Pizza Hut Revamps to Survive

CEO Udi Shamai knows that a thick crust is not enough to keep ahead in a tough market

Pizza Hut branches in Israel were closed during Pesach, but the management was working overtime. Now that the festival is over, Pizza Hut has introduced a new menu, including such dishes as grilled cauliflower, lasagna and grilled eggplant. Although this seems to be just another variation of the fast food restaurant's menu, as has been customary at other chains that have added salads and other items to their menus, Pizza Hut Israel CEO Udi Shamai explains that this is a strategic change.

"Pizza Hut will be an Italian-American take-out and delivery business," says Shamai, adding that the broader menu is just the beginning, that the chain plans to invest about $1 million in changes.

Shamai knows the pizza market well, as he was a partner in a Domino's pizza franchise. And in a country in which pizza chains are falling into receivership one after the other, Shamai is not optimistic about the future of dough and sauce businesses.

"The pizza market is currently 35 percent below what it used to be," notes Shamai. "The competition for pizza places these days is from restaurants that serve noodles, spaghetti, Italian food and basically any restaurant that offers deliveries. The market has undergone such essential changes that we must either change or go bankrupt."

Industry sources estimate that sales at pizza chains and neighborhood pizzerias plummeted from NIS 350 million in 2003 to only NIS 270 million in 2004, making survival very difficult. Just over a year ago Domino's Pizza collapsed, with debts of some NIS 20 million, and last month Tel Aviv District Court Judge Varda Alshech ordered the dissolution of Pizza Meter, after no suitable buyer was found for the four branches owned by Alex Gordon and Bernardo Belajovich. (The failing chain also has 20 franchises).

Home deliveries

Israeli franchise for both Pizza Hut and KFC are held by Dor Alon, which is owned by Dudi Wiessman. In recent years Pizza Hut has undergone substantial changes. Back in March 2002 the chain had 33 branches, while today it has only 25, and these too are smaller than before. Pizza Hut entered the Israeli market with the slogan "restaurant pizza," but its focus today is more on home deliveries, reducing the need for large restaurant space.

One branch that has relocated, for example, was in the Henegev mall in Be'er Sheva. This restaurant will be relocated to a counter inside a Mega supermarket, in which Wiessman also has holdings.

Pizza Hut's annual sales are currently estimated at NIS 45 million, and Shamai offered no information on the chain's profits and losses, although he did say the company is generating positive cash flow and is on an upward trend.

Pizza Hut's recovery strategy differs from that of Domino's new owners. While the latter has sought ways to cut prices in order to increase sales, Pizza Hut is not making do with just pizzas.

"Make no mistake," notes Shamai, "pizza is still the main menu item, but today's consumer is looking for a variety that allows those who don't want pizza to join them. Pizza is a family experience. When a family buys pizza, everyone eats pizza, but the other dishes provide extra options."

Shamai says he feels no competition from either Domino's or frozen pizzas.

"There is only a 5 percent overlap [with Domino's]," claims Shamai, and as for frozen pizza, Shamai says there is no comparison between the experience of hot, freshly risen pizza delivered to one's door and reheated frozen pizza.

Crusty and kosher

Shamai stresses the three advantages of Pizza Hut pizza: the thick crust of the pan pizza, which has some uncompromising fans; the kashrut certification (Shamai says there is no other kosher international brand, especially in central Tel Aviv), and the strength of the brand, bolstered by years of investment in advertising and marketing.

Pizza Hut's changes include a new strategy of special offers, because "consumers are tired of the old ones."

"For example, we offered 3 pizzas for NIS 100, delivered - where could customers find a better deal than that?!" declares Shamai enthusiastically.

The expanded menu will not include healthier foods or reduced calorie pizza, such as that offered by Domino's, but Shamai says that the salads have been improved to provide a more varied meal.

Other aspects of the changes include a streamlining of the ordering process, face lifts for the stores, a more advanced computer system and new packaging.

"In the end," states Shamai, "we will be a quality, tasty Italian food chain with a high level of services and deliveries, and profitable, of course. It's a long, complicated process. There is no magic here. We have set very high goals and plan to make this business into an enterprise with a lot of sales."