“It’s a financial nightmare”: Pizza Hut franchisees launch class action over price war with Domino’s

Tension is escalating between Pizza Hut franchisees and their parent company Yum! Restaurants, with a high-profile franchisee launching a class action against Yum! in the federal court this month.

The class action follows a failed bid by 80 Pizza Hut franchisees in June to stop Yum’s latest price strategy, which has seen the Pizza Hut chain go head-to-head in a discount price war with rival Domino’s, offering pizzas for as little as $4.95.

Diab Pty Ltd, a company owned by Sydney Pizza Hut franchisee Danny Diab, initiated legal proceedings against Yum! in the Federal Court on August 12.

Justice Annabelle Bennett scheduled a directions hearing for October 3 and in a court order gave applicant group members until October 28 to opt out of the action.

Fairfax reports the franchisees, the number of which is unclear at this point, are seeking damages from Yum! to cover the profits they have lost since the discount price strategy was introduced on July 1.

The franchisees are reportedly attempting to find out if Yum! breached its franchise agreements with its stores and engaged in unconscionable conduct by lowering prices.

An unnamed franchisee told Fairfax they are struggling to keep their business going and hopes the legal action will make Yum! “just listen to us for once”.

“Everyone’s struggling, it’s a financial nightmare,” they said.

“It’s been ongoing since the price cuts, this just puts the final nail in the coffin.”

SmartCompany contacted Pizza Hut but the head office declined to comment as the case is before the courts.

SmartCompany also contacted Jim Kartsounis, president of the Australasian Pizza Association and solicitor for the franchisees, but did not receive a response prior to publication.

Jason Gehrke, director of the Franchise Advisory Council, told SmartCompany the class action “certainly signals a growing level of unrest” between the two parties.

Gehrke says while this is not the first time a group of franchisees have banded together to launch a class action against a franchisor, “this is probably the first time in recent memory a class action has been unleashed over a pricing issue”.

He says the case “illustrates the danger of a discounting strategy” and given the directions hearing will not take place until early October, “it’s a long time to wait for franchisees who are hurting already”.

He says it appears Pizza Hut “has been a little flat footed” in moving to match the low prices offered by Domino’s, which as the chain to drop their prices to $4.95, likely had time to plan their strategy and improve their in-store efficiencies to cope with the lower margins.

But by “playing catch-up”, Pizza Hut franchisees have not had the same time to prepare in-store and supply chain efficiencies, says Gehrke.

“They haven’t brought the franchisees on the same journey,” he says.

Gehrke says it is highly unlikely Yum’s agreements with its franchisees would contain a duty of care for the franchisees to be profitable, which is essentially what the class action will rest on.

“There is usually nothing in a franchise agreement about profitability,” he says. “There is no legal obligation.”