Pizza Hut sales under pressure in US

Pizza Hut sales under pressure in US

May saw Yum! Brands set out its plans to boost the performance of its flagging US Pizza Hut chain, investor pressure on US fast-casual operator Fiesta Restaurant Group and France-based contract caterer Elior Group finalise two acquisitions in India.

Pizza Hut set for "bold transformation" in the US

Growing internationally but in decline at home, Pizza Hut is a business under some pressure.

The US, Pizza Hut's domestic market, still accounts for just short of half the chain's annual sales and the operator's performance at home has led some on Wall Street to call on owner Yum! Brands to offload the business entirely. According to Yum! Brands' own data, the US Pizza Hut business generates around 10% of its total annual operating profit.

In 2016, Pizza Hut's system-wide sales in the US rose 1%. Yum! Brands did not split out its US same-store sales growth but, with the chain's total same-store sales (including its international outlets) down 1% in 2016, it is safe to assume it saw pressure on that metric domestically last year.

Nevertheless, despite the anaemic performance by Pizza Hut in the US and despite the calls from some quarters of the investment community to consider the chain's future, Yum! Brands has insisted it still sees opportunities for growth for the chain at home and has pointed to its work in improving the domestic results of sister business KFC.

At the start of May, Yum! Brands issued its results for the first quarter of 2017. Pizza Hut's system sales were flat year-on-year, with the US business reporting a decline of 6%. The chain's total same-store sales were down 3%. Yum! Brands said the international Pizza Hut outlets eked out same-store growth of 1%.

Yum! Brands CEO Greg Creed said the US Pizza Hut business was lapping the first quarter of 2016, when a promotional campaign boosted sales but said its results in the opening three months of this year were "disappointing" and added: "Prior laps are never an excuse, and the continuation of the soft results are clearly a priority we are addressing with urgency."

After talks with Pizza Hut franchisees in the US, Yum! Brands is to spend US$130m to "upgrade" restaurant equipment, "accelerate improvements" in technology in-store and "enhance" the business's "digital and e-commerce capabilities", president and CFO David Gibbs said, adding the investment would be nearly all be spent this year and next.

"Although this is a relatively modest investment in the scheme of Yum!, it is obviously quite significant to Pizza Hut U.S. and we are confident it will unlock significant value in years to come," Gibbs said.

Pizza Hut is just the latest foodservice major to invest in digital. Creed said the moves would "make it easier for our customers to get a better pizza". He added: "This is another great example of the power of Yum!. We were able to leverage important learnings from the transformation work at KFC US over the past few years to enable the system to make critical step-chain investments and to reset the business. It is working at KFC, and we believe this breakthrough can unlock renewed growth at Pizza Hut in the US."

Industry analysts believe Pizza Hut does need that investment in digital and e-commerce. "Creed's commitment to a more "digital-delivery centric strategy" for the Pizza Hut brand speaks volumes about the chain's struggles of late, and what it needs to do to overcome them," Euromonitor International foodservice analyst says. "Delivery is the fastest growing foodservice channel in the US, and online ordering is growing as well. Pizza Hut hasn't been able to compete as effectively with Domino's in that space. Pizza Hut is also losing share to fast casual pizza chains, and the full-service family dining formats that Pizza Hut is still known for have struggled to resonate with consumers that want faster, more convenient options."

Fiesta Restaurant Group feels investor pressure

The US fast-casual chain, founded in 2011, spent May feeling the heat from part of its shareholder base.

Fiesta Restaurant Group, the listed company behind the Pollo Tropical and Taco Cabana chains, was put under the microscope by JCP Investment Management, which owns around 9% of the business.

JCP accused Fiesta Restaurant Group's directors of being "unaware of the deteriorating performance of the company". In 2016, the company's total sales were up 3.5% at US$711.8m. However, comp sales at Pollo Tropical fell 1.6% and declined 2.5% at Taco Cabana in the wake of steeper declines in the last quarter of the year.

In the first three months of 2017, Fiesta Restaurant Group's overall revenues slipped 0.6%, with comp sales at both chains falling faster than in the fourth quarter of 2016.

Announcing the results on 8 May CEO Richard Stockinger said: "We are addressing our challenges and disappointing financial performance through a strategic renewal plan." The company has moved, for example, to close 30 Pollo Tropical restaurants".

JCP, however, pointed to the closure of those outlets not long after 47 had been opened, as evidence Fiesta Restaurant Group needed fresh blood on its board. It put forward two nominees for election at Fiesta Restaurant Group's annual meeting, which took place yesterday (7 June).

Fiesta Restaurant Group said yesterday a preliminary count of votes showed all three incumbent director nominees had been re-elected, although changes to its board are in the offing. "During the course of this election campaign, we had very insightful discussions with a great number of our shareholders, including JCP, and received important feedback," the board in a statement. "The board has also decided to conduct an overall review of its corporate governance and board composition and to put forward a proposal to declassify the board at its next annual meeting.

"While we understand that challenges continue to lie ahead, we are gratified by the broad support of Fiesta's shareholders and look forward to revitalising the company's iconic brands and continuing to improve its financial results with our new CEO, Rich Stockinger, Fiesta's renewal plan and a refreshed and expanded board."

David Henkes, advisory group senior principal at US foodservice consultants Technomic, believes Fiesta Restaurant Group's management team should be given time to try to improve the operator's performance. "They seem to be working from the standard playbook – menu and unit refreshes, ingredient upgrades, employee training – and with a seasoned leadership team that's been in the industry for a while, it seems that they should be given some leeway to implement their changes," he says.

France's Elior expands emerging market presence

May saw France-based contract catering giant Elior Group seal two acquisitions that marked its entry into India.

Expanding in emerging markets is part of Elior's four-year strategic plan to 2020 and the company believes the fragmented Indian market offers "significant growth potential".

Elior finalised the acquisitions, announced in November, of MegaBite Food Services and CRCL, two businesses group chairman and CEO Philippe Salle claimed are "among the top three contract caterers in the Indian market".

MegaBite Food Services, was founded in 2005, has been described by Elior as "the top player in premium corporate catering in Bangalore", working with companies including Microsoft, Google and Shell.

Further south, the Chennai-based CRCL is the fourth-largest catering company in India, Elior said, serving businesses like upmarket car maker Daimler and pharma giant Pfizer. Elior bought Megabite outright and acquired a majority stake in CRCL.

"We believe India is one of the most promising markets with significant growth potential and a very fragmented profile. The combined acquisitions of MegaBite and CRCL will position the Group among the top 3 contract caterers in the Indian market," Salle said.

Florent Thy-Tine, an equity analyst covering Elior for brokers Midcap Partners, argues the caterer continues to eye other markets ahead of India but was positive about the two acquisitions and expects the company to strike more deals in the country.

"I don't think that it is a strategy of Elior to develop the emerging market. The first target is the US and then the UK. Elior could only expand its strategy in India and China and could reach maybe 1% of the total group sales in 2020, so nothing relevant," she tells just-food.

"With these two acquisitions, Elior is directly number three on the market after Sodexo and Compass with only $30m sales. The market is still really fragmented and there are other opportunities for sure for Elior. The market is estimated at $250m. The interesting thing is that the two companies had really big customers like Microsoft or Google, so, to my mind, Elior does not take any risks with these two acquisitions. We had not really expected a move in India so early but there will be other acquisitions in the coming month in India for sure."

Ruby Tuesday and MTY Food Group grab headlines elsewhere...

May saw no news on the review of Ruby Tuesday's "strategic alternatives" the US-casual dining chain announced in March but the operator made its first significant announcement since foodservice veteran Jim Hyatt was named its new president and CEO in April.

Ruby Tuesday is to enter Qatar after signing a "development agreement" with local franchise group Al Bairaq Trading Import & Export Co.

The companies plan to work together to open five restaurants in Qatar over the next five years, a tentative target but, nonetheless, the deal is a sign of Ruby Tuesday's appetite for international expansion.

"International franchising provides a great opportunity for Ruby Tuesday to strategically grow into new markets, leveraging the knowledge and expertise of local area operators," Hyatt said. "We will continue to seek out new, highly-qualified operators who are able to strategically expand our great brand into new regions internationally and thereby support our overall business strategy."

Euromonitor's Dutton sees Ruby Tuesday's international efforts as a way of offsetting the challenges in the US casual-dining sector.

"Chained North American full-service restaurants, like Ruby Tuesday, have experienced negligible value growth in the US in the past several years, while traffic actually declined in 2016. Consumers are shying away from family-style casual dining chains in favour of quick-service alternatives. The opportunity for growth has shifted elsewhere, to regions like the Middle East, where chained North American full-service concepts which have grown rapidly in the past few years," he says. Given the long-term growth potential, the Ruby Tuesday brand should resonate well with consumers in Qatar, especially with a strong local franchise partner that can help the chain co-opt local preferences."

In Canada, QSR franchisor and operator MTY Food Group continued its expansion with two acquisitions.

One deal, announced on 8 May, saw MTY snap up the assets of two chains - Steak Frites St-Paul and Giorgio Ristorante - that have a combined 15 outlets. 

Another transaction, set out the same day, saw MTY acquire The Works Gourmet Burger Bistro, a 27-strong chain, chairman and CEO Stanley Ma said had "great growth potential for the future".

The two deals are not on the same scale as two others MTY struck in 2016 - those for Kahala Brands and the company behind Baja Fresh Mexican Grill and La Salsa Fresh Mexican Grill - but demonstrate no let-up in the company's desire to grow through acquisition.

"MTY is an aggregator of chain brands that operate primary in the US, Canada and the Middle East.  They generally look for restaurant chains that have a strong franchise base and are small but growing and that can quickly lead to incremental revenues for the parent. They have a well-diversified base of over 40 different restaurant brands under their umbrella that can be grown both within Canada and the US but that also have potential upside in the global market," Technomic's Henkes says.