Quiznos sees Asia move as key to its future

December 16, 2014

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Quiznos is undertaking a major expansion in Asia as it emerges from bankruptcy, with plans to open 1,500 stores in China and several hundred more in other countries.

Kenneth Cutshaw, president of the company’s international division, says the overseas move is important to help restore the company’s financial health.

The Denver-based sub chain filed for bankruptcy protection in March, citing a need to reduce its debt load by more than $400 million and to aid franchisees who have fought with the company over their profitability.

It exited Chapter 11 protection in July after court approval of a prepackaged plan in which three senior lenders acquired 70 percent of the company’s shares in exchange for debt.

These new efforts in Asia represent the first substantial growth plans the company has announced since then. In addition to the Chinese partnership, Quiznos signed deals with master franchisees to open 100 stores each in Malaysia, Taiwan and Indonesia, including a 24/7, 10,000-square-foot location in Indonesia that will be the chain’s biggest in the world.

In betting big on growing Asian markets — it also has franchisees who have opened stores in South Korea, Singapore and the Philippines — Quiznos is following in the footsteps of larger chains such as McDonald’s and KFC that have found success in that region.

But Quiznos enters these new arenas after spending 10 years reducing its number of American stores from more than 5,000 to about 1,100, making Cutshaw keenly aware of how important this growth is.

“Yes, it is a key component to restoring our company’s financial health,” Cutshaw said. “We’re not alone. There are other brands that have had tremendous success outside the country and are still rebuilding their operations in the U.S.”

Quiznos entered the international market in 1999 in Latin America and now has more than 100 locations in that region. For its international expansions, it seeks out master franchisees who know the markets and who have experience operating chain restaurants. About 35 percent of its total stores are outside of the United States.

Asia would host the largest concentration of its overseas stores if the growth is completed as projected. Key to that is the 1,500 Chinese locations planned over the next 11 years in a partnership with AUM Hospitality and Parkson Holdings Berhad. Parkson operates about 60 top-tier stores of other brands throughout China now, Cutshaw said.

Quiznos will enter the market with what Cutshaw believes is a built-in advantage.

“American brands are given the strong benefit of the doubt when they enter an international market,” he said. “It’s perceived as a superior-quality product.”

Brands that have experienced Asian success have changed their culture and menu somewhat, adapting to the use of Asian meats and vegetables and an inclination toward spiciness, said Darren Tristano, executive vice president of Technomic Inc., a Chicago food-industry consultant. But there are big opportunities present.

“Looking abroad for growth … is definitely a way for brands to grow, especially for Quiznos as it comes out of bankruptcy,” Tristano said.


Carl’s Jr. Revolutionizes Fast Food with New All-Natural Burger

December 15, 2014

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New All-Natural Burger features the first all-natural, no added hormones, no antibiotics, no steroids, grass-fed, free-range beef patty from a major fast food company

Today, Carl’s Jr.(R) announced the All-Natural Burger, featuring an all-natural, grass-fed, free-range beef patty that has no added hormones, antibiotics or steroids. With the introduction of the All-Natural Burger, Carl’s Jr. is the first major fast-food chain to offer an all-natural beef patty on the menu. The All-Natural Burger will be available in participating Carl’s Jr. locations beginning Wednesday, Dec. 17 and features the charbroiled, all-natural beef patty topped with a slice of natural cheddar cheese, vine-ripened tomatoes, red onion, lettuce, bread-and-butter pickles, ketchup, mustard and mayonnaise, all served on the brand’s signature Fresh Baked Buns.

The Carl’s Jr. All-Natural Burger features an all-natural, grass-fed, free-range beef patty that has no added hormones, antibiotics or steroids. With the introduction of the All-Natural Burger, Carl’s Jr. is the first major fast-food chain to offer an all-natural beef patty on the menu.

“We’ve seen a growing demand for ‘cleaner,’ more natural food, particularly among Millennials, and we’re proud to be the first major fast food chain to offer an all-natural beef patty burger on our menu,” said Brad Haley, chief marketing officer of Carl’s Jr. “Millennials include our target of ‘Young Hungry Guys’ and they are much more concerned about what goes into their bodies than previous generations. The new All-Natural Burger was developed specifically with them in mind. It features grass-fed, free-range beef that’s raised with no antibiotics, no steroids and no added hormones. The charbroiled All-Natural Burger also has a slice of natural cheddar cheese, vine-ripened tomatoes, lettuce, red onion, bread-and-butter pickles, the classic trio of condiments – ketchup, mustard and mayo – and it’s all served on one of our Fresh Baked Buns that we bake fresh inside our restaurants every day. Whether you’re into more natural foods or not, it’s simply a damn good burger.”

“Greater awareness for health and wellness is driving the growth in healthful menu items, yet our research indicates that the majority of consumers still opt for more indulgent food,” said Darren Tristano, EVP of Technomic Inc. “The push and pull between healthfulness and indulgence makes an All-Natural Burger on-trend. All-natural products also have a ‘health halo’ impact and often help consumers feel confident that they are getting a product better for them and from a source they can feel good about.”

The new All-Natural Burger is available as a single all-natural beef burger for $4.69, as a double burger for $6.99, and may be ordered in a combo meal with fries and a drink. Guests may also substitute the all-natural patty on any burger on the menu for an additional charge. Prices may vary by location. For a limited time, visit carlsjr.com/coupons to download a coupon for $1 off any All-Natural Burger combo meal, valid at participating locations.

The new burger will be supported by an advertising campaign created by Los Angeles- and Amsterdam-based creative agency, 72andSunny. The first of two TV spots will begin airing on Dec. 29 with an additional commercial to debut Feb. 2015 during the super big football game many will be watching.


Habit Looks to Trade on ‘Better-Burger’ Standing in IPO

December 11, 2014

© 2014 Orange County Business Journal. Provided by ProQuest Information and Learning. All Rights Reserved.

RESTAURANTS: Recent growth, timing of offering look favorable

The Habit Restaurants Inc. in Irvine appears to have a number of factors working in its favor for an initial public offering that’s expected sometime this week, including some that reflect its strong run of recent years and others that indicate the chain is well-positioned for the future.

Among them:

* Habit has staked out a spot in the meaty middle of the “better burger” category with an effective mix of competitive standing on price and quality.

* The burger chain has quadrupled in size in seven years and now has 99 locations in four states.

* Habit plans more growth in 2015, notably on the East Coast and other new regional markets.

* It’s the first better-burger chain to go to market, and the move comes just a few months after the IPO by Costa Mesa-based fast-food chicken chain El Polio Loco Holdings Inc., whose shares have more than doubled since their July debut.

Habit’s offering of 5 million shares at $ 14 to $16 a share would put about 20% of the company on the market and raise about $66 million for the parent of the Habit Burger Grill chain after costs, according to its Securities and Exchange Commission filings.

Habit Restaurants Inc. would trade on Nasdaq under the ticker symbol “HABT.” Its market capitalization at $15 a share would be about $380 million.

When El Polio Loco’s similarly priced offering-$15 a share-hit July 25, its stock quickly traded above $20, and it now trades at about $35 for a market cap of some $1.3 billion.

Habit has been busy with expansion plans in the run-up to its public offering. It signed master franchise deals for 15 units in Las Vegas and 25 in Seattle in May. The first restaurant in a planned East Coast expansion came in August in Fair Lawn, N.J.

Growth

Habit was founded in 1969 in Santa Barbara.

Greenwich, Conn.-based private equity firm KarpReilly LLC led a group in 2007 that bought a majority stake. It will own 37% of the company after the offering, with voting control of 55%, the SEC filings said.

Habit had $162 million in sales for the 12 months ended Sept. 30, according to the documents. It ranked No. 16 this year on the Business Journal’s list of OC-based restaurant chains.

Net income has grown from $2.4 million in 2011 to $5.7 million in 2013.

It has had 43 consecutive quarters of samestore sales growth, and average unit volumes have grown from $ 1.2 million in 2009 to $ 1.7 million for the trailing 52 weeks as of Sept. 30, the filing said.

“They have strong leadership and strong growth,” said Darren Tristano, executive vice president at Chicago-based restaurant consultant Technomic Inc.

Tristano said Habit benefits from being the first prominent hamburger chain to go public this year. New York-based Shake Shack, which has about 50 units, is also considering an IPO, according to reports.

“If you believe in this segment, this is the first available investment,” Tristano said.

He attributed several restaurant IPOs this year to private equity investments that led to “operators trimming the fat” and then tapping the public markets to slash debt.

El Pollo Loco raised $113 million to pay down part of $289 million in debt when it went public.

That and a prior refinancing cut its debt service from $36 million a year to $10 million. It said resulting cash flow would fund growth.

Habit said it would use $41 million of its offering proceeds to close out debt, with $25 million for working capital, according to the filing.

Company representatives declined to comment for this article.

‘Better Burger’

Tristano placed Habit firmly in the “better burger” category: chains with a higher-quality hamburger than a $2 McDonald’s or Burger King selection, but at a lower price-$3 to $5 compared with $8 to $10-than restaurants such as The Counter.

Habit’s roots are in fast food, and “they’ve evolved toward fast casual, so they’re in-between,” he said.

He said El Pollo Loco has staked out similar territory-somewhere between Chipotle and Taco Bell.

“Quality and price means a better deal for lower- and middle-income customers,” Tristano said.

He said Habit-again, like El Pollo Loco- is strong in California, but sounded a note of caution.

“They’ll have strong regional competition in other markets,” he said.

One example: Prairie du Sac, Wise.-based Culver’s, which is similar in style to Habit and has 450 company-owned and franchise locations in 20 mainly Midwest states.

Tristano said Habit has shown it can do well against established competitors, including Irvine-based In-N-Out Burgers, a standardbearer in the better-burger category.

“They have to introduce themselves to a new audience, but they can be competitive,” Tristano said. “And they did well in the Consumer Reports [national] test early this year.”

Habit Burger Grill: 99 units and counting, initial public offering slated for this week

The Habit Restaurants Inc. in Irvine appears to have a number of factors working in its favor for an initial public offering that’s expected sometime this week, including some that reflect its strong run of recent years and others that indicate the chain is well-positioned for the future. Among them:

* Habit has staked out a spot in the meaty middle of the “better burger” category with an effective mix of competitive standing on price and quality.

* The burger chain has quadrupled in size in seven years and now has 99 locations in four states.

* Habit plans more growth in 2015, notably on the East Coast and other new regional markets.

* It’s the first better-burger chain to go to market, and the move comes just a few months after the IPO by Costa Mesa-based fast-food chicken chain El Polio Loco Holdings Inc., whose shares have more than doubled since their July debut.


Immigrants to Get Wage Boost from Job Mobility Under Obama Plan

December 10, 2014

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President Barack Obama’s decision to lift the economic ceiling on almost half the nation’s 11.4 million undocumented immigrants will give those workers a chance at higher pay and better jobs.

That means it will also raise costs for businesses that rely on off-the-books labor.

Dishwashers will become waiters, and day laborers will move to full-time work on farms, forcing employers to pay higher wages for new workers. A 1986 immigration law covering 2 million people pushed up pay by 15 percent in the first six years for those workers.

Those are some of the effects of the president’s plan to protect about 5 million people from deportation.

“We’re going to see these people do better in the job market,” said Sherrie Kossoudji, an associate professor at the University of Michigan in Ann Arbor. “They’re going to be more mobile.”

On the higher end of the economic scale, workers with specialized technical expertise will have more freedom to change employers. And their spouses — often highly skilled themselves — will be allowed to work, too.

The consequences for the broader economy will be slight. The order has the potential to boost U.S. output by between 0.4 percent and 0.9 percent over the next 10 years, according to a report from the White House Council of Economic Advisers.

In contrast, the sweeping, bipartisan immigration legislation passed by the U.S. Senate last year would raise the gross domestic product by 3.3 percent by 2023, according to the Congressional Budget Office. That bill failed to advance in the Republican-controlled House.

Wage Pressures

Obama’s plan, which he outlined this week, will defer for three years the deportation of those who came to the country as children, as well as the parents of children who are citizens or legal permanent residents.

As a result of the order, the agricultural industry, which relies heavily on immigrant labor, could face rising wage pressures. Once workers are documented, they won’t stay in seasonal work for long, said Baldemar Velasquez, president and founder of the Farm Labor Organizing Committee of the AFL-CIO.

“How are you going to replace the people you’re losing?” Velasquez said. “Farmers will still be looking for workers to harvest their short-term crops.”

Restaurant Workers

An estimated 18 percent of undocumented workers — about 1.5 million — are employed in low-paying restaurant and hospitality jobs, according to the Migration Policy Institute, a Washington-based research group. Another 1.3 million work in construction and 723,000 in retail.

For restaurants, Obama’s action will make it easier for those employing undocumented workers to follow the law, said Darren Tristano, an analyst at Technomic Inc., a research firm in Chicago.

“It will help the operators who are not compliant, who are running the risk of being closed or fined,” Tristano said. “It should take some of the complexity and pressure out of a business that is hugely labor oriented.”

One of the smaller groups aided by Obama’s directive may see the biggest gains: Some 40,000 foreign students who earn graduate degrees to get jobs in technology industries will be allowed to work in the U.S. for up to 29 months.

These students, who have degrees in science, technology, engineering and math, would have a significant effect on productivity and innovation, said Giovanni Peri, an economist at the University of California at Davis.

“It involves few people, but very crucial people,” said Peri, whose research shows that undocumented labor complements, rather than competes with, U.S. workers. “Those workers will go beyond the effect of matching the right person to the right job and increasing efficiency. They’ll create innovation.”

Good Start

For employers, the steps are a good start toward addressing the shortage of skilled workers, said Emily Lam, vice president of federal issues for the Silicon Valley Leadership Group, a San Jose, California, trade association. Still, the effect is limited because it’s only a temporary fix, she said.

Another large impact might result from a provision that expands opportunities for skilled immigrants and their spouses. Workers with specialized technical expertise would have more freedom to change employers. Their spouses would also be allowed to work.

Settled Debate

While Obama’s order has sparked a clash with Republicans over its legality, the economic debate over easing immigration laws is largely settled: Decades of research shows the economy benefits from greater worker mobility.

The 1986 amnesty law signed by President Ronald Reagan raised wages and boosted the economy. Almost 2 million undocumented immigrants living in the U.S. were given legal status, as were about a million seasonal workers.

By 1992, real hourly wages for those workers had risen an average of 15.1 percent as they moved out of low-status, low- paying jobs, according to a Department of Labor survey. Wages continued to rise, according to a 2012 study by the Economic Policy Institute in Washington, even as the nation entered a recession that lasted from July 1990 to March 1991.

Obama’s plan is even less controversial from an economic viewpoint because it mostly applies to people already working in the U.S. For them, the move brings opportunity.

“It’s quite a small effect in the aggregate,” Peri said. “There’s no harm done to the American worker and a big gain for the immigrants who can take these opportunities. That’s the big picture.”

Cumbersome Process

Peri was one of those immigrants, moving to the U.S. from Italy to study in 1993. He earned a doctorate degree and landed an H-1B visa, which are set aside for highly skilled people. The system made it almost impossible for him to get his green card granting permission to live and work in the U.S.

“It was so long and cumbersome I had to marry an American,” he said with a laugh. Now he’s a citizen raising three children. “I’ve invested in the U.S.”

For undocumented workers, moving up the economic ladder can be difficult, if not impossible. The economy creates and destroys millions of jobs a month, and that churn is one key to raising wages. Companies hired more than 5 million employees in September, according to Labor Department data, and almost 2.8 million people voluntarily quit their jobs, the most since April 2008.

The threat of deportation typically discourages workers from switching jobs, even within an off-the-books economy. Many don’t consider more visible jobs with their current employers to reduce the risk of detection, cutting off the easiest route to better wages, Kossoudji said.

With the danger of deportation at least temporarily lifted, “it releases them from having to be in the back of the restaurant,” she said.


Building a Bigger Burger Biz

December 9, 2014

Paul Wahlberg starts expansion across US

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Paul Wahlberg has dreamed of owning a restaurant almost since he started out washing dishes on Canal Street in the early 1980s, but the chef couldn’t have imagined something this big. Wahlburgers, the restaurant company he owns with his celebrity brothers Mark and Donnie, will on Thursday unveil plans to open 27 more locations.

The major expansion comes just three years after the first Wahlburgers restaurant opened in Hingham and follows deals for three in Las Vegas and five in the Philadelphia area. A Toronto restaurant — the second Wahlburgers — drew huge crowds to a grand opening last month.

The new franchise agreements include 20 locations in Florida and seven in New York City. But Massachusetts isn’t being left out of the growth spurt — the Wahlbergs are getting ready to open their second and third Boston-area Wahlburgers restaurants, in Lynnfield and the Fenway. Eventually, the brothers say, there could be up to 300 across the country.

Unlike other restaurant chains, this one’s growing pains are playing out in front of a TV camera. A&E’s reality show, “Wahlburgers,” has featured the business in 18 episodes so far. The show brings people to the burger joints. But it also elevates the stage on which Paul Wahlberg works, putting more pressure on him to send customers away satisfied.

“We’re just fortunate that people are interested in it,” Paul, 50, says of the franchising efforts. “The family name has some celebrity status to it. But we still have to live up to that.”

The route to becoming a national chain can be traced to a meeting Mark Wahlberg had with Rick Vanzura, a former cochief operating officer at Panera Bread, soon after the Hingham shop opened. Vanzura was brought on board in 2012, first as a consultant and then as the company’s chief executive, with the charge to chart an expansion plan. Vanzura works at an office across the street from the redeveloped Hingham Shipyard — the home of the first Wahlburgers and Alma Nove, a restaurant the brothers opened in 2010. Aside from Vanzura and Paul Wahlberg, the corporate staff now consists of just one other person. Vanzura anticipates a few more hires in 2015 and a more meaningful increase in 2016 as restaurants open.

The A&E show generated interest among potential franchisees. But most of the inquiries don’t make it far: Vanzura says he only considers operators with considerable restaurant experience and a net worth of at least $5 million.

The Toronto operators — including hotelier Henry Wu and investor Michael Wekerle — had a relationship with the Wahlbergs as investors in Hingham. Wu says he’s also investing in the Fenway and Lynnfield locations. He says he was attracted to the concept’s unusual mix of sit-down service on one side of the room, with alcohol, and fast-casual service on the other. His team plans to open several more in Canada, likely starting in Ontario. Wu says the 120-seat restaurant in downtown Toronto already has exceeded expectations: The tables turn at least three times every dinner period and up to six times on busy nights.

In Florida, franchisee Manny Garcia was introduced to the Wahlbergs through Orlando venture capital firm Blackwood Holdings. Garcia, a former Burger King franchisee who sold his 67 BK shops in the 1990s, established Davgar Holdings to oversee his family’s three restaurants in the Orlando area.

Davgar’s restaurants will include the Wahlburgers locations in Florida.

Garcia says that by the time he got involved, he had already seen the TV series. He saw a kindred spirit in Paul — someone with a passion for the restaurant business. The first Florida Wahlburgers will likely be on his home turf in the Orlando area, and he says he will scout for locations in Miami and Tampa, with Blackwood providing a major equity investment.

Wahlburgers faces plenty of competition as the chain grows. The “better burger” segment of the casual dining market is already crowded, with the likes of Five Guys, Smashburger, and Shake Shack, says Darren Tristano, of the restaurant consultancy Technomic in Chicago. Many rivals offer burgers for less than the $7 or more that Wahlburgers charges, although most don’t have sit-down service or alcohol. “So many players have gotten into the space,” Tristano says. “It’s hitting a saturation point.”

Like many restaurants, the Wahlburgers shops don’t always open on their original timetables. The brothers hoped they could open the location on Brookline Avenue in the Fenway — which, like the Hingham spot, will be in a Samuels & Associates development — in time for opening day at Fenway Park next year. Now, they’re aiming for the summer.

Paul admits to some nervousness as he works under the unyielding heat of a national spotlight. But he’s hardly planning on getting out of the kitchen. “There are going to be hiccups,” he says. “There are going to be bumps in the road. But we have to keep plugging along and doing the best that we can.”


Second Cup Tries Upmarket Vibe

December 8, 2014

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Underdog coffee shop chain is trying to remain relevant as competition heats up

When Alix Box joined Starbucks Canada almost 20 years ago, it was the underdog taking on titan Second Cup in the fledgling coffee wars.

Today, as the new boss of Second Cup Coffee Co., Ms. Box is again the underdog, this time battling giant Starbucks – and an array of other fast-growing rivals.

Just over nine months into the job as chief executive officer, Ms. Box is rolling out a three-year transformation effort starting with a sleek redesigned Second Cup in downtown Toronto. On Wednesday, Ms. Box held court at the new “store of the future,” which opens on Friday. Located in the city’s hipster King Street West entertainment district, the café is an airy, white-hued space with marble counters, a “slow bar” and a high-tech Steampunk coffee brewing machine.

But as a reminder of the increasingly brutal café landscape, the new store faces a Tim Hortons restaurant across the street and a Starbucks about a block away. There’s also an outlet of the nascent, but increasingly popular, Aroma coffee shop several steps away and other independent cafés nearby.

Given the intense competition, Ms. Box travelled the country to get feedback from Second Cup franchise owners at their almost 350 cafés – a far cry from Starbucks’ 1,445. She got an earful.

“They felt Second Cup had fallen behind and was outdated,” she said as she sipped a Finca La Cumbre light roast Costa Rican brew at the slow bar, priced at $4.75. “This is not tweaking,” Ms. Box added, referring to Project Crema, the internal name for Second Cup’s reimagination. “We’re not doing a little bit here and a little bit there. This is a revolution … It’s never too late.”

It may not be too late but time isn’t on Second Cup’s side. Having essentially created the affordable luxury café culture in Canada, Second Cup has lost steam as Starbucks, market leader Tim Hortons and global titan McDonald’s Corp. have raced to perk up their coffee business here.

Now, under new leadership, the chain is betting it can get the jolt it needs with a chic café design, fresh offerings and breaks for its franchisors.

“Is it too late? Probably,” said Joe Jackman, CEO of consultancy Jackman Reinvents, which specializes in turnarounds such as the ones at U.S. fashion retailer Old Navy and drugstore chain Duane Reade. “They’re yesterday’s brand … But I don’t count them or anybody out. It’s doable. It’s just a long-odds situation.”

Added Darren Tristano, executive vice-president at researcher Technomic in Chicago: “Given the size of Starbucks compared to Second Cup, it’s a more uphill challenge.”

The challenge is daunting. In its latest quarter, Second Cup posted a $26.2-million loss, including provisions for café closings and a hefty $25.7-million writedown of impaired assets – the value of its trademarks – while its adjusted profit tumbled 64 per cent. Meanwhile, its same-store sales dropped 2.9 per cent, its 10th quarterly decline in that important measure of sales at outlets open a year or more.

Starbucks doesn’t break out its Canadian results, but in the third quarter, same-store sales at its Americas division rose 5 per cent and “Canada is a contributor to that growth,” Rossann Williams, Starbucks Canada president, said in an e-mail. It has also been adding more food and digital payment alternatives.

At McDonald’s Canada’s 1,430 restaurants, including McCafe, coffee sales have nearly tripled since 2008, more than doubling its coffee market share here, said president John Betts. Tim Hortons for its part will soon be acquired by Burger King, counting on the heft of the fast-food chain to help it expand even further.

Even as its rivals stake out their territory, Second Cup has an opportunity to move more upscale to make gains, Mr. Jackman said.

Other retailers, such as Hudson’s Bay Co., have found that reinventing themselves by shifting more upmarket can be more rewarding rather staying in the sinking middle ground, he said.

Ms. Box’s store of the future reflects her focus on a premium experience and offerings. Coffee at the slow bar, which she compares to the feel of a wine bar, costs up to $4.95, which can be more than twice the price of its regular brew. At the bar, the coffees include an Ehiopia YirgZ, with a “peach-like sweetness and grapefruit acidity” and Finca La Soledad, a light roast from Guatemala.

She’s chosen a new, local bakery to source a more edited offerings of muffins, scones and croissants, with a breakfast menu that includes egg white and kale sandwiches and granola and oatmeal. Franchise owners had told her that the food needed to be better and fresher.

The store’s remodelling cost close to $1-million, although rolling it out will probably cost half that much as the company learns from the process, she said.

An $8-million share offering will help fund the renovations in the 10 corporate stores, while Ms. Box is giving breaks to franchisors that could encourage them to invest in re-doing their stores.

Second Cup’s recent $2.3-million of annual savings from cuts to head office – dubbed coffee capital – went toward shaving franchisors’ royalties to 7.5 per cent of sales from 9 per cent, and their marketing spending to 2 per cent from 3 per cent if they achieve high operational scores, she said. That amounts to about $15,000 worth of annual savings for a café owner, and almost all of them so far have qualified for the breaks, she said.

At the new store. she changed the logo to a more modern-looking font and added art work by local artists to the cups. Her team has put hooks underneath the eat-in counters to hang purses and coats. And she introduced a new staff dress code of a charcoal grey apron over a white shirt and dark denim pants to replace the all-black with red piping uniform.

Its “image was very fast-foodlike,” Ms. Box said. “It looked like everybody else. We think we can be a bit different.”


Should Domino’s and Papa John’s Fear Pizza Hut’s Big Menu Changes?

November 21, 2014

Until now the differences between Yum! Brands (NYSE: YUM) Pizza Hut, Domino’s (NYSE: DPZ), and Papa John’s (NASDAQ: PZZA) have been mostly a matter of personal preference. Aside from the occasional special offer or novelty pie, all three chains offer a basic take on pizza.

That has changed as Pizza Hut, the lagging member of this trio of mediocre national pizza purveyors, has radically overhauled its menu. The company, which in recent years has resorted to stuffing cheese into its crusts, has added a wealth of new choices built on the idea that customers want customization. It’s pizza on the Chipotle model with choices including 10 different crust flavors, six sauces, and a variety of new toppings.

Favorites like the Meat Lover’s Pizza will remain, but customers will now be able to order it with a variety of enhancements. So, for people who want their pepperoni and sausage with honey Sriracha sauce and “Ginger Boom Boom” or “Curried Away” crust, Pizza Hut will have it for them.

Why is Pizza Hut doing this?
Pizza Hut has reported sales declines for each of the last eight quarters and this new menu is an attempt to turn things around. “This is the biggest change we’ve ever made,” Chief Marketing Officer Carrie Walsh told USA TODAY. “We’re redefining the category.”

Pizza Hut needed to do something; as it has struggled, Domino’s and Papa John’s have been chugging along nicely. In the third quarter Domino’s posted 7.7% domestic same-store sales growth year over year and growth of 7.1% internationally, marking the 83rd consecutive quarter of international same-store sales growth. In its third quarter, Papa John’s posted a 7.4% gain in its North American stores while gaining 5.5% internationally.

Will it work?
One industry analyst told USA Today the chain might be trying to do too much too fast. “It would appear that the brand that has lost touch with the consumer is trying to change too much overnight,” Darren Tristano, executive vice president at Technomic, was quoted as saying.

Pizza Hut might be aiming to please customers with a shift to Chipotle-like customization, but it’s going to be a challenge for a Yum! Brands property to gain a similar reputation. Chipotle has succeeded not just because it offers customization, but because it has a well-known commitment to quality food. Neither Pizza Hut nor sister chains Taco Bell and KFC have reputations based on offering good food. Pizza Hut may find that simply adding trendy flavors like Sriracha may not be enough to win quality-conscious millennials.

On the plus side, the chain will be adding new toppings including banana peppers, cherry peppers, and spinach. On the negative, filed under “please don’t insult our intelligence,” the pizza purveyor will be renaming a number of its standard toppings, ostensibly to make them more appealing. The customer who cares where Chipotle sources its beef from may not be fooled by Pizza Hut renaming black olives as “Mediterranean black olives” or red onions being dubbed “fresh red onions,” even though nothing has changed.

Can Pizza Hut be reinvented?
While Domino’s rebuilt its brand by revamping its pizza a few years ago, the company just improved its recipe, it did not radically change its menu. What Pizza Hut is doing amounts to a massive change in direction, an attempt to differentiate itself from its two major competitors.

Pizza Hut’s moves might even send some of its customers running for its rivals. Though the chain will still be selling “normal” pizzas, it runs the risk of confusing people who just want a plain old pepperoni pie and do not want to have to wade through a wealth of options. Those customers may well switch to Domino’s or Papa Johns.

The potential gain however is not in stealing traditional, undiscerning pizza eaters from its rivals, it’s a bigger growth strategy of winning over fast-casual diners not necessarily looking for pizza. Domino’s and Papa John’s have largely penned themselves in to a specific audience — people who want familiar pizzas cheaply.
Pizza Hut is looking to break the mold and widen its potential customer base — a move that could push it ahead of its rivals. That is a huge risk because the company could scare away its existing customers while failing to win new ones. For this to work the brand has to win customers not just from its pizza rivals, but from fast-casual restaurants including Chipotle, which have a higher perceived quality.

To do that, Pizza Hut needs to up its game. It’s one thing to offer more choice, but a lousy salted caramel organic beet pizza with an artisanal cheese crust won’t be successful just because it has a lot of trendy words attached to it.

To make this new offering, which rolls out Nov. 19, work, the company is going to need to actually deliver quality pizza that people want to come back for. Fancily named olives and balsamic drizzles won’t be able to disguise a mediocre pie.


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