue to in reased osts in vehi les and ustomer servi e enter osts, e,hibit 4 sho*s that eat"in and arryout business are more profitable for Pizza Hut than their delivery"only operations *ith a net ontribution of 13#1' versus 8#8'# ?hile the margins of the eat"in segment and arryout segment are not evaluated separately in the ase, it is likely that osts asso iated *ith arryout *ould be less than those for eat"in given the additional time spent in ustomer servi e and the need for eat"in resour es 6tables, plates, ups, and eating utensils7# Based on this, it is some*hat easy to argue that the arryout segment is urrently the most profitable one for Pizza Hut, and signifi ant losses in this area *ould greatly impa t their overall business# -f management is orre t and the delivery ustomer is different from the eat"in ustomer, an additional =uestion arises# ?hat *ould be the impa t of additional ustomers on Pizza Huts business given a move into the delivery segment1 8igure % estimates this potential#

"i#ure * %cenario +nalysis o) t!e I pact o) Ho e Delivery 0 enario 12 :oss sales due to annibalization 6assumptions2 %&' of arryout and 5' of eat"in is onverted to home delivery7# @arryout >at"in ' onvert %& 5 0ales +ffe ted (%1%#)mm ' of business A 4& A 6& 0ales A (1,934mm A (1,934mm $otal 0ales +ffe ted B (154#)mm B (58#&mm (%1%#)mm Profit 6:oss7 B 6(9#%mm7

Profit -mpa t ' A 613#1' " 8#8'7

0 enario %2 Potential gain from home delivery 6assuming Pizza Huts delivery share e=ual to its overall share 615#4'77# ' Potential 0hare 15#4' <e* 0ales (4&&#4mm -nd# !elivery 0ales A %#6 bil# ;argin A 8#8' <e* 0ales B (4&&#4mm Profit 6:oss7 B (35#%mm

0 enario 32 :ost sales 6profit7 due to not offering home delivery 6assumptions2 1&' of urrent sales lost to ompetitors7# 0ales (1,934mm :ost to @ompetition A 1&' :ost 0ales B (193#4mm ;argin A 13#1' Profit 6:oss7 B 6(%5#3mm7

Co petition
!ominos ontrols the delivery segment *ith almost 6&' of the delivery share 66(1#55C(%#6 bil7, and a large lead in the number of delivery units 63,696 vs# )497 versus Pizza Hut# By fo using on delivery"only units, !ominos has be ome an e,pert in this market segment# -n fa t, it is likely that a Pizza Hut move into the segment may initially e,pand the segment overall, in reasing !ominos business# Pizza Hut initially underestimated !ominos impa t on the pizza market# Pizza Hut may have felt that the relatively small !ominos fran hises ould not pose a long"term risk to their large, orporation"o*ned fran hises# -n fa t, !ominos system may have aided their gro*th given the relative po*er of their orporation to the fran hises# $hey *ere able to di tate strategi and operational de isions for their fran hises leading to a unified image in the ustomers mind# <umeri ally, !ominos *eekly sales are signifi antly higher than Pizza Huts 6(9,1%1 versus (6,&&&7 and their stores average ustomer base is signifi antly higher than Pizza Huts 6(9,1%1C(9#5& B 96& ustomers versus (6,&&&C(9#99 A 1#1 6upsizing

harge7 B 5467# +lso given the additional osts asso iated *ith Pizza Huts ustomer servi e enter, it is likely that the !ominos delivery"only unit is more profitable than the Pizza Hut delivery"only unit#

Pizza Hut,s Delivery Business %trate#y

Diven the previous dis ussion it is relatively lear that the potential monetary losses from not pursuing the delivery segment for Pizza Hut *ould be greater than any they might see from pursuing the market segment# -n fa t, one =uestion may be, *hy did Pizza Hut *ait so long in ans*ering !ominos1 -f Pizza Hut had used their industry name and e,tensive distribution system during the early 198&s, they may hold a signifi ant advantage a ross all three pizza market segments at this point# En e determining that this opportunity is one to be pursued, the final =uestions remain, *hat strategy should they use, and ho* should they sell it to their fran hises# $he first de ision raised regarding their delivery strategy is should they pursue delivery"only units or should they attempt to retrofit e,isting restaurants1 ?hile the ase does not provide enough data for a full finan ial analysis, it is evident that retrofitting e,isting restaurants *ould re=uire less investment apital than installing delivery"only units# Fetrofitting e,isting stores might also alleviate some of the on erns mentioned by Pizza Hut management related to oversaturation of total pizza units# Fetrofitting e,isting stores might have stronger appeal for the fran hises, some of *hi h have already e,perien ed su ess *ith this strategy# -n orporating delivery"only units *ould re=uire establishing a parallel business system for marketing and operations# $he Pizza Hut orporation has identified the additional responsibilities in a ompletely separate distribution system as evident by the hange in the organizational stru ture and development of a separate business unit# !elivery"only units *ould also reate some human resour e diffi ulties# -t *ould hange the typi al areer path for Pizza Hut employees# $he promotion path in a delivery"only unit *ould likely be mu h different for the employees# +lso the management of employees *ould prove mu h different for Pizza Hut managers# $his ompletely separate distribution hannel *ould lead to signifi ant training differen es not only of the line employees, but also of the restaurant management and even the distribution system# $he se ond strategi element related to moving into the delivery segment of the pizza market is the ustomer servi e enter# $he one number all enter *ould greatly in rease operating effi ien ies of the delivery units# $he servi e itself *ould identify the orre t distribution outlet as opposed to ustomers trying to identify for themselves the appropriate outlet# +lso this system *ould allo* enormous marketing effi ien ies# <ational advertising ould fo us on one number and feature onsistent spe ials# Diven the osts asso iated to the fran hises asso iated *ith marketing and advertising, these effi ien ies should help to offset the high osts of the system itself# Ene feature not mentioned in the ase that *ould also prove to be a potential benefit *ould be the ability

to use the information olle ted from the system to make targeted marketing appeals to e,isting ustomers# $he final strategi element related to this hannel is the on ept of pri ing and upsizing# -t is lear that there are additional osts asso iated *ith this hannel method from @0@ osts to a tual delivery osts# >,hibit 4 from the ase sho*s that these osts alone a ount for 1%' of gross sales# @ertainly upsizing and up"pri ing ould be used to help offset these osts# ?hat is not in luded in the ase are the operational hanges and osts asso iated *ith these hanges# :arger pizzas re=uire larger pans, more dough, more ingredients, and possibly a hange in bo,es# -t *ould also lead to potential operational differen es for the restaurants as *ell# 8or e,ample, *ould arryout re eive the upsizing strategy as *ell1 -f so, *ould ustomers in the store be ome a*are of the size and pri e differen es1 ?ould they be onfused1 -s a medium a medium or is it a medium"small1 ?ith only delivery"only units it *ould be mu h more possible to manage the differen es in the operations, but *ith retrofitted stores as part of the delivery system, these hanges ould lead to onfusion and frustration among ustomers# Based on these arguments, - re ommend that Pizza Hut initially retrofit e,isting stores for delivery# - believe that this *ill be one *ay to ontrol osts to the fran hises and make them more interested in the idea in general# +lso - believe the @0@ system *ould provide many long"term benefits and retrofitted e,isting stores *ould allo* fran hises to a ept the osts of these system more readily# ?hile upsizing *ould help spread the operational osts over a larger dollar amount, these benefits *ould be minimized in the short"term due to hanges in the organizational operations# $herefore *ould ontinue operations in e,isting stores *ith the urrent produ t mi,# - think suggestive selling add"ons su h as appetizers and dessert options *ould be a more effe tive *ay to in rease the average delivery pur hase amount#

-pco in# "ranc!ise .eetin#

Ene of Pizza Huts strongest advantages is its relationship *ith the fran hises# $he fa t that many of its fran hises are relative strong organizations it their o*n right gives Pizza Hut additional resour es to *ork *ith on the store level# !i tating *hat the fran hises must do based on the previous agreement likely *ill not be a smart move in the longrun# -n developing delivery"only units, it is likely the fran hises *ill not respond positively# Fetrofitting e,isting stores mu h more losely fits the fran hises urrent operations# +lso there is eviden e that this strategy *ill *ork on the fran hise level# - like the suggestion that *ould allo* for royalty on essions for fran hises that *ere *illing to open delivery"only units# 0ome of these agreements for the retrofitted stores in the short"term may enti e the fran hises into an a eptan e of the @0@ system *hi h should prove benefi ial for both ompany"o*ned and fran hise store in the long"term#