Transcript:
Welcome to The Restaurant Boiler Room season three, episode three. I'm your host, Rick Ormsby, managing director at Unbridled Capital. Today in the Boiler Room I'll be talking with Kevin Hochman, brand president of both KFC and Pizza Hut in the U.S. Kevin will share his perspectives on both brands, how business is going, what to expect post-pandemic, how those brands are evolving, what's happening within the franchise base of each brand, how the future will look, as well as other thoughts and topics. It should be a great listen, hope you enjoy.
The Restaurant Boiler Room is a one-stop-shop for multi-million dollar merger and acquisition activity and financial complexities affecting the franchise restaurant industry. We talk money, deals, valuations, and risk, delivered to the front door of franchisees, private equity firms, family offices, large investors, and franchisors on a monthly basis. Feel free to find our content at Unbridled Capital's website at www.unbridledcapital.com. Now, let's enter the Boiler Room.
As you know Kevin is the president of both KFC and Pizza Hut in the United States. He's just a fantastic individual as a person if you know him. If you don't know him you're going to get to know him a little bit more today. He, as a businessman, his track record, his accomplishments, his accolades are second to none. And hopefully, we'll hear a little bit about that today too. Kevin, just welcome to the webinar, and thanks again for joining us, it's pretty cool to have you.
Thanks, Rick. I listen to your podcast actually a lot when I run. You don't update it that often but I do listen to it.
I try to do once a month but maybe a little more frequently. But thank you man for being a listener to it too, it's been fun to do it. Here's a quick discussion of what we'll go through today. I basically just wrote down... I mean, Kevin, we probably have like 20 questions that we'll just go through. I've kept a certain portion of this audience is obviously going to be private equity, family office, and large franchisees to buy and sell things. So I can of at the end, probably the last four or five questions are maybe geared more towards the franchisees space and some of the things that they might want to listen to and hear your perspective on. But this is going to be mostly a brand discussion, because I know everyone's going to want to hear from you a little bit about your background and about the brands. So fire away, what excites you about these businesses?
Well, the first thing I would tell you is, these are household names. Everybody's heard of KFC and Pizza Hut. When they see that logo on your shirt they'll undoubtedly have some story about the brand or some type of food that they eat, or how it's a part of their lives. I mean, who hasn't heard of Kentucky Fried Chicken or Pizza Hut, right?
The second thing I'd tell you that's exciting about the businesses is they both have a really great trajectory right now. So on KFC we just completed our seventh consecutive year of same-store sales growth, and we hope to complete an eighth consecutive year. On Pizza Hut we had really a record year in 20, both on top line growth and resetting formal economics to be a really profitable business for our franchisees. We have very clear strategies on both.
The last thing I'd tell you is both of these brands are part of America, right. I was watching that show on the history channel the other day, The Food That Built America, and there's all these different rivalries and sure enough Pizza Hut showed up in the first episode. So there's a lot to be excited to be working on these brands. Both the fact that these brands have an upward trajectory and clear strategy, but also that they're just super famous and totally fun to work on.
That's great. Thank you. And that's what attracted me to this industry and I tell people who work for me and with me that if you make it 18 months in this industry you typically never leave. Because it's so exciting to work within these iconic brands that we can all remember from the time we were like two years old eating from a bucket of chicken, or eating the Pizza Hut pizza. So yeah man, it had me hooked a long time ago. I can understand your comments. Maybe take this next question, if you can.
Yes. So what am I most proud of of my journey at KFC? It's probably about eight years ago I was interviewing with David Novak who was our first CEO, well actually our second CEO, but basically the founder of the company. But it was like a snowy morning and he's asking all these questions, then he was like, hey, if you could choose what brand you wanted to run marketing on here which one would it be in Yum!? And I said, I think you're probably going to think I'm crazy on this answer because I don't really want to work on Taco Bell, that's like a well oiled machine, even back then it was a well oiled machine, right. Could do no wrong, great strategy, all I can do is go in there and either roll with everybody else or screw it up.
And that was not exciting me but KFC I was like, man, this brand is such an amazing brand and I think there's so much opportunity there. And that's something I just like hard challenges and I thought I could help. And that was a little naïve in my answer, and call it seven plus years later and understanding what the challenges were and it probably wouldn't be that easy. But I'm really proud to have been a part of turnaround of that kind of brand that touches so many people's lives.
A year after I had started it was before the rest of the story was written about KFC, Novak called me and he was like, hey, are you really going to bring the colonel back? And I'm like, yeah boss that's the plan, and if it doesn't work you'll get a new CMO one day. I think he respected that. I think people know me that no, I do take risk but usually it's a pretty well thought out risk and we understand contingencies if those things don't work. But that's probably the thing I'm most proud of of KFC is, this is a great brand and it should be on center stage and be a leader in the industry and we're getting back to that.
It was a wild idea to put the colonel the way you guys did it. It's just so cool though, it was this retro cool kind of thing. I love it, man, it was a brilliant, brilliant idea. I think it had a lot of... obviously had a ton of social media engagement, a lot of noise around it. In a prior life, didn't you work at P&G, or didn't you work... someone has always told me this, so if you didn't do this just tell me you didn't, but that guy and the horse, and the deodorant, did you have something to do with that in the prior life?
There was a lot of people that were involved in it. It was the marketing director on the business when that was conceived. So I can't take credit for coming up with the idea, or just, I was leader on the brand when that happened. But yeah, that's one of the most famous advertising campaigns in the history. It's a great example that brand, and I shared it with actually the franchisees on day 17 at the convention when I started at KFC. Is the idea that this was an old entire brand but had real great DNA about that brand. Like the thing about being a man and the idea of tradition and all those, and what does it mean to smell like a man? Those are things that are really important, even today even when it was conceived way back during World War II, and we just had to bring it back in a more modern, interesting way.
Clearly, people my age on the hairy edge, do we really understand their ads, right? But if you're in anywhere from the 12 to 40-year-old scene, you see those ads and you just think it's a really modern contemporary brand. You get the idea and the benefit of the brand, and it's definitely resuscitating. And there's no reason why these legacy brands like KFC and Pizza Hut, they have such strong DNA. Those values and those things that they were built on, they're timeless, and you see that. When you bring them back and you bring them back to the things that they were known for but in a modern way the business responds. And I think we've seen that on both businesses.
It's interesting, one of the questions here is what's your biggest challenge? I know it's a banal type of question to ask, but anything that comes to mind with either the brands that's been particularly challenging for you? I mean, getting up and putting your feet on the ground in the morning is probably an answer, but.
Yeah, challenges on both of the brands, I mean, they're legacy brands, they have huge humongous footprints, right. There's not a lot of standardization across some of the units. The strategy is usually not the hardest part of figuring out these brands, it's really about the execution. How do you get there over time, and how do you make sure that you're doing that in partnership with the franchisees who really know the business even better than the franchisor at times? And then just making sure that things are well tested but moving fast without being irresponsible with money or people's resources.
You always want to just make all the change overnight because it's clear what needs to get done, but it takes a while, right. So how do you move fast and still be patient? And how do you make sure that the things that you were a lot or have a high probability of working. I was commenting the other day, the guys that I brought over the Pizza Hut, the work there it's not an easy job at all. But we've already made a lot of mistakes on KFC that we don't have to recreate. We don't make them on KFC anymore, but we're selling off, deport them to this other brand. And just the experience and being able to spend time with the franchisees and they teach you the brand, makes those challenges a little bit easier. Because you've got large teams that want you to win and they'll do whatever it takes to help the brand win because they have a big steak in it too. So I tried, I think I'd say what the biggest challenge is.
Yeah. And it's interesting, franchisees are great place and they'll tell you their opinion real quickly, won't they?
Yeah, which is a good thing. I'd rather know it before it doesn't work.
And the franchise basis between these two brands are pretty, or have been historically pretty different. Now they're changing and we'll talk more about this, and those of you who have listened to some of the resources we put out know that KFC was largely a brand started by smaller franchisees, the colonel driving around making hand shake deals across the country with a small owner operator who was going to own one store location. And then Pizza Hut franchisees started in Wichita, Kansas and they took out big swats of the country and still to this day have less than a 100 franchisees. So managing the franchise basis is definitely different but the learnings are still the same, and the DNA of these people across these different brands are very similar.
So that's really neat, it's really neat. Well, let's see. Give us some highlights from your journey at Pizza Hut which has been a little more recent than what you've been doing at KFC? And what are you most proud of and biggest challenge? And same question, how's the brand position for the future?
I've been at about 16 months now on Pizza Hut as an interim president. And the first thing I'd tell you is, there are a lot of the same challenges I think we saw at KFC. Some things are different but at the core getting back to the things that make Pizza Hut great. So it's always been a brand that's had iconic pizza's that are built on really awesome customer insights, and we would set the trend on things. So for example, we want to get in the delivery and carry-out, versus just dine-in. So they invented this idea of a pan pizza that retained heat that could be off premise at a much higher quality than a thin crust. A lot of people think we're only pan pizza. The first pizza on Pizza Hut was actually a thinned crust pizza and was really designed for just the dine-in occasion, right.
We did research and found customers don't like eating the crust because it's boring, right? So we started stuffing cheese in the crust so that you'd eat it all. And that was 25 years ago. And then we have competitors 25 years later and will copy, and we've got to be onto the next thing like Detroit style.
So one of the things I think that we've done a really good job is spending time early on with the franchisee leadership, in Wichita where you just said earlier that the brand was boring. To understand what makes this brand so special, and then how are we going to take those things and make them modern and contemporary and relevant again? I think we've had some obviously tailwinds because of COVID in the pizza industry, but I think if you're talking to Pizza Hut franchisees some of that growth also was from the strategy changes and that's exciting.
That's like to me to be able to come in and take the things that we've learned in another business and be able to rapidly apply that to something that is similar but different, and then having really good results early on. It's been really exciting. It's energizing to see that.
And then vice versa, there's tons of things I'm learning on the Pizza Hut business, especially in the e-commerce space and apps, and all the things that we need to accelerate on KFC, and it's really helping me as a leader and helping our teams because we don't have to repeat the things that we learned on Pizza Hut. So how long will this happen? There's got to be an end to it, so I'm not saying that this is a sustainable thing long-term. But certainly the value that we're getting on both businesses, at least from my lens has been really, really awesome.
I think it's a fantastic point. For years Kevin, and this isn't for you to comment, this is just Rick talking on the side, Rick's own opinions here. But for years I've been of the opinion and I've told people this, somewhat in jest but somewhat seriously that I probably know all the franchisees across the three brands, and probably maybe the only person in the world who knows basically all the franchisees in KFC, Taco Bell, and Pizza Hut. And the reason why I would always say that is because these businesses were so segmented away from each other, right? And there's really nobody who knew the inner workings of the different franchisees within the sister brands. And many times doing deals and things, you see it much more stark than that, that they're territorial. And I love what you're saying about KFC and Pizza Hut, garnering the learnings from the different brands and applying them across one another.
Because to your point, I love KFC, I've loved it ever since 1999 or 2000 when I started working there. But Pizza Hut is a fantastic iconic brand. I love the fact that you're sharing from the top-level, sharing learnings in franchisees input across the brands, that's awesome, just really awesome. It can only make us stronger, it has to be that way.
So we'll go on to a couple more questions. What about this darn chicken sandwich? I mean, gee many Christmas, it was... I was down in Miami, and of course we do a little bit of business in those brands but we're very loyal obviously to the KFC brand in the chicken space. What Popeyes did with a Tweet and some good products were just amazing. What do you think about that, and KFC, and the chicken sandwich?
Well, I think there's definitely a trend in the industry right now where customers are willing to pay for a high quality product, right. I for years it was always this mindset of like, we're always going to have very, very sharp value and that's going to be on air 52 weeks of the year. And you still have to have great value but there's two parts of the equation of value. There's price which is one, and then quality, right? Quality of what you get for the price.
Then I think the Popeyes stuff just eliminated the idea that that's still really true. You make great products and you price them right and people will come and you'll see incredible growth. At KFC we just have to... we have a vision, we want to be a brand that people continue to trust and want of frequent. We have four pillars on that and how we're thinking about being more and more competitive in the market place. One is, we need to have a more relevant menu for modern needs of customers. We call it modern comfort, right. So we've always been a comfort food but people's version of comfort food is different. So if you're an older customer comfort food was fried chicken on Sunday's. If you're a younger customer it's probably burgers and chicken tenders, and chicken sandwiches, right? So we have to evolve our menu to meet the needs of a modern customer while still not abandoning our core customer which still continues to pay most of the light bills.
And the second thing we're working on is a safe operational example, which means secure, accurate, fast, and easy. Do you think these are the keys that we have to be consistent on at all 4,000 KFC's no matter where you are in the country, no matter what time of day you come. You always get a safe, accurate, fast, and easy experience from us.
The third is, we are on a mission to finish the update of our estate. And we get to a modern American Showman, we call it the American Showman remodel. As well as build new stores. And then lastly we've got some investments in technology in our business that will help us future proof it.
What I'd tell is, I think we have a really focused strategy. Popeyes' going to do what they're going to do, we're going to do what we're going to do. That said, we have a kickbox sandwich we just launched that I'd encourage everybody to go out and get, but that is part of becoming a more relevant brand with a more relevant menu.
I think it's a great answer. Now I'm going to make a comment that's going to divert a little bit from the comments you just made. But for those of you who are listening, I'm really happy because when most of the time when we're doing these webinars and things we're talking about things like EBITDA, and tax, and legal issues, and cap rates, and real estate values and these things. But it's really refreshing and for those of you who are sitting in New York or wherever you might be in a tall building listening to other data and information, it's more than just EBITDA when you're talking about these businesses, right? And listen to what Kevin's saying about the importance of the customer and the importance of the products. And that has to be part of what gets you excited about this type of a business and if it doesn't then it's just going to look like any other type of business that you might invest in. And that ultimately will make it less meaningful and you'll be less successful at it. So sorry for that left turn out of nowhere.
But you know Rick, it all comes down to formal economics, you're absolutely right. The reality is, if it wows the customer and you do it in a smart way you're going to improve those formal economics. But if you don't wow the customer it's going to go in the wrong direction, right? But at the end of the day, you need a business that's really going to resonate with the customer that makes sense from a margin's perspective and a labor perspective. It's all connected, right, but if you don't wow the customer I think it's over time going to be real tough long-term to have good formal economics.
That's right. Economics have to come close second to the customer or else you're not going to have customers. But they all work together.
They all end up in EBITDA, so I can... one of the reasons I listen to your podcast is to learn more about that stuff.
It's funny, my kids were talking to me the other day they said, dad, the word you say the most in your life is... and I'm thinking, uh-oh, what are they going to say? I hope they're not saying a cuss word or something else, right. They say, EBITDA, you say EBITDA all the time. And I said, well, do you know what EBITDA is? And neither of them did. My 16-year-old almost got it right. I mean, she's pretty sharp. She's like, earnings... then she started fumbling. My son was like, I don't know what it is.
So back to another question. Pizza Hut, I mean, that's what I think of the Pizza Hut, right, it's a marketing giant that's always had great products. You talk about 25 years ago with the stuffed crust pizza. I remember David Robins and I went to the Naval Academy, David Robins turns a pizza around backwards and he eats it and we're all shocked, right? And I know this is a part of what you do really well, so how do you build upon that with the future?
Well, it is about... the core of Pizza Hut was, when it was started pizza wasn't even a thing. So the Midwest they didn't really know what pizza was until Pizza Hut created a version of pizza that became the gold standard for pizza, right, which was this thin crust pie that they had invented. And then over the years they invented these other pizzas to respond to changing customer needs. When Pizza Hut's at its best they're creating and marketing pizzas that you can't get anywhere else, literally anywhere else. And we're going to bring back some of those favorites and re-promote them like pan and stuffed crust. And then we're going to create new ones that you haven't seen before like the Beyond Sausage pizza. We were the first national chain to bring up plant based protein pizza nationally to market.
Then most recently we had incredible success with our Detroit style LTP which that was one where it was like, it reminded me a lot of Nashville Hot on KFC where most people hadn't heard of that product, unless you lived in Nashville or unless you lived in Detroit. You could get a rendition of it in food circles. So whether it was in New York or LA or Chicago, everybody had a good rendition of Detroit style or a good rendition of Nashville Hot but nobody had taken it to market to really democratize that trend.
It's something that's funny I learned in the beauty business when I worked there... I worked in CoverGirl Cosmetics for 12 years and that's a drugstore brand where you buy a mascara for five bucks, right. But anybody that really knew that industry you always watch prestige, so you watch where people would go into a department store and buy a mascara for $35 and say, what was so special about it? And say, how do I bring that trend to the masses at an affordable price across 20,000 food drug mass grocers where you could just blow it out, right? And this business is... there's some of that same similarity in that people want familiar discovery. They don't want the same old thing, they want what's... but they don't want something that's too crazy, it's only a little wrinkle.
And then those two examples, those who just had little bit of wrinkle that created excitement back in their pizza experience or back in their fried chicken experience. Then we've done a great job of that with both the Beyond stuff, and then the Detroit style, and we got a bunch of stuff in the pipe that we're working on that I get really excited about pizza. Now, there's more to the story of Pizza Hut than just pizzas and we'll get into that. I know you have a couple more questions but that's been the heritage of the brand and I think that will continue to be the thing that separates it in the market, versus our two other major competitors is that we market pizzas that you can't get anywhere else that are really based on very finite customer needs. And when we do that well with great pizzas we went, so I think it's going to continue.
That's fantastic. Fantastic. I'm a big Pizza Hut fan and you may not know this Kevin, but I think the numbers escape me but probably over the last couple of years Unbridled has maybe sold 600 Pizza Huts for 13 or 14 franchisees across the country. And the Pizza Hut brand is one where just by nature there's fewer franchisees, even if you take in NPC and Greg Flynn acquisition now. The average franchisee has over 50 restaurants. So it creates the perfect type of investment for someone who comes in from the outside who wants to be a franchisee and wants something large enough to be able to operate with a professional team. KFC's not so much that way. Even though there are opportunities like that, but the audience that we're talking with here probably largely likes to hear the Pizza Hut story because those are the types of investments that they make, they're going to be interested in.
You've seen it in the franchisee base, right, in Pizza Hut over the last couple of years? And lots of them predated you by a year or so. All the larger groups that have been getting into the systems of, thanks for your focus on Pizza Hut too. And it says, Pizza Hut is in a time of transition to better digital delivery assets, new franchisees. The future for strengthening the pizza brand, I think part of this you've already answered. But anything else you might point out?
Yeah, [inaudible 00:22:44] two other things that we're working on that I think will really unlock a lot of growth on Pizza Hut. One is, taking our technology to the next level. We've made some pretty big investments in technology, and we've made some pretty good improvements in technology. But we still have an opportunity to do more frictionless and reliable for our customer. Which basically means fewer clicks to be able to order a pizza, and just making it a whole lot easier to navigate.
The reality is our app and our website and our mobile website, that's basically our storefront now for the customer. So we're partnering right now with the franchisee leadership to make sure we have world-class digital user experience, as well as upgrade the packer house technology which is going to just make it easier to run a Pizza Hut. So I'd say that's one big pillar in addition to the pizza strategy I talked about earlier.
I think the other one is we've got some work on upgrading the estate, right. You have been baked into your question about more delivery assets. Clearly over time the business continues to move to more off premise carry-out and delivery. And tend to have faster payouts with our delco units or delivery carry-out units. But that said, coming out of the pandemic we're also going to have to make sure that we're ready to welcome diners back for those restaurants that still have dine-in. And some of those restaurants have decent amount of mix in dine-in, right. So we're going to have to continue to evolve the estate both to migrate to this more of this off premise focus for some of these stores. And then make sure that we still have a very relevant dine-in experience for those stores that have such a big dine-in mix that even post pandemic there are things that we're going to have to support.
But it's an exciting time. I mean, there's a lot more liquidity in the system right now based on the products that we've made, on the formal economics of the business, and the trajectory in the business. I think there's a lot of things that you're going to see from Pizza Hut that are exciting in terms of upgrading the estate and getting back to building again. Because the people that are in our system know that we're a brand on the way up right now, and it's an exciting time to be a part of the brand.
That's great. That's great. I didn't know about the thin crust pizza. I'll tell you a quick story, we did sell a 110 Pizza Huts I believe for Bob Geist too as one of the original franchisees in Wichita. And he was I think the assistant greens keeper or working watering the greens in Wichita state next to the first Pizza Hut.
Wow.
And I said, well, Bob had to... I always ask people this, how'd you get involved in your brand? And whether it's KFC or Taco Bell, whatever brand it is, and he goes, well, I was on the 18th green at whatever clock in the morning watering the green. And I was looking over and there was this line on a Friday night of all these kids going in to eat pizza and drink beer at Pizza Hut. And so he said, I right away wanted to get involved in the brand.
He was a student at Wichita State. And he said, and when they asked where I wanted to do it he said, well, the kids like it so much, I want to go to a place with a lot of colleges. And you know what state he came up with? He goes, North Carolina, he goes, they play a lot of basketball. North Carolina, and North Carolina State, Duke, Wake Forest, all these schools. I mean, isn't that a neat story? Just stories like that are crazy.
Oh, they're amazing. The former chairman of the IPH board is the Pizza Hut board, Bill Walsh, that was in 2020 they rotate every year, so he ended his term last December. When we first got on the business he actually had us fly out to Wichita just to show us the brand with a bunch of other franchisees. And he took us to that first Pizza Hut that's now a museum on Wichita State campus. Took us through the history of the brand, what made the brand tick. He tells a lot of stories about how he got involved with the Carneys and worked in the original Pizza Hut and that's awesome. All these brands have amazing, amazing histories, and it's really important to get in touch with them so you understand what makes the brand tick and what made them successful. Because guess what? It's probably going to make them successful in the future if you find the ways to contemporize it. But Bill's got a million amazing stories and every time I see him he tells me a new one.
He's got man. That guy's got more stories than a book, man, I tell you [inaudible 00:26:41] he's awesome. He's awesome. Well great, this is going great. I didn't know the answer to these questions that you're answering so I'm learning alongside everybody else here. Next one would be, how are KFC and Pizza Hut different from a franchisee in cultural standpoint? Maybe we touched on this a little bit already, but any thoughts on that one?
Well, I think your structural point's right. There tends to be larger franchisees with more stores in the Pizza Hut system than the KFC system. There's a whole bunch of reasons of why that is but over time that basically it's played out. So I think that's probably the biggest difference to be honest with you, because I'd probably view them more similarly than different in that they have similar views of the business. They're looking for long-term profitable growth. They want to be a part of co-designing the programs because they have a lot of unique insights because they run all those restaurants that we don't have, or we try to acquire, right.
Labor in the operation continue to be a focal point, so how do we eliminate work and pantries used that don't make the guest experience better or don't create value for the guest? How do we make it easier to run the restaurant but still maintain that high quality that the guest expects? There's always a big push on both brands about how do we keep our core products as good as they possibly, and competitive as they possibly can be within the marketing structures of the business?
And then even though on things like new found things like digital. Both are pushing for aggressive digital adoption because they're seeing how it's been growing people's businesses and we want a piece of that. Clearly Pizza Hut is a little bit ahead in the game because it's in the pizza business. But you see a lot of the same themes and it's really about long-term sustainable business growth, and that's my intention. I think that's what probably one of the reasons why I get along with the leadership of both businesses, is I have that same as a young franchisor I have that same mindset which is, how do we make sure that we're growing your business for the long-term in a way that's sustainable and profitable so that you'll want to continue to reinvest in the business and help grow our mutual business together? So actually there's more similarities than differences with the exception of that structural point that you brought up earlier.
Well, and I'm thinking about it from perspective too. The way I know these franchisees and their lives and their kids and their dogs and everything else. I mean, despite the fact that there is... exempting the largest KFC franchisees, there's a different in terms of size, their DNA is really pretty similar. I mean, these guys they're middle America type of people with similar values and similar thought patterns, similar ways to run a business. So I think even from the way I see it other than just the unit count of the average franchisee there are a lot of similarities just by who they are.
And it's interesting, there's not really that much cross pollinazation between the two franchisees. I mean, I'm thinking of... In my mind I think of two, maybe three who really own both brands, not just like own a CPX or have a Pizza Hut license and a KFC. Or someone who might have a KFC and have one Pizza Hut. But there's not as much cross pollination of the two brands which is interesting two, but they're very similar in that way in the way they grew up.
Yes. I think there's an advantage certainly to if you're going to own 50 stores to be in one concept versus two. I mean, there's scale there, there's ease of operation and training, all that stuff is important, right? It's when you get to those, the bigger franchisees like I think you brought up Flynn earlier where you're just not going to have that kind of exposure in just one brand. But you're going to have fairly larger organizations across all those businesses. Someone asked me that question the other day, that exact question which is, how do you know... are you better off doing a couple of brands or just one brand? And really, I think there comes a point where depending on how big you are, you're better off probably focusing on one brand and then you get to be a size of Flynn, [inaudible 00:30:29] can't possibly be one brand, right?
Yeah.
An interesting observation that you see from your lens that there isn't as much cross pollination as you would expect because it's all within a young family.
Yeah, that's for sure. And I think to your comment, I think it is your comment from a minute ago is discussions that I'm involved in basically every day. Which is, how should you grow in a franchise brand? And I pretty consistently give a blanket piece of advice which is to pick one brand and grow with it to a certain scale, and then to think otherwise. Because if you are going to be a small franchisee of multiple brands it's really difficult to do. It's very difficult to know and to operate that way.
I've got an uncle who owns like two Hampton Inn's, a Days Inn, a Wendy's, a BP, a Huddle House, a Steak House, all at one exit in Kentucky. And I look at him and I'm like, I don't know how on earth you can do all of that. How do you keep up with all of the FDD's and all the procedures and operating manuals and training people? It's a tough thing to do and for that reason I think get involved in one brand, grow in one brand. If you have the right chocks, get into another, but I think it's a good point.
How about products? We love new products. Anything you can speak about? I know a lot of the stuff you can't speak about, but any new products or ideas across either brand that you could talk about?
I can't really tell you about future products. We just launched our new Kentucky Fried Chicken sandwich which is super exiting for us. A critically important segment in the population. 40% of chicken servings are chicken sandwiches, huge upside for us. We've launched our fries during the pandemic which have done quite well and are now our number one side very quickly. Which we'll similarly make us a more modern brand with a portable sandwich. We're doing a lot of work on tenders and sauces right now.
On Pizza Hut I think everybody saw the Detroit style, did really well. I wouldn't be surprised if we bring that back when we're ready to bring it back. We've got another huge pizza coming in May that I can't share that will feel new to the world, which is super exciting.
The way we think about new products Rick is, it all comes down to improving EBITDA. So there's four lenses that our teams work on on both brands. One is, does it resonate with the customer? Because if it doesn't it's not going to sell, right. Two, are we able to execute it consistently across thousands of stores? And so the builds and how things are put together is critically important. If it's too complex the answer is going to be no, it won't be able to be consistent. And it doesn't matter if it tastes great in the food kitchen here. If we can't execute it consistently across thousands of stores it's not going to matter.
Is it profit accretive? Ideally that's through both margin expansion and incremental customers coming into the restaurant for that new food product. And then what I call I've coined as term pantry SKU's responsible. So is any added complexity in pantry skews worth the size of prize? So Detroit style is an example when those were three new SKU's, and so it had to be a sizeable layer for us to be excited about it, right? Verus like if you're just bringing in a new sauce, the bar is a bit lower on what needs to deliver. It starts to be significant and drive sales but the size of price, the weight of it shoulders on that initiative isn't going to be as big.
And we do those four things, the franchisees are going to be excited because they're going to be making more money and selling more pizzas or selling more chicken, right? So a lot of times we over complicate innovation and I think if you do those four things right, it's my checklist when I look at plans that the teams bring to me. We're going to win and we're going to continue to see new innovation in this category because I'm not the only one that knows that formula, a lot of our great competitors do too.
I love that. I love the comment about fewer SKU's and using existing products, and having the threshold bringing in new things. When I moved to Florida last year we lived in Kentucky for 20 some odd years and you start moving and you realize how much you accumulate. It's just embarrassing. And sometimes I look at the menu boards at some of... heck, KFC's been a guilty party over the years. But any brand, you go look at the menu boards and dag on it you can't figure it out if you had a PhD. And so the menu simplicity is a good thing, a good thing.
Another reason why you got to get you uncle out at some of those concepts.
Totally. Totally. Totally. He ain't going to listen to me. But yeah it's interesting, totally so true. So how have the KFC and Pizza Hut brands adapted during the pandemic? I had a couple of email questions about these types of things. So not only how have you adapted or evolved during the pandemic but has the change that's going on going to last forever, or what's going to happen?
Well, we think that some of those changes will last forever. For example, if you get used to ordering digitally, are you really ever going to go back to the slower way, right? For example, in pizza are you ever going to call another pizza restaurant once you've set up the app and used it and saw how easy it is? Of course not, right. It's like going back to a horse and buggy instead of using the car.
So I think some of these things will change forever, right. Certainly the digital adoption has been there and I think our competitors know. That's why you're seeing, I call them extremely competitive activity trying to get folks into digital adoption, whether it's just a member of your CRM program or an actual app download. But once you're in that ecosystem and... well, I don't know if you guys have probably seen this but there's a clearer direct correlation the deeper you get in the ecosystem the more you buy from a brand. And everybody knows that and so everybody's on a mission to get you further down that path, right? I don't think that's going to change.
I think the innovation that we've seen in access channels across the businesses. So for example, on Pizza Hut we were the first national player to stand up curbside carryout. And so why is that a big deal? It's like, well, remember that first couple of months during the pandemic, people were afraid to go into stores. And being able to stand up, a quick way to be able to click a button on your app and have someone come out and just load it into your trunk or load it in the back of your car without ever having to leave your car, the safety of your car. You'll say, well that's not that big a deal, you can go to the drive-through. Well, Pizza Hut doesn't really have drive-throughs. So we have 1400 stores that have drive-throughs and we've now rerouted the app for those stores, you'll go through the drive-through instead of doing curbside carryout which is drive-through is much more labor efficient, right.
But that's an example where I think in general this idea of ease of access, whether it's order ahead and quick pick up, getting the drive-through to go faster. Using drive-throughs in pizza, we certainly have a lead versus our competitors on drive-through windows. All of those things to make it easier to either go faster or to not have to leave your car. I think a lot of that will be here to stay. And as long as we can continue to innovate against that and be ahead of the curb I think we're going to continue to win on that, right.
KFC, the example for KFC, they're in the pandemic that change was, one, getting the drive-through to get even faster. So we just wanted a word, I forgot the... I know there was a word, but some company did this third party and this study and published it. And it was all about drive-through speeds and we were always pretty good on that list and we actually improved, even though a ton more business is going through the drive-through because of the pandemic. A lot of lobbies were closed or people didn't want to go in the lobbies for carryout, right?
And then the other thing was the digital adoption even in fried chicken. Our mix went up exponentially overnight with the stand up of these aggregators and then having our own KFC.com site. So I don't see that retreating, I see that actually getting bigger in 21 and building off incredible growth in 20. So I think those things are here to stay. Is some of the stuff going to retreat as restaurants opening? Of course. But I think the habits that have changed in terms of how you order, how you pick up your food. I think it's hard to go back if you've already aligned up on that. Then I think the smart players in the industry will take advantage of that and continue to position themselves for winning.
I think it's great insight because the horse and buggy versus the car insight, we were forced to... our family learning these apps that we otherwise might have pun it down the road and not had to learn. And now that we know them and learn them, we don't see ourselves going back to the old way, right? So that's a really good thing. These brands, for those of you who don't invest or not own KFC's or Pizza Hut's, just broadly speaking, both platforms within QSR have done really well during the pandemic. KFC was a very portable, very transferrable bucket of chicken if you think of it that way that could feed a family, that carries and sits well, and you can hold it for a little bit of time. And that was probably advantageous.
Pizza Hut in the pizza brand it's obvious that they did well during the pandemic too. But this QSR increase in sales and profits was very uneven. You might be interested Kevin that a lot of the burger brands, some of them are kicking butt but some of the other burger brands just really saw no lift at all during the pandemic. Some of them actually retracted a little bit. Maybe a lot of it was because of the breakfast performance, some of it just because of the competition. But a very different-
To me there was like four different vectors on that, whether you did well or not. One was just the type of food that you're in, right?
Yeah.
Part in our two brands they're designed to already be eaten off premise, like it's a bucket of chicken and sides that are already packed out to be able to... they're essentially meant to be brought home and unpacked and eat at a dinner table, or in front of a TV. Pizza certainly the same way with the pizza box and the way the pizza has been constructed, it's been designed to be brought home and eaten. So I think that was one vector of whether you did better or not, if your food was already set up for success, or could you quickly pivot to make your food set up for success?
Another one is I think your access channels. So certainly delivery transactions because they're in the early part of the pandemic, like I don't want it in my home, right? Well, that's a pretty easy way to get food. If you had deliver channels set up that were priced competitively and certainly the major pizza players have very competitively priced delivery channels you're going to win in that.
Drive-throughs another one where if you have a drive-through you don't have to leave your car, the safety of your car, it's much easier to get your food in a more preferable way. And some of the concepts I had multiple drive-throughs did even better than ones that just do drive-throughs, right?
Then I think you have just the reaction to the pandemic. And the bigger brands tend to do a better job of being able to get the PPE out there, getting really clear on the types of things that we need to do in order to keep guests and team members safe. And I think customers were really noticing that, especially early on in the pandemic were much more noticing. Verus maybe some smaller restaurants or [inaudible 00:41:05] independence that didn't have that kind of slick way of making sure that the teams were safe and the customers were safe, right?
And then just think evolution of the menu, and just making sure that you were on top of bigger group meals and people were eating together that weren't normally eating together. I think some of that last one will probably attract. But I think those were the four big vectors, and I think you mentioned day part because it's probably a fifth. Certainly if you were dependent on people going to work for your day part, that was going to be challenged and that will likely come back as people go back to work. At least most of it depending on some flex working. But I think that was really what drove some of the different concept results. And fortunately for our two concepts we were on the better end of a lot of that.
Thanks for sharing. For sure, 100%. 100%. Both brands have been beneficiaries, so can you keep them? Can you keep them? Can you keep these incremental customer visits, these incremental customers, the sales momentum? Is it broadly speaking something that can happen or not?
I think some of it will stick, and some of it we can do some things to make it stick, and some of it might retract. So the digital stuff we just have to continue to put gas on both of the brands on making sure the app and the website and everything is working as sharply as it can. We just stood up in KFC, we just launched our first ever app in the U.S. and it's had incredible success so far. All new website to just making it sure that the digital channels one, have the correct funding and the correct infrastructure, and we're driving them through all of our channels. I think that's going to stick and continue to grow.
I think this idea of different channels of access that make it easier or faster to get your food the way you want it. So for example, I think on Pizza Hut we have 14 or 1500 now drive-through windows which are much easier to execute than a curbside carryout. Then I think even both of those channels are likely here to stay on pizza. We already have the drive-through on KFC. The big opportunity there is really about how much faster and easier can you make the click and collect experience, or the order ahead and being able to deliver the food to the customer at the restaurant faster? But I think we're on top of that. I think we're going to continue to grow in that too.
Then I think from a development stand point, I think you're going to see probably some smaller dining rooms, right?
Yeah.
More restaurants that are designed for off premise and-
Double drive-throughs maybe, two drive-through lanes potentially I mean?
If that speeds up the drive-through, absolutely. But I think that's going to create valuation because those restaurants are easier to operate. They have lower OPEX, so traditionally they tend to be a little less expensive, the bill. And I think it'll allow more growth because you're just going to be able to be in more spaces, right?
So we're very excited about the future, even with some of the retraction of some of those tailwinds. There are still a lot of those things are going to stick for a long time.
That's great. I think it's a good answer. We've got 10 minutes here, and so let's pick a couple of these new unit growth. What do you see happening on that front with KFC and Pizza Hut going forward?
Well, it's certainly of interest to me and our company. That's the two big sources of growth for our businesses, COGS growth. same-store sales growth, and then new unit growth. The one thing that I really charge my teams on that will help with both of those is just continue to drive formal economics, right? The more EBITDA these stores can spit out the more people will want to build versus just buy, and the bigger our system will get. And so we're squarely committed on that.
On a secondary note we have incentives on KFC right now, the KFC franchisees are well aware of that are excited to help make paybacks faster. We're working on something similar with the Pizza Hut system. Which already starting at some pretty good paybacks and really accelerate that, right.
So I think between really being laser focused on sustainable growing formal economics, and having the right new built packages with the right incentives in place. I get very excited about the future of growth and we're seeing I from our franchisees. I mean, they are really excited about growing this business both organically within the existing stores, as well as the new stores.
It's great. I love your answer about wanting to build the unit economics in the way that people want to build more units. That's like the-
The bold goal is, how do we make very unit cheaper to build then to buy the existing one? Which I know you probably don't love, but-
What are you talking about, man?
... see it's a really good mantra and it gets my team focused on what's important for the franchisees.
Well, especially in the Taco Bell space, Kevin. My goodness, to buy a Taco Bell. I mean, the prices sometimes on a per unit basis are so high that you could build three stores.
For that price.
If you could find the...
My [inaudible 00:45:46] is going to give me a kiss on the cheek but it probably is cheaper to build than buy right now in Taco Bell.
It's true. It's unfortunately true. Well, here's a couple more. What advice would you give to a potential franchisee of either brand who may be listening in and isn't a franchisee right now?
I think it's about getting involved in the community of those brands. There's some national groups that work closely with the corporation, but then there's... they typically have regional associations that you get a better sense of what your challenges are in your area. One of the ways I've learned the business over the years has really been traveling to all those different regions to understand how the different economics and business challenges work, whether you're one the West Coast or the North East, or the South East, or wherever.
I think if I was going to be an owner and put my own money into this business, I would really want to understand my peers and that I'm going to be working with. And how do they work with the company? Is it a positive relationship? These are all really important things if I want to be in a brand for 10, 15, 20 years. Understanding how that all works and do they have a real voice at the table? So that's be probably... I think it's an important thing. To me it's not just an investment like buying a security, in that you really... if you're the key operator making sure that you're a part of that community, so you understand what you're getting into. And understand how do you get your... what needs that you have articulated so that they become a part of the national agenda.
I think it's really interesting. People come to me all the time asking which brands are the most difficult, adversarial relationships with the franchisees, franchisors, and which ones are the easiest. And I always do one of these numbers. If I'm on the phone I just say, over here you've got this brand, over here you've got this brand. But I've always talked about both KFC an Pizza Hut in it, ebbs and flows based on the performance of the brands and the management teams at the corporate level. But you guys have done a good job. I mean, I would say, overall if this is really, really good relationship with the two and this one's really bad, you guys are way over on this side relative to other brands. And I think that's important for people to hear who are potentially investing in the brands.
There's been a lot of consolidation that's happened. And a lot of young franchisees, dynamic folks hopping into the brand and getting involved in leadership at the IPH, FHA level at the KFC level as well, a KFC level. What do you think? Think it will continue? You happy with it?
Well, we're not happy or sad with it. At the end of the day we just want operators that are running great restaurants and have a growth mindset, like they'll want to re-invest back into the business whether it's for the existing business or to build new stores. If you're a great operator and you have a growth mindset, we don't care whether you're a five unit operator or a 50 unit operator, right. As far as whether we think this will continue, I mean, likely there will be continued consolidation. You don't have to ask me that question, you see it yourself, right? But from our franchiser point of view, if you're a great operator and you have a growth mindset we're excited about having you in our family.
I think that's a great point. That's a great point and it's a great piece of encouragement for the smaller franchisees. Because there is a mindset out there that franchisors, not you guys but just in general, want to get rid of the smaller franchisees because they're a pain in the butt. And everyone feels it and so it's refreshing to hear you say that
We don't want to get rid of any franchise, we want franchisees that are great operators and have a growth mindset. That's how we think our business over the long-term will grow.
That's great. That's great. Fantastic. Well, let's see, I'll ask you a couple of questions personally. We only got a couple of questions, but pick one of these questions, one of these four questions. Which one of these do you think to give us the 30 second answer?
Lunch time KFC and Pizza Hut what would you order? That's like asking me, do I love my daughter or my son more? I'm not going to answer that, come on.
Although they both try to get you to say them, right? You know what I mean? So that's the other piece of it. KFC's like, you love us more, you love us more.
Yeah, and then you have some people say, when are you going to do a fried chicken pizza? And the answer is, likely never. So [inaudible 00:49:46].
Oh, that's great. That's great. Well, what would you be doing? Would you be playing, would you be on the tennis circuit if you weren't playing?
Yeah. I'd probably be in some kind of service industry. I love serving the Yum! Corporate, I love our organizations, I love serving the franchisees. It's a very sincere answer. I probably get that from my mom. She was just that kind of a servant to our family and to her friends. That gets me excited. I get excited seeing the sales report or seeing how a new item does. Or when a franchisee takes me aside and just like, man, we really killed it on X. That's exciting for me, right. I love this business because we're of service to so many people. So it would be something in service I think because I just enjoy it.
It's a good answer and it's something, if you're a family office guy listening to this. What you're going to hear from Kevin, I'll just go ahead and say it is, he's sounding like someone who rolls his sleeves up and wants to run and operate a business. And that makes a big different as opposed to someone who might fly in with a big degree and a bunch of big, huge corporate kind of speak but doesn't want to roll their hands up and get dirty in the business that they operate on behalf of the franchisees and behalf of the brand. I think it's a big deal.
Let me ask a couple of these questions, 30 second answers. Ready? What's your view on younger customers to make them brand loyal in Pizza Hut? These are all Pizza Hut... well, there's one KFC, but we already answered it. Young people.
I think that young people we got to continue evolve our digital channels, that's obviously their preferred mechanism of ordering. I think we got to get more contemporary and modern with our brand voice. I think we just launched this new campaign with Craig Robinson, which is the perfect sweet spot of the spokesperson. Because people my age know him from The Office but people my daughter's age know him from The Office too, because Office is the most watched stream show in the history of watch stream shows, right?
Yeah.
So doing it in a very distinctly Pizza Hut way, if anybody has seen the ad. It's talking to them in a way that's more relevant. It's making sure we have pizzas that they get excited about. So things like Detroit style are clearly on the cusp of internet food culture and then making sure our digital channels are easy to access.
We see one of our key competitors in pizza has a great relationship with young people, and it's probably because their digital channels are just very, very good. And there's no reason why we shouldn't have something similar.
Yeah, that's great. That's great. A lot of this is technology driven, and I'm frankly myself hearing this from you Kevin and realizing that I probably underestimated the importance of it. What about labor shortages? Minimum wage increases, how is that going to affect maybe... this is a long question, I talk about this a lot across a lot of channels. But automation, simplification, when you talk about higher cost of labor, labor shortages. It's been a big issue, right? Especially now in some brands where they're crushing it over last year with some of the stimulus money and there's tons of business and the franchisees... I got one KFC franchisee tell me that he's having to work in the stores and fry chicken.
I mean, it's challenging. I'm not going to share or quote, especially because I don't run the store. But I do hear that consistently from franchisees all across the country. Two things I'd say on that. One, we are committed to continuing to make the store easier and easier to operate. So Monica Rothgery, my CEO on KFC, Nicolas Burquier, her counterpart on Pizza Hut. They're constantly looking at ways to take things out of the business that will not impact the customer experience but make it easier to run the restaurant.
And that will continue and we'll just have to try to accelerate more of that or find bigger ideas that will help us do it. But likely you're not just going to automate or reduce the complexity based on the rate of increases in these things. We have to grow faster and I think the franchisees acknowledge that. We have to grow faster in order to earn the labor that's required, and then we're going to have to think of some new things to be able to attract and retain more employees.
You look across the country, certain owners have less difficulty with this than others. It's a difficulty for everybody, right, but the ones that I see are doing better at it have more out of the box things that they're thinking about. Whether it's retention bonuses, or sending employees home with a bucket of chicken once a week. Or little things that allow them to feel a bit more retained to that store than, I just make X an hour. So I think that's always been true. I think it's just going to put more pressure on us to have great cultures in the restaurant, have great programs in place. And then it's my job with my team to figure out what are the new things that we can bring to market, whether to make it easier to run the restaurants or to attract and retain more employees.
But I view it as a challenge just like any other challenge that we look at, whether it's inflation on COGS, or regulation, or whatever it is. We're just going to have to partner together with the franchisee leadership and find ways to really mitigate those challenges.
I it's a fantastic answer. And I'll just leave you with this before we say goodbye. I have a couple of comments here from Pizza Hut guys saying, thank you, we love your leadership. Product innovation verus discount, we love the product innovation. Greg Flynn wanted me to tell you that he's super excited to be a Pizza Hut franchisee. I mean, there's a KFC comment in there with a big thumbs up. So I just want to say thank you, thanks for your leadership in both brands. Really appreciate you being here today too. It means a lot to speak with you, and we're excited to see what the future holds and let's... like I usually say to folks, let's go get them, man. Let's go get them. Thank you so much for your time, Kevin, it's been an honor.
Hey, thank you Rick, I appreciate allowing me to share about the businesses. And I just want to thank all of our franchise owners and their teams out there. Honestly, I came to this business seven years ago, I didn't know anything about pizza or chicken, and it wasn't for those guys I would still not know very much about it. So they've been very generous with their time and I appreciate being able to serve all of them back.
That's awesome. That's a way to end it. Please look out for a replay and come to the website or podcast if you want to hear it. Thanks a ton, Kevin. Best to you and thanks everyone for watching.
Thanks so much, Rick.
All right. Y'all be good. See you.
Thanks so much for entering the Boiler Room today. You can find our podcasts on iTunes, Google Play, Stitcher, TuneIn, and Spotify. If you like these podcasts, please listen, rate, and review. I also encourage you to visit our website at www.unbridledcapital.com for the best franchise M&A and financial resources in the industry. Our website includes webinars, podcasts, videos, white papers, and a list of our past M&A transactions.
Please note that neither Rick Ormsby nor Unbridled Capital advisors LLC give legal, financial, or tax advice. These podcasts represent opinions that have been prepared for informational purposes only. We expressly disclaim any and all liabilities that may be based on such information, errors therein, or omissions therefrom.