Hankook Pizza Hut entered Korea in 1985 and popularized pizza. For more than 30 years, Pizza Hut has maintained its popularity, ranking among the top three in pizza sales in Korea. Pizza Hut is a brand of the American restaurant group YUM! Brands, and YUM! Brands manages the profits and store operations of Pizza Hut stores in Korea through Pizza Hut Korea.
Recently, however, there has been a lot of controversy surrounding the sale of Pizza Hut Korea. On December 15, 2015, the Korean Pizza Hut Franchisee Council (Franchisee Council), an organization of Pizza Hut franchisees, held a rally in front of Pizza Hut's headquarters in Daechi-dong, Gangnam-gu, Seoul, claiming that "Pizza Hut wants to sell the company to a third party without consulting the Franchisee Council at all." The franchisees' council wrote to Pizza Hut, "The sale is a matter of survival for franchisees and thousands of workers at the stores. Please reveal your specific plans for the sale."
Korean Pizza Hut said, "We have not considered selling to a third party. The information regarding the sale of our company is false." However, according to the data disclosed by each franchisee, the possibility of a sale of Pizza Hut Korea is not completely out of the question. The company's operating results and franchise agreements over the past eight years support the sale theory.
The first evidence that fuels the speculation is the company's steadily deteriorating financial situation. Since 2007, when Pizza Hut changed from a joint stock company to a limited company, the company has not disclosed its financial statements. According to the franchisees, the company's revenue has continued to decline from KRW 260 billion in 2006 to KRW 180 billion in 2009 and KRW 110 billion in 2014, meaning that in eight years, the company's revenue has dropped by less than half. Furthermore, according to them, in 2008, 2009, and 2014, the company incurred net losses ranging from tens of millions of won (2008) to billions of won (2014) and has been operating at a loss since 2007. Moreover, when the Korea Fair Trade Commission established the 'Model Trade Standards' for bakery and bakery franchise businesses in April 2012, Pizza Hut refused to apply the model trade standards, unlike Domino's Pizza and Mr. Pizza, citing the company's "poor financial situation as it has recorded operating losses for three years."
The recent downgrade of Salt Brands' credit rating also weighs on the sale speculation. In October 2015, Pizza Hut's Chinese unit announced plans to spin off as "Salt China," and in December of that year, international ratings agency Standard & Poor's (S&P) downgraded Salt Brands' credit rating by three notches from BBB to BB (speculative grade).

Who is the third party, the contract left blank

Ahn, who has been running a Pizza Hut store for 10 years, blamed the company's operating deficit on "excessive promotional activities." The "buy one, get one free" promotion from 2012-2014 was the main reason. "The buy-one-get-one-free event, which offered two pizzas for the price of one, led to a decline in the overall image of Pizza Hut and a loss of business," said Mr. A. "The headquarters forced the franchisees to run the event for about two years and did not support them. The deterioration of Pizza Hut's financial situation was expected from then on."
However, the company denies the ongoing sales decline and operating losses. A representative of Pizza Hut said, "The claim that sales have continued to decline is not true. It is difficult to disclose the exact sales and operating profit because we are a limited company." "Korea is an important and growing market for Pizza Hut International," said a spokesperson for Pizza Hut Korea. Especially in Asia, where the restaurant market is growing rapidly, Korea is an important country for Yum Brands to enter and grow in Asia. Therefore, neither Salt Brands nor Pizza Hut Korea is considering a sale to a third party."
However, a contract shared by Pizza Hut with franchisees suggests a possible sale. The agreement shows that an unidentified third party could assume the rights and obligations of the franchise agreement from Pizza Hut at any time (see photo on page 46). The agreement does not identify under what law or who the "franchisee" is between Pizza Hut and the franchisee, but it bears the corporate seal of Pizza Hut Korea and the franchisor's seal.
Mr. B (50), who has been running a Pizza Hut store for seven years, said, "When I signed the franchise contract, I left the name of the contracting party, date, etc. blank and stamped it. The entire contract is as thick as a book, so I couldn't pick out the contents one by one." "The contract seems to be a way for Pizza Hut Korea to avoid responsibility for renewing the contract after selling the business to a third party," he said. The allegation is that Pizza Hut will convert its business to a "master franchise" system, where it sells the business rights to another company or individual and receives a fee for doing so.
"According to the contents of the contract, there is a possibility of a sale," experts say. "The contract shows the possibility of selling to a third party," said Jeong Jae-wan, a lawyer at Hanbyul Law Firm. "It states that the headquarters and the franchisee (franchisee operator) agree to a third-party transfer in a situation where it is unknown which franchisee will be transferred at any point in time. In other words, it is a contract that makes it easy to delegate business rights to any third party. Even if there is a blank space, it is legally effective because it is stamped by the corporation and the franchisee."
"If the company claims that it has 'no plans to sell', it can be seen as a contract that is in line with that claim," said Lee Jun-young, a lawyer at Cheongmok Merchant Advisory Team. "This clause is not a clause that is usually included in a franchise agreement when referring to the standard franchise agreement published by the KFTC, and is usually included when a separate operating entity is planned to be established to promote the franchise business," Lee explained. Here, a separate operating entity refers to a third party that will transfer the franchise business rights of Pizza Hut.
Korean Pizza Hut declined to elaborate on the agreement. A representative of Pizza Hut said, "The relevant contents (of the contract) are not being disclosed as it is confidential information of management and business of Pizza Hut."

Franchising of all branches, a precursor to the sale

The franchising of all branches from August to December 2015 also supports the sale theory. Pizza Hut had 350 stores nationwide, of which 75 were directly operated by the company. However, in June 2015, the company announced the conversion to franchisees and the closure of 61 directly operated stores, citing "sluggish sales. The company announced that it would "leave the remaining 14 stores as direct stores," but then announced that it would convert all of them to franchisees. According to the Franchisee Council, more than 3,800 employees were laid off in the process of converting direct stores to franchisees or closing them, and stores with an initial cost of 200 million to 300 million won were sold for an average of 60 million won.
"Pizza Hut Korea is collecting more fees through franchising and weakening the power of labor unions through mass layoffs, making it easier for third-party companies to take over," said an official from the Franchisee Council. While the headquarters dispatches employees and is legally responsible for hiring and sales, franchisees are operated by individual entrepreneurs, so the headquarters has less legal responsibility and most of the fixed costs such as rent and labor are borne by the franchisee. On the other hand, the commission rate of store sales is higher for franchisees than for direct stores. In the case of Pizza Hut Korea, direct franchisees pay 6.8 percent of store sales (3 percent royalty from the U.S. headquarters and 3.8 percent commission from the Korean headquarters), while franchisees pay 11.8 percent (6 percent royalty from the U.S. headquarters and 5.8 percent marketing fee from the Korean headquarters) every month. In other words, as the number of franchisees increases, the amount of commission collected by the headquarters also increases.
According to franchisees, Yum Brands invested 600 million won in capital in Pizza Hut Korea in 2014 and took 10 billion won in royalties in the name of 'technology adoption fee'. One franchisee said, "The financial situation of Pizza Hut Korea is deteriorating, and domestic profits continue to flow out of the country. I wonder if the Korean Pizza Hut business will be able to stay strong at this rate," sighed a franchisee. "Pizza Hut's Chinese division franchised all of its branches last year and will be spun off as 'Salt China' by the end of this year, and it is expected that Pizza Hut will follow a similar path." "Pizza Hut should not just claim that it has no plans to sell, but should come up with an answer that can convince franchisees and employees."   
In response, Pizza Hut said, "The franchise conversion is a management strategy for business efficiency and has nothing to do with the sale." "The conversion of existing direct stores to franchisees is a policy consistent with the global franchising strategy of Yum Brands and a strategy to accelerate the growth of Pizza Hut in the domestic market," said a representative of Pizza Hut. "The expansion of franchisees is a rational move to improve our profit structure by enhancing management efficiency and improving competitiveness in the domestic restaurant market, which is facing saturation. We have not reviewed and have no plans to convert to a master franchise," he said.
Korean Pizza Hut claims that "the rumors of a sale are unfounded," but the evidence of a possible sale is mounting. It will be interesting to see how the company will respond in the face of declining sales, operating losses, and criticism from franchisees. 

Entered 2016-01-20 10:19:11