While the restaurant sector was seeing an explosion of growth, Pizza Hut Restaurants remained focused on consolidating and investing in its estate. Chief executive Jens Hofma, who led the management buyout of the business this year, talks to James Wallin about a return to growth, his concerns about the sector’s obsession with like-for-like sales growth over protecting margins and his frustration that responsible operators have been penalised in the CVA era.

The story of the casual-dining sector over the past few years has taken in aggressive growth, turning to oversupply and latterly a correction in the market.

Throughout Acts I and II of this saga, Pizza Hut Restaurants was often a bystander – quietly getting on with the task at hand of investing in its estate and constantly tweaking a brand that was a staple of UK high streets long before gourmet burgers or peri peri chicken entered the public lexicon. However, as the battle for a fickle consumer’s diminishing spend intensifies, the company appears to be in a strong position to fight its corner, with much of the diligent, unglamorous work to reinforce its foundations already completed.

The brand also stands apart from the vast majority of casual-dining chains in having no need for existential debates over home delivery. Pizza Hut has long been split between the c260-strong restaurants division, which was subject to a management buyout in April from private-equity owners Rutland Partners, and the delivery side – operated by global brand owner Yum! Brands. While this allows the Jens Hofma-led restaurants team the luxury of focusing 100% of its attention on the eating-out experience, it does also mean that much of the growth stimulus its peers see from delivery is denied.

Against discounting culture

Not that this unduly bothers Hofma, who insists he is the custodian of a brand that is built to last, rather than shifting constantly in the breeze of passing consumer trends. He insists his focus is on incremental improvements to a proven model, with a particular focus on adding more self-serve options.

He is also keen to stay outside the milieu of discounting across the casual-dining sector. Once again this is underpinned by experience of the peaks and troughs of the market.

He says: “The key for us was to protect our margins so we stayed away from discounting. The data shows that about 17% of Pizza Hut guests use a voucher – less than half of Prezzo or PizzaExpress. We’re in the bottom half of discounters and we want to keep our discipline on that.”

He adds: “The moment where you first start weaning yourself off high discounting – and we were in that place ourselves a few years back – you take a real hit, but you have to think of your margins. We are in an industry that is obsessed with like-for-like sales at the expense of margin. When you take that hit, you generally see good improvements and give yourself the financial means to deliver a great experience. If you erode that then you have to make up for it somewhere in your cost base and eventually you will run out of steam and the guests will take notice.”

At the end of 2017, the group had refurbished 80% of the estate and Hofma says there will be five to 10 investments a year going forward.

Pizza Hut implemented its first counter service model in Coventry last year and has continued to roll out the format. Last year also saw the first new-build Pizza Hut since 2012, at White Rose in Leeds, and Hofma says modest growth is now the focus with both leisure and city-centre sites under consideration. There will be a limited number of disposals as part of a natural churn.

End of sales process

A renewed focus on expansion is just one part of the strategy in the new era of management ownership. It brought to an end a protracted sales process by Rutland Partners, which had originally put the chain on the block back in early 2016, only to abandon the process post-Brexit vote.

Hofma says: “The MBO worked for everyone. Rutland got a fair return on its investment and it has set the business up for the next stage in its development. It is now a business that is under management control so has more freedom, more of an entrepreneurial spirit.

“We’re in a good position because we have not taken our eye off the quality of our estate and our offer. What’s happening at the moment is, in many ways, a healthy dose of realism in what I consider to be quite an over-hyped market. We’re turning back to a realisation that running a restaurant requires a lot of hard work and dedication over a sustained period of time.”

On the evolution of the offer, Hofma says: “We are focusing on how we develop the format so it remains relevant. A key consideration has always been about getting the right balance between full-service and self-service elements as part of the experience. Pizza Hut has always sat astride casual-dining and fast-casual, and we’re quite unique in terms of being able to flex between the two models.

“My sense is that the guest wants to be more in control of their own experience and to have a frictionless experience with as few things as possible in the way of them and the product. Therefore dialling out some of the more self-service elements is probably the way we’ll go forward. We’re looking at technology solutions – different ways people can order and pay for their meals – to make the whole process more streamlined and cost-effective. We are in the middle of experimenting with that. We continue to adapt the model to fit with what customers want.”

He adds: “Over the past four or five years, we have put more effort into celebrating our American heritage and all the positive attributes associated with that, rather than trying to compete in the traditional Italian market, where we don’t have that much credibility.”

Delivery evolution

Earlier this year, the Pizza Hut Delivery business started to roll out a new fast-casual model, which included seating for the first time. Hofma said this was part of an agreed development of both sides of the business.

“We work closely with the delivery side and Yum!, the brand owners. When it comes to experimenting with new formats, we are very much doing that hand in hand. We are strongly aligned on how we want to evolve the brand because, from a consumer perspective, it is one brand, regardless of how they interact with it.”

He adds: “It’s true that we do have to work a bit harder than our competitors because we do not have access to that delivery element. We do takeaway and that remains a good portion of our business.

“It allows you to run a great operation between the four walls of your restaurant and there’s a risk that when delivery is a substantial part of your business, it deflects away from your core focus and that you become average at both. That’s part of why we set this system up in the first place.”

Lack of help from Government

Hofma is clear about the challenges facing the industry, stressing that the Government has not made things easy for the industry.

He says: “We’re still caught in a system of upward-only rent reviews as well as facing unsustainable levels of VAT and an antiquated business rates system. Things like the apprenticeship levy as well – while very well-intentioned – are mired in red tape.

“The Government could take some definitive steps to help the industry. VAT rates are still among the highest in Europe and impact labour-intensive businesses dis-proportionately. It’s not sustainable and should be up for revision. The business rates debate also seems to continually fall on deaf ears. As tragic as some of the recent developments in retail are, I just hope it gets the Government to think again about some of these policies.”

On the state of the property market, Hofma says: “Landlords are becoming more realistic and we are having more reasonable conversations, but there’s still a way to go.

“A lot of the rent concessions have been made on the back of the CVAs, which feels like the wrong way to go about it. We have always paid our bills and honoured our commitments and, therefore, feel we shouldn’t be penalised by the fact that others enter CVAs and get more favourable rental conditions.”

 

Pizza UK key dates

1973 – First UK Pizza Hut restaurant launches in Islington

1980 – The brand starts selling deep-pan pizzas

1988 – First dedicated delivery site opens in Kingsbury.

During the ’80s and ’90s, the group saw rapid growth – at one point, one restaurant per week was launching in the UK

1995 – The stuffed crust is introduced

1997 – Tricon Global Restaurants (now Yum! Brands) buys out PepsiCo to partner with Whitbread as Pizza Hut owner

2006 – Whitbread sells remaining stake to Yum!

2012 – Rutland Partners acquires the then 340-strong Pizza Hut UK restaurants division, with delivery remaining with Yum!

2014 – An estate-wide refurbishment programme begins

2018 – Management buyout, backed by funding from Pricoa Capital Group, completes