Case Presentation Discussion of Case Presentation and Report Format 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 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

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 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%

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 Channel Eat-In Carryout Delivery Benefit Atmos. Time Time Quality Convenience Price Lowest Modest Highest Sensitivity Demo Profile 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 cannibalization Assumes 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 = $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 delivery Assumes 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 delivery Assumes 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 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

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.