What's Wrong With Yum! Brands' Pizza Hut?
While its closest rivals Domino's (NYSE: DPZ) and Papa John's (NASDAQ: PZZA) have steadily delivered impressive growth in the United States Yum! Brands (NYSE: YUM) Pizza Hut has struggled.
Domino's saw its same store domestic sales grow by 13% in its most recent quarter, the 22nd consecutive quarter of positive sales in its U.S. business.Papa John's has not done quite as well, but it posted 5.5% growth in U.S. comparable store sales in its latest quarter, in line with how it has been performing, and well ahead of industry averages in the struggling domestic restaurant market.
Pizza Hut, however, saw U.S. comparable sales drop 4% in Q4 while they were even for the full year. The numbers look worse when you factor out that the company had a 53-week 2016 versus a 52-week previous year.
It's a market where two brands -- Domino's and Papa John's -- have connected with the consumer through convenient delivery in the case of Domino's and higher quality in the case of the Papa John's (with both making price a driving marketing factor as well). Pizza Hut, which has no clear brand positioning with U.S. consumers, has fallen behind, but its parent company seems to recognize that something is wrong and has promised to fix it.
Pizza Hut has struggled to grow its sales in the United States. Image source: Pizza Hut.
What did Yum! do wrong?
In late 2014 Pizza Hut tried to go upscale launching its "Flavor of Now" menu. It was an attempt to become less of a fast food brand competing with Domino's and Papa John's and more the Chipotle of pizza -- something that a number of growing chains are attempting as well. The company launched a customizable menu featuring new crusts and trendy ingredients including Sriracha, curry, and salted pretzels.
That effort failed to reignite sales and it may have further confused consumers as to where Pizza Hut fit into the market. Its rivals have not suffered from the same muddled message. Domino's has spent years pushing convenience and price as its core messages while Papa John's has repeated its "Better Ingredients, Better Pizza" tag line while also driving home a value message.
What is Yum! doing to fix it?
Admitting you have a problem is the first step. Yum! Brands CEO Greg Creed did that during the company's Q4 earnings call.
He described Pizza Hut's U.S. segment "which is roughly 10% of total Yum! operating profit" as being "clearly in turnaround mode." He went on to add that the "quarter's results disappointed and are not acceptable."
Creed detailed that Yum! has begun an extensive study of the pizza chain's business using outside consultants. He said the company has identified a number of areas where it needs to improve including "improvements in the digital experience, delivery times, point-of-sale system simplification, and asset optimization, among others," said Creed.
The CEO also acknowledged that the road ahead would not be short. He said that the company would work with its franchise owners and that the changes would take longer than 2017 to implement.
"We will execute initiatives across all aspects of the customer experience to capture our fair share and more, and I'm certain we have the ability and the determination to accomplish this," he said. We've confronted challenges in all of our brands in the past and always overcome them."
Can Pizza Hut be fixed?
Pizza Hut has a marketing problem. Consumers know that Domino's and Papa John's offer quick delivery or takeout of good-enough pizza at low prices.
The same cannot be said of Pizza Hut which started as a sit-down restaurant brand, dabbled in fast casual with "Flavor of Now," and has recently pushed low prices. It's a confusing message which has left consumers not exactly understanding where the chain fits into their pizza consumption plans.
If Yum! can articulate a clear message for Pizza Hut and stick with it for years, there's no reason to believe it can't win back U.S. market share. Doing that requires a long-term strategy as well as a commitment to catching up with Domino's and Papa John's when it comes to ease of ordering and speed of delivery.
Pizza Hut arguably has the best product of all three chains (though each has its supporters). If it can go back to basics, pick a clear message to consumers, and keep repeating it, the company should eventually be able to catch up to its more-successful rivals.
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Daniel Kline has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool owns shares of Papa John's International. The Motley Fool is short Domino's Pizza and has the following options: short June 2017 $140 puts on Domino's Pizza. The Motley Fool has a disclosure policy.