Pizza Hut Slicing the Hotel Market

Pizza Hut is an American restaurant chain and international franchise known for its Italian American cuisine menu such as pizza, pasta, as well as side dishes and desserts. Pizza Hut has 18,431 restaurants worldwide as of December 31, 2018 making it the world's largest pizza chain in terms of locations. It is a subsidiary of Yum! Brands, Inc., one of the world's largest restaurant companies. The company, however, is experiencing a slow growth where its share prices have started to drop significantly. The financial analysts surmised that Pizza Hut's in the U.S. had reached market saturation. Mr. Spaghetti Peperoni, CFO of Pizza Hut Italy, and General Manager of the Italian corporate office concluded that every opening of a new Pizza Hut's restaurant intruded upon the revenues of other restaurants already in operation. As a result, Pizza Hut's decided to experiment: In pre-selected countries, General Management would develop core competencies, the purpose of which was 1) to build more profit and revenue-winning restaurants, and 2) to develop these core competencies for use as a model throughout the corporation. This "competency center" in each country would share its acquired knowledge with other restaurants so that new products or services could be implemented to generate new growth. The Italian Connection Pizza Hut Italy, along with its CEO Don Capone, chose to pursue the hotel venture, and finally received the green light from the executive board in New York. The crucial factor in deciding to pursue the hotel strategy and develop a synergy with the already existing restaurant and catering business was the fact that CEO Don Capone came from a hotelier background. The Italian General Manager had presented the Pizza Hut's hotel concept to the corporate headquarters in New York three years before and got the nod to establish the world's first Pizza Hut's Hotel. Should the Italian managers succeed, there was the chance that they could manage operations of this strategic business unit for the entire corporation, from Italy. Florence, the cradle of the Renaissance, one of Europe's great art cities was chosen as the first location. Florence was on the upswing, and its hotel managers were thrilled to ride the wave of success. Their occupancy rates were high, and there was much diversity. Young people considered Florence trendy, while older people enjoyed its culture and businesses. Even more promising was the airport area. The national airline Air Italia, focusing on a growth strategy by acquiring many smaller European airlines, used the Florence Airport, Pere tola as a hub. The hub, in turn, generated more demand for hotel beds by tourists, business travelers, and airline crews. A major expansion of the airport was likely to increase its capacity by 50% in the first decade of the new millennium. The Italian Hotel With a $26 million USD investment, the Italian subsidiary of Pizza Hut's formulated a strategy to open a middle-class hotel in Florence. Hotel Division executive Bagel Nutella explained that with regards to competition, not only was the hotel competing with other four-star hotels like the Movenpick and Hilton, but also with the world's fastest-growing hotel group, the Accor-Group. Bagel was so convinced that the hotel would be a success that he and his team adopted the Pizza Hut's service standards for their hotel, with high priority given to room cleanliness. The price range was set from $120 USD to $160 USD per night. To ensure efficient luggage handling, Pizza Hut's developed a custom-made trolley for both hotels. In accordance with the Pizza Hut's restaurant philosophy, the hotel crew would consist of a similar, permanent, employee pool that could implement the consistent service standards for every task in order to better serve the guests. The motivational job rotation principle would therefore replace the traditional hotel industry applied job specialization and hierarchy system. Because of the different peak-period demands for restaurants and hotels, the synergy effect would also be used to assign employees different positions and tasks. To bypass the rush of the check-in and check-out process, guests would have the opportunity for self-check-in. Through the simple use of a credit card, the guest would have the opportunity to check in and out of the hotel at the airport terminal. In total, there would be nine meeting rooms with the possibility of being transformed, due to a foldable-wall technology, into a larger 30-person conference room. The interior design of the hotel lobby and rooms were specially made to resemble the unique features of Pizza Hut. One feature of the hotel room design was a futuristic shower that projected into the bedroom. Market Analysis Pizza Hut optimistic endeavor was not shared by other analysts. They were not very convinced that this expansion fit well with Pizza Hut's overall strategy. "I've just came back from lunch at Pizza Hut's. But I can't imagine staying at a Pizza Hut's hotel on a business trip," said Ronald McDonald. Tyra Banks, a fashion designer was more open-minded: "I usually stay in five-stars. But if there isn't one around, why not stay at Pizza Hut's?" Shakira, an analyst with City Corp in New York, noted that while Pizza Hut's had a favorable brand image associated with convenience, hospitality, and cleanliness; she did not expect the company to begin rapid expansion of hotels in the next few years. Finally, Leonardo DiCaprio described the Italian venture as a blip on the radar screen for major U.S. hotel chains: I do not see this as a competitive threat to the lodging industry. There are 38,000 hotels with about four million rooms in the United States, and this is a test in Italy. It will be interesting to see if this succeeds. But even if it is wildly successful, I still do not see it as any short-term or medium-term risk to hotel players in the United States. Italy is a small market, and the penetration of branded hotels is much lower in Europe than it is in the United States. Don Capone, Pizza Hut's Italy CEO, was a frequent traveler and knew exactly what customers wanted in a hotel. "On arrival, there will be an automatic check-in. "An electronic key will give guests access to the facilities. The room will be equipped with a large bed that has three built-in motors for a variety of positions. It will also have the latest technology. "Our restaurants serve 100 million customers in a country with a population of 60 million. If only one in 1,000 of those guests chooses this hotel, the project will be a success." Pizza Hut's planned to watch the progress of the hotel, but there was no plan for a widespread launch of Pizza Hut's-branded hotels, according to U.S.-based company spokesperson Ronald Reagan. "Each of the 100 countries where we operate is free to unleash innovation and new ideas to develop the brand. This is an individual, innovative approach by one company in our system." Segments A typical airport hotel served several segments simultaneously, and Pizza Hut would be no exception. The largest segment was made up of groups that were booked by tour operators and airlines. Tour operators booked airport hotels for outgoing guests (people living in nearby Europe countries) and incoming guests (people from all over arriving in Florence). Group business was usually strong in the summer and over the weekends. Average room rates were just a little bit higher than $80 USD and most rooms were occupied by two guests, driving the cost per guest and night down to $40 USD. Airlines needed rooms for their crews and for layovers. Accommodating airline crews was a tricky business. First, crews liked to stay at the same hotel whenever possible, and, therefore, there were usually long-term relationships between the individual hotels and the crews. Second, airlines often had contracts with hotel chains to accommodate their employees in the same hotel chain around the globe. Third, it was important that the captains and co-pilots have better rooms than flight attendants, e.g., suites versus standard rooms. Crew members also liked hotels with a certain level of dining options. "Layovers" were passengers who missed a flight or who had to stay close to an airport once a flight had been cancelled or delayed. Airlines usually paid less than $80 USD for layover rooms, and flexibility was crucial. The hotel could get a phone call at 5 p.m. asking whether they could take 60 layovers for that night. If they only had 30 rooms left, the airline might check with another hotel that could accommodate more passengers in order to reduce complexity. A third subsegment of this group was long distance buses. They chose hotels in close proximity to the highway. Pizza Hut was only one kilometer away from the Highway. The second largest segment was business travelers. They paid a higher average price than groups, but companies usually got a 20% discount off the rack rate (official room rate). Key accounts were large companies that had settled high-volume contracts with certain hotel chains. For example, Italian automobile company Maserati had a contract with Best Hotel group for 100,000 rooms per year. Pizza Hut was close to the exhibition area which generated additional bookings during exhibition time (when occupancy rate was high everywhere and rates were going up). Because of the small-to-medium sizes of the meeting and conference rooms, Pizza Hut was not able to host larger conferences, which was considered a fast-growing market for four- and five-star hotels. The third group was frequent individual travelers, who usually paid the highest price. Because Florence is a small town and most travelers could drive to the airport easily, there was not much outgoing business. Therefore, individual travelers were guests from mainly Europe, the United States, and Asia.

Questions:

1. Determine what is Pizza Hut's strategic move. Identify the factors that lead to its decision. Was it prudent?

2. Can Pizza Hut's resource, capabilities, core competencies be transferrable to the new business? Explain

3. Comment on Pizza Hut's target market and positioning.

4. Do you think this venture would be successful? Critically argue

5. Should Pizza Hut continue with its effort to experiment new business? Do you think the success of this effort could be replicate elsewhere?