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Pizza Hut Inc. is the largest pizza restaurant company in the world in terms of both the number of outlets and the percentage of market share that it holds. A subsidiary of PepsiCo, Inc., the company oversees more than 11,000 pizza restaurants and delivery outlets in 90 countries worldwide. In October 1997, the company expected to become a subsidiary of Tricon Global Restaurants, Inc., formed from the spin-off of PepsiCo's restaurant holdings.
Pizza Hut was founded in 1958 by brothers Dan and Frank Carney in their hometown of Wichita, Kansas. When a friend suggested opening a pizza parlor--then a rarity--they agreed that the idea could prove successful, and they borrowed $600 from their mother to start a business with partner John Bender. Renting a small building at 503 South Bluff in downtown Wichita and purchasing secondhand equipment to make pizzas, the Carneys and Bender opened the first Pizza Hut restaurant; on opening night, they gave pizza away to encourage community interest. A year later, in 1959, Pizza Hut was incorporated in Kansas, and Dick Hassur opened the first franchise unit in Topeka, Kansas.
In the early 1960s Pizza Hut grew on the strength of aggressive marketing of the pizza restaurant idea. In 1962, the Carney brothers bought out the interest held by Bender, and Robert Chisholm joined the company as treasurer. In 1966, when the number of Pizza Hut franchise units had grown to 145, a home office was established to coordinate the businesses from Wichita.
Two years later, the first Pizza Hut franchise was opened in Canada. This was followed by the establishment of the International Pizza Hut Franchise Holders Association (IPHFHA). It aimed at acquiring 40 percent of the company's franchise operations, or 120 stores, and adding them to the six outlets wholly owned by Pizza Hut.
The acquisitions, however, brought turmoil to the chain. Varied accounting systems used by the previous franchise owners had to be merged into one operating system, a process that took eight months to complete. In the meantime, sales flattened and profits tumbled.
Turmoil Brings New Structure in Early 1970s
In early 1970 Frank Carney decided that the company practice of relying on statistics from its annual report to inform its business strategy was inadequate, and that a more developed, long-term business plan was necessary. The turning point occurred when Pizza Hut went public and began growing at an unprecedented pace. Carney said in 1972, "We about lost control of the operations. Then we figured out that we had to learn how to plan."
Pizza Hut's corporate strategy, arrived at after much consultation and boardroom debate, emerged in 1972. Carney would later remark that the process of introducing a management structure did much to convince PepsiCo, Inc., that the pizza chain was worthy of purchase.
The corporate strategy's first priority was increasing sales and profits for the chain. Continuing to build a strong financial base for the company to provide adequate financing for growth was the second priority. The strategy also called for adding new restaurants to the chain in emerging and growing markets.
In 1970 Pizza Hut opened units in Munich, Germany, and Sydney, Australia. That same year, the chain's 500th restaurant opened, in Nashville, Tennessee. Further acquisitions that year included an 80 percent stake in Ready Italy, a frozen crust maker, and a joint venture, Sunflower Food Processors, formed with Sunflower Beef, Inc. The same year, the menus for all restaurants added sandwiches to the staple "Thin 'n Crispy" pizza offering.
In 1971 Pizza Hut became the world's largest pizza chain, according to sales and number of restaurants--then just more than 1,000 in all. A year later the chain gained a listing on the New York Stock Exchange. Pizza Hut also achieved, for the first time, a one million dollar sales week in the U.S. market.
At the end of 1972 Pizza Hut made its long-anticipated offer of 410,000 shares of common stock to the public. The company expanded by purchasing three restaurant divisions: Taco Kid, Next Door, and the Flaming Steer. In addition, Pizza Hut acquired Franchise Services, Inc., a restaurant supply company, and J & G Food Company, Inc., a food and supplies distributor. The company also added a second distribution center in Peoria, Illinois.
In 1973 Pizza Hut expanded further by opening outlets in Japan and Great Britain. Three years later the chain had more than 100 restaurants outside the United States and two thousand units in its franchise network. The company's 2,000th restaurant was opened in Independence, Missouri. It also established the 35 by 65 meter red-roof Pizza Hut restaurant building as the regulation size for all its new establishments. The new construction standard called for free-standing buildings built in a distinctive one-story brick design. The sites seated from 60 to 120 people.
Advertising played an increasingly influential role at Pizza Hut at this time, broadening the chain's public profile. Campaigns were run on both a national and local level in the U.S. market. Spending on local advertising increased from $942,000 in 1972 to $3.17 million in 1974.
PepsiCo Buys Out Company in 1977
In 1977 Pizza Hut merged with PepsiCo, becoming a division of the global soft drink and food conglomerate. Sales that year reached $436 million, and a new $10 million dollar headquarters office opened in Wichita. PepsiCo had clearly seen potential in Pizza Hut. People continued to eat outside their homes, especially as convenience and price-competitiveness in the fast food industry gained importance.
The 1980s brought new competitors to Pizza Hut, all challenging its number one position in the pizza restaurant trade, then worth $15 billion in sales annually in the United States alone. While in the 1970s the company's main competitors had been regional chains like Dallas-based Pizza Inn, Denver-based Shakey's, and Phoenix-based Village Inn and Straw Hat, fierce competition in the 1980s brought new entrants into the quick-service pizza category, including Little Caesar's, Domino's Pizza International, and Pizza Express.
To raise its profile, Pizza Hut introduced "Pan Pizza" in 1980 throughout its network. The product, with a thicker crust made in deep pans, soon became popular. The success of new additions to Pizza Hut's menu was facilitated by the marketing resources provided by PepsiCo.
For example, in 1983 Pizza Hut introduced "Personal Pan Pizza," offering customers a five-minute guarantee that their single-serving pizzas would arrive quickly and steaming hot. The aim was to make a quick, affordable pizza the ideal lunchtime meal. Another addition to the chain's menu was "Hand-Tossed Traditional Pizza," which would be introduced in 1988.
Strong Growth in Late 1980s and Early 1990s
In 1984 Steven Reinemund was appointed president and chief executive officer of Pizza Hut. He oversaw a period of unprecedented growth for the pizza chain. In 1986 Pizza Hut opened its 5,000th franchise unit, in Dallas, Texas, and began its successful home delivery service. By the 1990s the delivery and carryout business had grown to account for approximately 25 percent of the company's total sales.
In 1990 Pizza Hut opened its first restaurant in Moscow. Russians' pizza of choice, "Moskva," a pie topped with sardines, tuna, mackerel, salmon, and onion, became a favorite at the Moscow Pizza Hut. The Moscow location quickly established itself as Pizza Hut's highest volume unit in the world. Restaurants just behind in total volume served were found in France, Hong Kong, Finland, and Britain. Other favorite toppings for pizzas in countries other than the United States included sauerkraut and onion, and spinach, ham, and onion. In Hong Kong corned beef and Canadian bacon were favorites, while Asians and Australians seemed to enjoy various curry pizzas.
Competition in the United States was heightened in 1991 when McDonald's, the world's largest hamburger fast food chain, put "McPizza" on its menu in several test markets and even offered home delivery to customers. Despite this effort and the economic recession of the early 1990s, Pizza Hut continued to profit. Company sales at the pizza chain were up ten percent worldwide to $5.3 billion in 1991 as growing health awareness and the popularity of vegetarian lifestyles had prompted many people to reconsider pizza as a nutritious alternative to greasy fast food fare. Pizza Hut Delivery, the home delivery operation, provided $1.2 billion in sales alone, and overall Pizza Hut sales, added to those of PepsiCo subsidiaries Taco Bell and KFC (formerly Kentucky Fried Chicken), gave the parent company more than $21 billion in sales that year on its restaurant and fast food side.
In the early 1990s Pizza Hut was concerned with making itself more accessible. Drive-through units were added for customers' convenience, and Pizza Hut Express units were being developed. The Express unit originated in shopping malls, where it provided customers with fast food at affordable prices made possible by lower operating overheads. Since that time, Pizza Hut positioned Express units in school cafeterias, sports arenas, office buildings, and major airports. The company saw nontraditional locations as the fastest-growing sector of its operations in the first half of the 1990s.
PepsiCo's corporate sponsorship of Pizza Hut included funding the Book It! National Reading Incentive Program, which encouraged higher literacy rates among young people. The reward for better reading ability was free pizza at any Pizza Hut. In 1992, the Book It! program involved more than 17 million students in North America alone, and Pizza Hut received letters of endorsement that year from President George Bush and Secretary of Education Lamar Alexander.
PepsiCo took advantage of global change following the end of the Cold War, expanding Pizza Hut into new and emerging markets. In 1991 PepsiCo had restaurant outlets in 80 countries worldwide. Wayne Calloway, chairman of PepsiCo, indicated he wished to see continued growth with the approach of the 21st century. He commented, "The major question for international restaurant growth is, 'How fast can we get there?' A steadily growing interest in eating away from home and the continued gravitation to convenience foods are creating an atmosphere of excitement for our restaurants." Pizza Hut restaurants had spread to 90 countries by 1997.
Declining Profits in Mid-1990s
In 1994 several changes resulted in the company's first decline in operating profits in 15 years. The pizza market was no longer growing; fast food rivals cut prices; and investment in new outlets was draining corporate resources. PepsiCo's restaurant division saw sales in restaurants open at least one year fall six percent in 1994, contributing to a drop in profits of 21 percent (to $295 million).
In an effort to change this disturbing direction, Roger A. Enrico moved from PepsiCo's beverage and snack food divisions to head the restaurant division in 1994. His first move was to heavily promote a new product: stuffed crust pizza, a pizza with a ring of mozzarella folded into the outer edge of the crust. The company used a massive advertising campaign to promote the new product, including television commercials that paired celebrities eating their pizzas crust first.
Some indicators were promising: market share rose from 25.6 to 27 percent; 1995 sales increased 16 percent to $5.2 billion; and operating income rose to $414 million, up 40 percent from the year before. In 1996 Pizza Hut planned to introduce a major new product each year and two or three line extensions. The following year it followed through on this course, introducing Totally New Pizzas with 67 percent more toppings than previous pizzas and thicker sauce. The company allocated $50 million for the project, part of which was to be used to install new or improved ovens. In 1996 Pizza Hut accounted for 17 percent of PepsiCo's total sales and 13 percent of its operating profit.
However, these gains could not offset the drain that capital investment placed on PepsiCo's other divisions. The parent company's return on assets was significantly greater in its beverage and snack food divisions than in its restaurant division. In the late 1990s, PepsiCo drew together its restaurant businesses, including Pizza Hut, Taco Bell, and KFC. All operations were now overseen by a single senior manager, and most back office operations, including payroll, data processing, and accounts payable, were combined. In January 1997 the company announced plans to spin off this restaurant division, creating an independent publicly traded company called Tricon Global Restaurants, Inc. The formal plan, approved by the PepsiCo board of directors in August 1997, stipulated that each PepsiCo shareholder would receive one share of Tricon stock for every ten shares of PepsiCo stock owned. The plan also required Tricon to pay a one-time distribution of $4.5 billion at the time of the spinoff. If approved by the Securities and Exchange Commission, the spinoff would take place on October 6, 1997.
Enrico, who had risen to the position of PepsiCo CEO, explained the move: "Our goal in taking these steps is to dramatically sharpen PepsiCo's focus. Our restaurant business has tremendous financial strength and a very bright future. However, given the distinctly different dynamics of restaurants and packaged goods, we believe all our businesses can better flourish with two separate and distinct managements and corporate structures."