Pizza Hut’s Franchisee Bankruptcy

The bankruptcy of the Leawood NPC, Kan This report shows a declining relationship between Pizza Hut’s largest and oldest operators. NPC’s problems have been a major problem for the chain, as it lost its position in the top pizza franchises to long-time rival Domino’s. It also struggled to gain traction.

Pizza Hut took a bold step in 2019 after years of sales decline. They allowed franchisees to delay remodels for up to a year.

The bankruptcy of NPC International, a giant franchisee, reveals tensions between the 58-year-old company and its franchisor.

These deferrals were not available to everyone. NPC International claimed it was ineligible, according to bankruptcy documents filed this week. NPC International stated in court documents that Pizza Hut had denied the company participation in the deferral programs.

Court documents reveal that there were also difficult negotiations between franchisors and franchisees dating back to last year. These negotiations eventually led to this week’s filing, one day after the expiration of a forbearance arrangement between the companies.

NPC stated in its filing that “While the company continued to investigate these and other strategic options through 2019, discussions with Pizza Hut franchisors failed to gain traction as the pressures continued, leaving the company facing an extensive liquidity shortfall in early 2020.”

NPC is not a regular franchisee. It owns more than 1,200 Pizza Hut locations, mainly on the East Coast and Midwest. It is a franchisee that controls approximately one in six Pizza Hut stores, which makes it an unusually powerful franchisee within a system.

NPC’s history dating to 1962, when it opened its first Pizza Hut in Pittsburg, Kan.

In 1994, NPC was adopted. It was the first franchisee of the pizza chain. It was also known as Southeast Pizza Huts, then National Pizza Company.  It has also sold Tony Roma’s and Skipper’s fish chains over the years.

After reaching the limit of its pizza chains, it decided to refocus on Pizza Huts again in the 2000s. In 2013, however, it began buying up Wendy’s units.

The current problems of NPC are the result. A terrible stew of poor sales, massive debt, and rising food and labor costs. After the sale of Delaware Holdings to Eldridge Investment Group, this debt was repaid in 2018.

Eldridge deferred its NPC investment last year. This week, Eldridge CEO Todd Boehly spoke to Bloomberg TV. “When we decided what to protect or defend, NPC was not going to be one that we would defend or protect.” “Now and then, we make a mistake.”

Yum Brands, Pizza Hut’s parent company, has been hinting at NPC problems for some time without naming the franchisee. Greg Creed, the former CEO of Pizza Hut, stated last year that we will need to address franchisees who have too much debt, lack capital, or aren’t committed to long-term success.

NPC’s debt issues prevented NPC from remodeling more units. This was also a problem because NPC operates so many Pizza Huts, which affected NPC’s overall numbers. NPC has many “red roof” restaurants that the franchisor tried to move away from over recent years.

The franchisee also took Pizza Hut to task over its recent performance. For example, same-store sales at Pizza Hut have fallen 0.6% on average since the first quarter of 2015.

Average 7.8% for Rival Domino’s Pizza. It surpassed Pizza Hut as the country’s biggest pizza chain. Papa John’s was at 0.3%, but take out the seven quarters marred by the controversy surrounding its founder John Schnatter, at 4%.

NPC stated that Pizza Hut’s competitors, Papa John’s and Domino’s, have evolved their respective delivery models with better technology and more compelling prices and product offerings. It stated that Pizza Hut’s “lack of sales growth and associated cash flow creation” had prevented many franchisees from shifting away from less-profitable and weaker-performing dine-ins.

NPC also brought Pizza Hut under fire for its heavy discount marketing and operating an “asset-light business model.” This model creates a misalignment between Pizza Hut franchisees and franchisors, as Pizza Hut relies on top-line sales to generate revenue, while franchisees must make a profit.

NPC stated that “this misalignment has resulted in a material decrease in store-level profitability of the company and other franchisors over the past several years.”

NPC, however, had positive comments about its relationship to Wendy’s (385 locations). NPC had planned to sell its Wendy’s business this year, but the pandemic ended that plan. It intends to sell this division during bankruptcy proceedings.

NPC stated that the company has a strong relationship with Wendy’s franchisor. This company plans to keep up during Chapter 11 cases. “The company’s Wendy’s business performed well in the past.”

 

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