Pizza Hut franchisee bankruptcy signals Yum Brands tensions

The largest operator of Pizza Hut restaurants in the US has filed for bankruptcy after warning it failed to secure adequate financial relief from the brand’s owner Yum Brands, a sign of tension in the fast food sector as it grapples with the effects of the coronavirus pandemic.

NPC International, which operates 1,225 Pizza Hut outlets as well as 385 Wendy’s, filed for Chapter 11 protection in Texas on Wednesday after it buckled under the weight of its $900m debt burden. The privately owned-company employs 7,500 people full-time and about 28,500 part-time.

The group had been struggling long before the pandemic, and its Pizza Hut business was particularly weak. Pizza Hut — part of the New York-listed food franchise Yum Brands group — was a favourite destination for generations of families, but in recent years the brand has fallen out of favour and more tech-savvy delivery rivals, including Domino’s as well as DoorDash and GrubHub, have stolen market share.

In court papers, NPC, which is backed by the private investment firm Eldridge, said several factors contributed to the bankruptcy filing. It had been hurt by intensifying competition that kept prices down, rising minimum wage rates in some jurisdictions and higher beef prices. Safety measures it needed to bring in because of the pandemic cost an average of $750,000 a month.

Among the pressures, NPC said capital expenditure demands under the Pizza Hut franchise agreement were “unsustainable”. It said that before the bankruptcy it had tried without success to “build a mutually beneficial partnership” with Pizza Hut and its parent company, Yum Brands.

Yum has said it would do “would do everything in our power within the constraints we are all facing” to help franchisees.

Pizza Hut said in a statement on Wednesday: “Addressing franchisee
health issues — with NPC and other franchisees — is an essential part
of our US transformation strategy. For some franchisees, that means
fixing longstanding financial issues, closing underperforming
restaurants, or removing other barriers that limit their potential for
growth.”

Wendy’s said in a statement that before the Covid-19 disruption, its “restaurants were generally performing very well, and they continue to perform in line with our US system”.

NPC, based near Kansas City, opened its first Pizza Hut outlet in 1962. It was sold to Merrill Lynch Global Private Equity in 2006, and Olympus in another leveraged buyout in 2011. Eldridge took its interest in 2018.

The company said that despite efforts to strike a “consensual resolution on a go-forward business plan” with Pizza Hut and Yum, it was ultimately unable to reach a deal. It added that it maintained “a strong relationship” with Wendy’s.

NPC said it planned to continue discussions with Pizza Hut while it was in Chapter 11 “with the goal of achieving a value-maximising solution”. It intended to keep its business operating through the bankruptcy.

Eric Koza, chief restructuring officer, said that after an initial drop in sales in the coronavirus lockdown, pizza revenues had since spiked as housebound Americans fed up with cooking turned to delivery and takeaway. Its Wendy’s business had failed to enjoy a similar pick-up due to a “less developed delivery infrastructure”. However, Mr Koza said these trends were likely to be shortlived.