Pizza Hut and its rival Papa Johns could both go private. | Photo: Shutterstock.
Two of the four largest pizza chains in the U.S. are apparently nearing a sale, which might tell you everything you need to know about the state of the pizza sector.
According to Reuters, both Pizza Hut and Papa Johns are inching closer to a deal. Papa Johns is apparently weighing an offer from Irth Capital and Brookfield Asset Management and have been conducting due diligence over the past month, according to the report.
A deal is “not guaranteed,” the report said, which is probably obvious because if we had a nickel for the number of times we’ve seen reports of offers and speculation surrounding that particular chain, we’d have an awful lot of nickels. Suffice it to say, companies constantly sniff around Papa Johns and either walk away or are turned back.
We know Pizza Hut is on the market, because parent company Yum Brands told us so. Reuters specifically mentioned a trio of private-equity firms, Sycamore Partners, Apollo Global Management and LongRange Capital. Apollo among them is the most notable name.
As with the Papa Johns information, there was a caveat on the Yum Brands-Pizza Hut news, which is that Yum could still keep the chain or spin it off.
But it’s worth noting that two of the four biggest pizza chains in the U.S. are actively considering go-private deals, which tells you as much as you need to know about the state of that sector.
Neither chain is exactly thriving right now. Papa Johns’ same-store sales have declined seven of the past eight quarters, prompting the company to close locations this year and lay off corporate staff. The company’s system sales last year declined 1% and it will likely decline more this year because it will have fewer locations.
But Pizza Hut’s decline has been extraordinary. Its system sales declined more than 8% last year, according to Technomic. And like Papa Johns it appears set for another decline this year because it is closing 250 locations. The company’s unit volumes average $790,000, or more than $600,000 per restaurant less than Domino’s, which has about 800 more shops.
There is a good chance that, as soon as next year, Pizza Hut will be smaller than No. 3 pizza brand Little Caesars.
In theory, taking these brands private can enable them to fix what ails them without the limelight associated with being a publicly traded restaurant chain. But that is a two-edged sword, because it also comes without all that free publicity.
When a legacy chain goes private, particularly if the buyer is a private-equity firm, the brand becomes the subject of financial engineering and profit-taking.
The simple fact is, a buyer could look at these brands, particularly Pizza Hut, and decide that the better path to profitability would be through some combination of cost cuts and dividend payments. Companies that go private are more likely to decline after doing so than they are to flourish.
Regardless, the buyers of these two chains would be wise to adapt them to a reality of life in which they cannot simply count on delivery for their sales. Third-party aggregators have siphoned off a lot of customers that previously would have ordered pizza. And many of those customers have money.
Carryout is a huge part of that sector’s future. Long before the pandemic, Domino’s smartly invested in remodels and new locations and marketing to make that business more palatable to those customers. Neither Pizza Hut nor Papa Johns did that, and their businesses have paid the price.
Regardless, no matter who buys those chains they will be entering the epitome of a market-share game. Because pizza is a tough business right now.
