Will Pizza Hut’s buyout of Eagle Boys pay off?

Pizza Hut’s acquisition of the Eagle Boys franchise and the possible expansion of its dine-in service offerings are expected to be costly for a franchise that has lagged behind Domino’s, its main competitor, over the past five years.

That’s according to IBISWorld senior industry analyst, Andrew Ledovskikh.

“While both initiatives may benefit the franchise at great cost, they are unlikely to fix the underlying problems that have caused it to underperform compared with the wider industry,” he said.

A competitive pizza market

IBISWorld expects the pizza restaurants and takeaway industry to show 2.8 percent growth over the five years through 2016-17.

In this period Domino’s sales have increased at an annualised 11.3 percent. Pizza Hut has lagged behind the industry in nominal terms, with growth of 2.8 percent.

Much of Domino’s success can be attributed to ongoing innovation and enhanced ordering methods.

“Domino’s has established a significant competitive advantage with online sales over the past five years,” said Ledovskikh. “The company’s uptake of new and innovative ordering platforms has meant that almost 60 percent of its orders are generated online, with about half of these made through mobile devices.”

Pizza Hut has lagged behind and lost market share to its rival.

“Four main competitive elements exist in the fast food sector: price, convenience, quality and healthiness. Currently, Pizza Hut is struggling to stake out a distinct advantage in any of these areas. Its aggressive discounting in 2014-15 failed to boost its market share and also made many of its franchisees unprofitable,” added Ledovskikh.

Acquisition and expanded service

The acquisition of Eagle Boys is expected to increase economies of scale, boosting the value of advertising expenditure and improving the company’s ability to compete on price.  

However, Ledovskikh points out Pizza Hut’s aggressive discounting strategy has failed in the past and is unlikely to strongly affect price competition in the industry.

Lisa Ransom, CEO of Pizza Hut Australia, told FranchiseBusiness, a price campaign in not going to be part of the Pizza Hut strategy.

“We’ll be running our own race,” she said. “There’s no denying we have not had the performance we want and we are working collectively to make improvements.”

Ransom said there is lots of consumer passion for the dine-in model.

Right now Pizza Hut’s dine-in services are only available in 15 stores across Australia, mostly in rural areas. Developing this model will give the brand a new channel to compete in.

A larger store footprint and consumer interest in the rollout of dine-in services will give Pizza Hut access to a wider market and generate some excitement around the brand, believes Ledovskikh.

But while this move could boost short-term sales he indicated it runs counter to trends among consumers and may struggle to be a profitable venture for the franchise over the long term.

“The Pizza Restaurants and Takeaway industry is facing a difficult market and Pizza Hut will need to be innovative to make this acquisition a success,” said Ledovskikh.