Pizza Hut, Inc.

1. Pizza Hut, Inc. Case Presentation Discussion of Case Presentation and Report Format

2. 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 Analysis • Relevant 5 C’s and 4 P’s discussion • Chronological discussion • Make recommendations last • Be sure to provide discussion points • I encourage you to include class discussion as you go

3. 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?

4. Industry Trends • Food Prep moving out of the home • Food Consumption moving back in home • 1982 delivery = 1.3% of pizza sales • 1986 delivery = 20% of pizza sales • Delivery growing at 61% rate • Carryout growing at 12% rate • Eat-in growing only at 4.25% rate • Expected by 1990 delivery would = 48% and carryout would = 43%

5. 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?

6. 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

7. Competitive Positions • Pizza Hut dominates eat-in and carryout • Domino’s dominates delivery-only

8. Discussion Question • Why would consumers choose each of the three pizza segments, eat-in, carryout, or delivery?

9. Consumer Purchase Behavior Consumer Segmentation by Channel Eat-In Carryout Delivery Benefit Atmos. Time Time Quality Convenience Price Lowest Modest Highest Sensitivity Demo Profile Couples Families Families

10. 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

11. 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?

12. Impact of Delivery Business (Scenario 1) • Lost sales due to cannibalization • Assumes 20% of carryout and 5% of eat-in is lost

13. Impact of Delivery Business (Scenario 2) • Gain from home delivery • Assumes Pizza Hut delivery share is 15.4% = overall share

14. Impact of Delivery Business (Scenario 3) • Lost sales from not offering home delivery • Assumes 10% of current sales lost to competitors

15. Discussion Question • Should Pizza Hut pursue the delivery segment?

16. Delivery Strategy • Retrofit existing restaurants vs. delivery-only • Use Customer Service Centers • Engage in Upsizing/Up-pricing

17. Discussion Question • What are the pros and cons of the Delivery-only system versus retrofitting existing restaurants?

18. 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

19. 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?

20. 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

21. 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?

22. Winter Franchise Meeting • Key Issues • Resolve any bad feelings with franchises • Convince franchises of opportunities in delivery • Come to a compromise on the operations in the new segment • Obtain system-wide agreement

23. Winter Franchise Meeting • I recommend: • Propose a strong move into the delivery segment • Propose a more extensive retrofit operation • Allow short-term royalty reductions for franchises who are willing to operate delivery-only units • Convince 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.