Dive Brief:

• A Pizza Hut spokesperson confirmed Thursday that a handful of EYM franchise-owned restaurants in Indiana have temporarily closed. 
• EYM Group, which owns about 140 Pizza Huts across five states, closed the stores in Northwest Indiana earlier this month. Local reports highlight over a dozen closures in the state as well as four in Ohio. Pizza Hut did not mention if the Ohio restaurants will reopen.
• Pizza Hut is planning to transition the Indiana locations to different ownership and expects they will reopen soon, the spokesperson said, adding that the other locations operated by the franchisee outside of Indiana remain open.

Dive Insight:

EYM has been in a dispute with Pizza Hut since March when it accused the chain of not keeping up with competitors, adapting modern practices or employing new technology, among other accusations in a breach of contract lawsuit filed in the U.S. District Court for Northern District of Texas Dallas division. A judge denied the franchisee’s motion for a preliminary injunction in April. Pizza Hut counter-sued the operator in June alleging that EYM failed to pay the operator various fees per its franchise agreement. 

Pizza Hut alleged in its suit that the operator has underperformed financially compared to the rest of the system. From 2019 to 2023, Pizza Hut’s systemwide same-store sales grew 7%, but EYM’s same-store sales were down 10%. 

EYM’s “record for operations has been poor,” the chain alleged. Thirteen times a year, the franchisor scores restaurants on a one to five scale, with a score of two or less marked as failure. EYM had a failure rate of 12.4% from Feb. 21, 2023, to Feb. 19, 2024. Comparatively, the average failure rate is 3.2% over that same time period. 

The franchisee has a history of failing to pay Pizza Hut, according to the counter suit, and was behind by over $3 million by the end of 2022. Pizza Hut sent EYM a notice of default; the operator paid that amount, but then fell into default again for $2.5 million in March 2023. Pizza Hut entered into a forbearance agreement instead of terminating its franchise agreement, while EYM pursued a sale of its restaurants, per the court filing. 

EYM did not comply with the forbearance agreement and other subsequent agreements made with Pizza Hut, the franchisor’s suit alleges. As of June 7, the operator owned Pizza Hut and other interested parties about $2 million. 

This isn’t the first time a Pizza Hut franchisee has struggled financially. Its largest franchisee, NPC International declared bankruptcy in 2020, later selling its 925 Pizza Hut stores to Flynn Group. Gaining new operators for EYM’s closed locations, and possibly the remainder of its store network, could be key, especially as Pizza Hut’s U.S. same-store sales were down by 6% last quarter. Some of that shortfall is simply attributable to the calendar: Last quarter the company lapped the launch of its Melts and Big New Yorker.

Pizza Hut has a history of temporarily closing underperforming restaurants to implement operational changes. In 2019, it said it would temporarily close up to 500 units to remodel them and reopen with a carryout and delivery focus.