Pizza Hut, Inc.

Case Presentation

Discussion of Case Presentation and Report Format

General Presentation and Report Format

Begin with brief overview of the key point(s).Next a discussion of the key case info.

Assume we have read the material. Identify a good organizational scheme, such as:

SWOT AnalysisRelevant 5 C’s and 4 P’s discussionChronological discussion

Make recommendations lastBe sure to provide discussion points

I encourage you to include class discussion as you go

Pizza Hut Case – Key Decisions

Should Pizza Hut enter the delivery segment of the pizza market?

If they move into the delivery segment of the pizza market, what operational approach should they use?

If they move into the delivery segment of the pizza market, how do they convince their extensive franchise system to participate with them?

If they move into the delivery segment of the pizza market, what will be the overall effects on their eat-in restaurant business and their franchise relationships?

Industry Trends

Food Prep moving out of the homeFood Consumption moving back in home

1982 delivery = 1.3% of pizza sales1986 delivery = 20% of pizza salesDelivery growing at 61% rate Carryout growing at 12% rateEat-in growing only at 4.25% rate

Expected by 1990 delivery would = 48% and carryout would = 43%

Discussion Questions

How much of a threat does Domino’s pose to Pizza Hut’s existing operations?

How much of a threat does Domino’s pose to Pizza Hut’s future operations?

Competitive Positions (Exhibit 1)

Brand Sales(mm) Units Channel

Pizza Hut $1,934 5,025 Most Eat-in

Domino’s $1,550 3,696 Delivery

Little Caesar $520 1,308 Eat-in

Pizza Inn $278.7 748 Mix

Godfather’s $275 650 Most Eat-in

Competitive Positions

Pizza Hut dominates eat-in and carryout

Domino’s dominates delivery-only

Discussion Question

Why would consumers choose each of the three pizza segments, eat-in, carryout, or delivery?

Consumer Purchase Behavior

Consumer Segmentation by ChannelEat-In Carryout Delivery

Benefit Atmos. Time Time Quality Convenience

Price Lowest Modest HighestSensitivity

DemoProfile Couples Families Families

Delivery Factor

While the added convenience of delivery is a feature that customers might be willing to pay for, Domino’s has changed this perception by pricing below Pizza Hut

Discussion Questions

Is it more likely that the growth of the delivery segment is cannibalizing existing eat-in sales or bringing in a new customer?

If delivery cannibalization is a concern, won’t Pizza Hut deliveries cannibalize existing operations?

Impact of Delivery Business (Scenario 1)

Lost sales due to cannibalizationAssumes 20% of carryout and 5% of eat-in is lost

% convert % of business Sales Sales Affected

Carryout 20 * 40 * $1,934mm = $154.7mm

Eat-in 5 * 60 * $1,934mm = $58.0mm

Total $212.7mm

Sales Affected Profit Impact % Profit (Loss)

$212.7mm * (13.1% - 8.8%) = ($9.2mm)

Impact of Delivery Business (Scenario 2)

Gain from home deliveryAssumes Pizza Hut delivery share is 15.4% = overall

share

% Potential Share Ind. Delivery Sales New Sales

15.4% * 2.6 bil. = $400.4mm

New Sales Margin Profit (Loss)

$400.4mm * 8.8% = $35.2mm

Impact of Delivery Business (Scenario 3)

Lost sales from not offering home deliveryAssumes 10% of current sales lost to competitors

Sales Lost to Comp. Lost Sales Margin Profit (Loss)

$1,934mm * 10% = 193.4mm * 13.1% = ($25.3mm)

Discussion Question

Should Pizza Hut pursue the delivery segment?

Delivery Strategy

Retrofit existing restaurants vs. delivery-only

Use Customer Service Centers

Engage in Upsizing/Up-pricing

Discussion Question

What are the pros and cons of the Delivery-only system versus retrofitting existing restaurants?

Retrofit versus Delivery-only

Delivery-only results in higher initial capital investments (especially a problem for the franchises)

Delivery-only would increase overall the number of outlets. Some managers are already concerned with oversaturation

Delivery-only would lead to the need for an entirely new operation system

Delivery-only would lead to human resource issues because managers would need to be trained on the new career paths and existing employee issues

Discussion Question

What are the pros and cons of the Customer Service Center system?

Do these pros and cons differ for the company units versus the franchise units?

Customer Service Centers

Would increase operating efficiencies and reduce the number of “stock-outs” (customers being unable to reach a local restaurant phone number)

Would be expensive to implement, specifically a problem for the franchises

Would allow a more consistent overall brand image and marketing strategy

Could be used long-term for more directed target-marketing programs

Upsizing and Up-pricing

Would allow a spreading of new operational costs over larger orders. Customers would pay more for somewhat equivalent orders

Might be viewed by the customer as a delivery charge

Might cause confusion among customers between delivery-only units and non-delivery units

Could increase costs due to increased materials or operational costs

Are there others ways to increase the average order size without changing the product mix?

Winter Franchise Meeting

Key IssuesResolve any bad feelings with franchisesConvince franchises of opportunities in deliveryCome to a compromise on the operations in the

new segmentObtain system-wide agreement

Winter Franchise Meeting

I recommend:Propose a strong move into the delivery segmentPropose a more extensive retrofit operationAllow short-term royalty reductions for franchises who

are willing to operate delivery-only unitsConvince system to buy into the CSC. Use some form

of short-term incentive to offset some of the costs, also point out the lower costs associated with retrofitting units which will offset some of the CSC costs.

Maintain consistent product mix, not engaging in upsizing. Sales can be increased through suggestive selling of appetizers, desserts, and offering promotional efforts to increase order size.