PIZZA HUT CASE QUALITATIVE ANALYSIS SEC D, GROUP 8

SYNOPSIS
CASE OUTLINE THE USA PIZZA MARKET FRANCHISEE SYSTEM CONTENTION BETWEEN PIZZA HUT AND FRANCHISSES ANALYSIS OF KEY ISSUES QUANTITATIVE ANALYSIS RESULTS RECOMMENDATIONS

The Major facts in the case are shown as a time-line below:

Characterized by Red roof Full service, eat-in or carry out Seating for 60-90 customers

Pizza hut started in June 1958 by two college students, Dan and Frank Cartney

Franchising was an integral part Company-franchise mix kept varying

296 stores by 1968 Went public in 1969 Pepsico acquires in 1977

Franchisees not so interested in home delivery initially Towards second half of 1986, interest increased Franchise delivery units were more profitable

Home delivery from 1985 CSC (Customer service center), single number to take orders

Current management confused over expansion in delivery units

Major facts pertaining to the USA Pizza market is shown below:

Fastest growing part of $53 billion fast-food market 3 main segments :eat-in, carry out, delivery Total market for 1986 estimated to be $12.7 billion Rapid growth due to home delivery, observers felt industry has reached its potential
2nd most preferred fast food; An evening snack or dinner Consumers saw pizza to be a personal or sensual experience Tastes varied by region Rapid growth in inhome video market + double income families would fuel more growth
Regional chains and single

unit owners posed some competition Godfather's Pizza was seen as the major competitor Domino grew rapidly with great stress on home delivery Other small players included Pizza Inn, little caesar, Mr. Gatti's etc.,.

PIZZA MARKET

PIZZA CONSUMER

COMPETITION

THE FRANCHISEE SYSTEM

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Franchising was an integral part of Pizza Hut strategy since founding. 1) RATIO OF FRANCHISEE TO COMPANY OWNED STORES Though initially dominated by franchisee outlets, by mid-1970s the ratio of franchisee to company owned stores was 1:1. Franchisees operated 2395 Pizza hut system restaurants and 96 delivery only units 2) CHOICE OF FRANCHISEES Most of the francisees were large companies with diversified holdings like KFC, Long John silver 3) FRANCHISEE AGREEMENTS Under a formal agreement, each franchisee was obligated to develop its exclusive market area in Accordance with five year development schedule 4) FRANCHISEE DEVELOPMENT SCHEDULE Each franchisee was required to open up an agreed amount of new restaurants during first year of agreement and so on. After a 5 year period, company could negotiate a secondary development schedule. 5) EXCLUSIVITY RIGHTS In no case could there be a restaurant within 2 miles of an existing franchisee 6) FRANCHISEE INVESTMENT Franchisee Invested about $15,000 and paid a 4% commission on sales. 7) IPHFHA (International Pizza Hut Franchise Holders Association) This association acted as bridge between Pizza Huts top management and Franchisees INVESTMENT : Traditional unit $466,000 - $816,000 Delivery only unit - $128,500 - $198,500

CSC, computerized central operating system, took calls from customer and processed as shown below :
Customers in a particular market call up a single Ask caller his mobile number Check if his caller has called before NO Make a new entry and take an order Forward the order to appropriate delivery unit YES Verify name and address, check the pizza ordered

CONTENTION BETWEEN FRANCHISEE AND PIZZA HUT KEY ISSUES AND THEIR ANALYSIS
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Franchisees were not very happy with the idea of delivery units due to 3 reasons. They are reviewed below 1) The Upsizing Concept Pizza hut wanted home delivery pizzas to be bigger than traditional store pizzas by 1 inch They were priced 10% higher. This was to combat the expenses of free delivery and CSC expenses Not implemented in some markets at spring/summer (Pg 6, para 4)

ANALYSIS OF UPSIZING CONCEPT People tend to consume more at home. So increased size might be preferred Increased price would be surely noted, but increased size might go unnoticed. Marketing should be scaled up for this Retrofitting might now be very difficult since many sizes are to be maintained 2) Expensive Customer Service Care ANALYSIS OF CSC A single number will reach more customers and avoid any confusion Online marketing possible (since a single number), all stores get equally benefitted Easy to keep track of sales and customer data Such coordination was not feasible for Dominos since their franchisees had only one store and franchisees formed a greater share of Dominos stores. This was a complicated system. Most of the calls (~60%) came during a particular one hour of the day. Initial problems in this system lost market share in some markets (Pg 5, last para) Franchisees didnt know why they need a CSC if Dominos didnt have one. They wanted to keep costs minimum. 3) Marketing Procedures Pizza hut gave autonomy to delivery units. Franchises felt they do not have enough resources to operate and market independently for traditional and delivery units Pizza hut bifurcated advertisement expenses. Franchisees felt coordination between the two could be difficult Dominos spent huge amounts on advertising especially in areas where Pizza hut was trying to enter the delivery market. ANALYSIS OF MARKETING PROCEDURES Since many franchisees implemented retrofitting separate advertising can harm their interests.

RESULTS FROM QUANTITATIVE ANALYSIS Loss due to cannibalization Potential Gain from home delivery Potential loss from not offering home delivery Actual gain from Home delivery $ 4.60 $ 35.24 $ 7.65 $ 9.18 Million Million Million Million

RECOMMENDATIONS
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1) PRODUCT QUALITY AND INNOVATION Customers are quality sensitive. As in-house pizzas are not fit for delivery, special pizzas that meet the needs of delivery must be made. Product innovation that could suit the needs of delivery and in-house would help the firm and franchisees that use retrofit model. 2) RESTAURANT QUALITY To prevent cannibalization loss, restaurant dining should be made an experience along the lines of Starbucks and similar firms. If restaurants could offer more than pizzas people would definitely prefer visiting them. Restaurants can offer more items in the menu so that customers perceive a difference between delivery and in-house. Special arrangements for parties and celebrations can attract a larger customer base 3) CSC SYSTEM Considering the huge network of Pizza hut stores, CSC would ease marketing and advertising required. Franchisee owners should be convinced of its merits. Though simple phone ordering can help in the short run, the CSC is best suited for long run. Lowered call time could be achieved only through CSC and so is a competitive advantage over Dominos. However, resources needed for CSC must be gauged properly and implemented. Since 60% of calls come during a particular time in the day, leasing additional resources during that time can help. 4) UPSIZING Upsizing is not a very good idea because: o Customers do not perceive the increase in size but they clearly see the increase in price and this could lead to decline in sales o Franchisees operating in a retrofit model may find it very difficult to offer two sizes o Pizza hut can retain market share by charging the same price for both channels To make up for delivery costs, Pizza hut must try to sell more to customers through home delivery. Discounts for combo purchases, family packs, discount on the 2 nd pizza etc., can attract customers to buy more. Higher margins due to this can help us cover delivery costs.