Deal focus: Allegro to revamp Pizza Hut’s recipe

Within a fortnight of Domino's Pizza Enterprises (DPE), the largest pizza chain in Australia, testing a drone delivery system in New Zealand, Pizza Hut Australia was sold by its US parent to local turnaround specialist Allegro Funds. While the former is looking to the skies, the latter will look to close the gap by getting the basics right.

"Pizza Hut in our view has more latent brand equity than many other businesses; and there is nothing wrong with the product - in blind tastings it does better than its competitors," says Chester Moynihan, founding partner at Allegro. "Over the years there has been a lack of investment in the brand and a lack of focus on operational matters that are now more ticket-to-the-game than a differentiator."

While Pizza Hut has 270 locations in Australia and a 10% market share, DPE opened its 600th outlet earlier this year and controls 30% of the market. DPE is an Australia-listed entity that serves as master franchisor for Australia and New Zealand, Japan and parts of Europe. It opened 49 new stores in Australia and New Zealand in the 2016 financial year for a total of 714. Revenue rose 23.6% year-on-year to A$268 million ($204 million).

The drone test took place in New Zealand because that jurisdiction's regulations are most amenable, but there are plans to roll out the service across all of DPE's markets. Alongside the introduction of a fleet of electric bikes, customer pick-up services, store refurbishments and menu upgrades, it is one of several initiatives intended to improve user experience.

DPE's service enhancements give context to Moynihan's remark about getting the basics right: the priorities for Allegro include improving Pizza Hut's online presence, making it easy for customers to place orders, and ensuring food is delivered efficiently. To this end, it has brought in three senior executives who previously worked for McDonald's in different Asian markets to lead the turnaround. They will take a minority stake in the business.

Allegro has not disclosed how much it paid Yum Brands for Pizza Hut, although the GP typically writes equity checks of up to A$50 million. Most of the capital is being used to drive growth - and once the operational issues have been addressed this means meaningful, though realistic, network expansion. "We want to achieve new store growth but it's not astronomical," Moynihan says. "Restoring the business to health is probably sufficient to give us the return we need."

Whatever the number of outlets added, a significant proportion will be directly-owned rather than franchised. About 10% of DPE's network in Australia and New Zealand comprises self-owned or equity stores, and Moynihan sees 10-20% as optimal. "Most successful franchise businesses globally have an equity store presence, but in Australia Pizza Hut is 100% franchise," he says. "Having equity stores enables us to test, innovate and lead by example. The franchisees love it because you have skin in the game."

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• Topics
• Australasia
• Buyouts
• Consumer
• Credit/Special Situations
• Australia
• Allegro Funds
• Special Situations