• It's Here!

    Etf Pro

    Get the big financial market moves right, bullish or bearish with Hedgeye’s ETF Pro.

Initially, I did not pay much attention to the idea of rebranding Pizza Hut to Pasta Hut, because it makes no sense to me and seems to be a complete waste of money. Today, a story in the Korea Herald woke me up to the fact that YUM is actually going ahead with this strategy in some key international markets.

A restaurant concept that incorporates a type of food in its name will always have a difficult time diversifying to a broad based menu. Kentucky Fried Chicken incorporated the name KFC to get away from the stigma of fried chicken. Chick-fil-A sells chicken. Pizza Hut sells pizza. Pasta Hut will sell pasta. McDonald’s and Wendy’s can sell chicken, beef and fish because their names do not define and/or limit their menus.

Following on the heels of YUM’s national launch of pasta at Pizza Hut earlier this year, the Korea Herald reported that Pizza Hut is planning to rebrand three of its 330 restaurants in Korea to “Pasta Hut” in an attempt to broaden both its mid-range menu items and more importantly, its consumer base. All of the 330 units will include the new pasta offering on its menu, but only three units will be rebranded as part of the company’s marketing strategy as they are all located in high foot traffic areas.

Lee Seung-il, managing director of Pizza Hut Korea, stated that with the country’s pizza market believed to have hit saturation point that pasta offers menu diversity from both a taste profile and value standpoint. Lee hopes that pasta sales will account for 30% of Pizza Hut Korea’s next year’s revenues.

"This so-called 'shock' marketing strategy is aimed at raising consumer awareness that Pizza Hut specializes in dishes beyond the pizza," Lee told reporters. Pizza Hut used this same rebranding strategy in the U.S. back in April when it replaced all of its exterior signage at its Dallas headquarters with the new Pasta Hut logo and launched a national print and TV advertising campaign that stated “Pizza Hut is now Pasta Hut.” Pizza Hut followed with similar Pasta Hut rebranding efforts at its 700 units in the U.K. in October in a bid to overhaul the company’s image and menu. The fact that Pizza Hut Korea is now doing the same signals that the company’s pasta initiatives have been successful as a means to increase customer demand. As of YUM’s 3Q08 earnings call, management stated that its Tuscany Pasta has already become a $500 million brand in the U.S. and is on the way to become a $1 billion brand. The company also said that it plans to roll out a whole new line of pastas over the next couple of years.

The true success of Pizza Hut’s pasta launch is subject to whether these growing pasta sales are incremental to the company’s sales versus cannibalizing existing pizza sales and whether they are increasing overall profitability. Because as Lee stated, “For now, we're focused on capturing repeat customers, especially during these sensitive economic times." Right now, the company just wants to get people in its doors. Additionally, Lee said the company is willing to sacrifice a bit of profit-making to raise awareness that Pizza Hut is more than just pizza, which might imply that the pasta offerings do not generate the sale level of profitability. This brings into question YUM management’s statement from its 3Q08 earnings call that its pasta margins are slightly higher than what it earns on a “pure pizza.”