“I can’t figure it out,” Rick, the Pizza Hut delivery area manager, commiserated to Jean, an area manager on the dine-in side of the business. “I’ve got stores with double digit sales growth. Their bottom lines are as strong as they’ve ever been. Yet the managers of these stores aren’t meeting their quarterly bonus targets so they’re quitting. In the past few months I’ve lost many of my best managers.
Some have gone to work for Papa John’s and one now works for Domino’s. Two of them have even taken voluntary demotions to become delivery drivers saying that driving pays more than managing. This is all because their customer loyalty scores are not very good.”
“I’ve got the opposite problem,” replied Jean. “My dine-in restaurants are showing negative sales growth, yet have very high customer loyalty scores. My managers are happy because they’re making their quarterly bonus targets; however, my boss is breathing down my neck wondering where the sales growth and profit are.”
“It wasn’t like this in previous years,” Rick said. “In those days, all the management bonuses were based on store profitability. If you weren’t making a profit, you weren’t getting a bonus. Then, in 1995, the company began its customer satisfaction/loyalty initiatives. The company was jazzed about it. All my
* This case was prepared by Alan Seidman, associate professor of hospitality at Johnson and Wales University, North Miami, Florida.
managers were jazzed about it. Instead of receiving bonuses based on their stores’ financial statements, managers now qualified for bonuses based upon how loyal and satisfied their customers say they are when surveyed.
It seemed to make sense. Loyal customers were going to patronize us more and tell their friends about us. That meant extra business. Extra business meant extra profits.”
“And extra profits are going to mean big bonuses for the managers,” agreed Jean. “But somehow that never happened. Somewhere, somehow, the system broke down.
Maybe we can figure out why.”
OVERVIEW
In 1958, the Carney brothers in Wichita, Kansas, borrowed $600 from their mother and opened the first Pizza Hut restaurant to great success. Within a year, the first franchise was opened. By 1977 the company had grown to nearly 3200 units and was acquired by PepsiCo. With over 12,300 units, Pizza Hut has become the largest pizza restaurant chain in the world, operating in 84 countries and territories.
Providing carry-out, dine-in, and delivery service, Pizza Hut features a variety of pizzas as well as pasta, salads, sandwiches, chicken wings, and other food and beverage items. Its list of awards includes the Best Pizza Chain in America in a survey conducted by Restaurants & Institutions magazine, as well as the January 1997 winner of the Consumer Reports best pizza chain in America. Its recognition is tremendous and hardly anyone in the U.S. has not tried a Pizza Hut pizza.
In 1986, the company began offering delivery service. Special Pizza Hut delivery units were constructed, separate from the smaller, traditional “red roof” restaurants. Because of their relatively low cost and easy construction, delivery units began to proliferate in strip malls and other centralized locations, competing directly with Domino’s Pizza, the leading pizza delivery company in the country at that time.
Although delivery was a huge success, the company continued to search for new products and ideas that would keep Pizza Hut at the forefront of an increasingly competitive pizza delivery segment. In 1993, BIGFOOT™ pizza was introduced, followed by stuffed crust pizza in 1995 and triple-decker pizza in 1996. All three pizzas were instrumental in providing short-term increases to sales; however, they lacked the ability to increase sales over a long term.
In 1996, worldwide system sales exceeded $7.4 billion. Although this was a record sales figure, it was due primarily to system growth. Same-store
U.S. Systemwide Food Service Sales (in $ millions)
Top Five Pizza Chains 1997 1996 1995
Pizza Hut 4700 4927 5300
Domino’s 2480 2300 2100
Little Caesar’s 1375 1400 1450
Papa John’s 868 619 459
Little Caesar’s 1375 1400 1450
Papa John’s 868 619 459
Sbarro 422 400 395
Exhibit 14.1 Pizza Hut’s Declining U.S. Market Share (From Rubenstein, E. [1998], Nation’s Restaurant News, April 6, 8.)
sales in company-operated stores decreased 4%, reflecting fewer transactions within each store. In the first half of 1997, same-store sales of company-owned restaurants dropped an additional 7%. Clearly, the company was headed in the wrong direction (see Exhibit 14.1).
Pizza Hut’s role as a PepsiCo subsidiary ended in 1997 when the parent company spun off its three major fast-food holdings (Pizza Hut, KFC, and Taco Bell) in an effort to concentrate solely on its beverage and snack food (Frito Lay) business. Consisting solely of fast-food restaurants, the new company, TRICON Global Restaurants, focused solely on the needs of its three restaurant holdings. The major challenge facing Pizza Hut and TRICON was to remain competitive in today’s global environment by keeping old customers happy while trying to attract new ones.
CUSTOMER LOYALTY
In response to increasing competition and declining sales, Pizza Hut began a comprehensive customer loyalty initiative in 1995. Through marketing research, the company aimed to improve guest satisfaction and unit-level execution at over 3700 company-owned stores and about 200 franchised restaurants. By presenting restaurant managers with weekly feedback from their customers, Pizza Hut hoped to strengthen operations within the control of each restaurant manager. The plan comprised two
components: a customer service toll-free number and a customer satisfaction/loyalty survey.
TOLL-FREE CUSTOMER SERVICE NUMBER
For the first time in its history, Pizza Hut introduced a customer satisfaction hotline.
Composed of a toll-free number visibly posted inside stores and on individual pizza boxes, the customer satisfaction hotline was designed to answer all questions, problems, and/or complaints a customer might have about the product or service.
Because many issues and concerns were handled by an outside marketing agency, the hotline was able to reduce the time a manager spent handling customer complaints, thereby giving him or her more time to devote to running the store. Additionally, the hotline operator was able to listen and respond to each situation from a neutral perspective.
The customer service hotline provided another benefit. It became a forum for those who chose not to complain to a store manager or employee during a face-to-face encounter. Many customers who normally did not like to complain, now had an opportunity to do so. This was very important for Pizza Hut. Consider the following findings from Consumer Complaint Handling in America, a study by Technical Assistance Research Programs, Inc. (TARP):2
■ About 50% of the time, customers who have a problem with a product or service are not likely to tell the company about it.
■ Nine out of ten of these “silent critics” will probably take their future business to a competitor.
■ Even when a customer does complain, one out of every two will not be thoroughly satisfied with the company’s efforts to solve the problem.
These findings have a large impact for Pizza Hut as well as all other service firms.
Because dissatisfied customers typically tell between seven to nine other people when they have had an unsatisfactory experience with a company, it is imperative that companies do all they can to try to get a dissatisfied customer to complain. If a customer’s concern goes unresolved, the likelihood of that customer returning is greatly diminished.
When a call was made to the hotline, the operator would try to find out which Pizza Hut was in question (landmarks and other relevant information could be used to help identify individual stores in case a customer was unsure). The operator would make notes of the incident and send the customer free pizza coupons as an apology. All incidents were sent to each affected store manager and area manager via a computerized download.
More severe incidents would be presented to people further up the chain of command.
These incidents did not affect a manager’s bonus opportunity in any way. The customer service hotline was merely a tool for Pizza Hut managers to listen to customers who might not normally complain. It was a great resource for the customer and the company.
CUSTOMER SATISFACTION/LOYALTY SURVEY
Identifying loyal customers became a necessity for many service businesses. In the early 1990s, articles in the Harvard Business Review detailed the impact loyal customers can have on a business.3,4 Simply stated, if a customer is satisfied with the product and service, he or she stands a good chance of returning to that business. Keeping the customer loyal to a business has obvious implications. A loyal customer will return to the business time and time again. Often times, he will bring other customers along. Almost certainly, he will tell other people about his good experiences. Such positive word of mouth will bring other customers. Over time, they, too, become satisfied and loyal, telling their friends as well. Over time, the business becomes more profitable because of repeat business and positive word of mouth of loyal customers.
The questions asked were constructed in such a way as to analyze the relationships between repeat customer visits and the operational components within each restaurant that would affect customer loyalty. Such components included product quality, service quality, and overall restaurant appeal. Each interview was conducted by an outside marketing agency. Brief telephone interviews were given only to customers who purchased a Pizza Hut pizza within the preceding 36 hours. After that time, it was deemed that the survey results would lose some degree of accuracy. Because delivery stores and dine-in restaurants had unique customer relationship characteristics, separate survey processes were developed for each.
Delivery Restaurants
Capturing and quantifying loyalty is by no means an easy task for any business. Pizza Hut (in the delivery side of the business) did have a distinct advantage. An in-store database, which contained customers’ names, addresses, and phone numbers, as well as a record of what they had ordered in the past, tracked carry-out and delivery customers.
The satisfaction/loyalty initiative for the delivery stores worked as follows. A name at random would be drawn from the store’s database and contacted by the marketing research representative. The customer was asked if he or she had ordered and eaten the pizza within the last 36 hours. If the answer was yes, the following questions would be asked (in this order):
1. On a scale of 1 to 5, if you had a chance to return to this Pizza Hut in the next 90 days, would you do so? (1=definitely not; 2 =probably not; 3=may or may not;
4=probably would; 5= definitely would.)
2. Did you have any type of problem with your last order? (yes or no) 3. Did you receive the correct order? (yes or no)
4. How valued did we make you feel as a customer? (did or did not feel valued) 5. On a scale of 1 to 7, how would you rate the topping amount on your pizza?
(1=hardly any toppings; 7=toppings were plentiful)
6. On a scale of 1 to 7, how would you rate the temperature of your pizza? (1=very cold; 7=very hot)
7. On a scale of 1 to 7, how would you rate the appearance of your pizza? (1=did not look appealing at all; 7=looked very appealing)
8. On a scale of 1 to 7, how would you rate your overall experience? (1=terrible, 2=unsatisfactory; 3=average; 4=above average; 5=good; 6=very good; 7=excellent)
On average, nine customers per store per week were polled, regardless of the store’s volume. Generally, delivery stores’ order volumes would range from about 800 up to 2000 orders a week.
Survey data were then brought into Pizza Hut’s mainframe computers where they were organized, analyzed, and sent or downloaded to individual stores. Each delivery store manager and area manager (as well as every other level of management up the chain of command) received a tabulation of these scores on a weekly basis. Tabulations were kept on a running 4-week basis. In other words, all scores and data were the reflection of 4 weeks of customer surveys (approximately 36 surveys). When results from a new week were downloaded, the earliest week’s scores would drop off so that the scores now reflected the preceding 4 weeks’ worth of surveys.
Questions 1 and 8 determined customer loyalty. A customer needed to answer the first question with a 5 (definitely would return to this store in 90 days) and a 6 or 7 (very good or excellent) for question 8, dealing with his overall experience. If question 1 received a 5 and the eighth question a 6 or 7, Pizza Hut considered the respondent a loyal customer.
The percentage of loyal customers was regularly tabulated and considered to be the leading index of that store’s performance. For example, if 36 customers were surveyed in a month and 20 answered question 1 with a 5 and question 8 with a 6 or 7, that store would have a loyal customer reading of 56%.
Dine-In Restaurants
The dine-in restaurants, or “red roofs” as they were known, did not have the computerized database information that the delivery stores did. As a result, the red roofs had a different approach toward the survey process. In these cases, loyalty/satisfaction measurements were based on voluntary surveys taken by customers. At random, certain customer receipts were issued asking the customer to participate in a loyalty survey. The customer was to call a special 800 number (within 36 hours after his visit); give a coded identification number (provided on the receipt); and answer questions about the quality of food and service identical to those asked of delivery customers. The only question that differed was one dealing with a lunch buffet, if applicable.
Customers were encouraged to participate by incentives described on each receipt, e.g., a free soft drink or free order of breadsticks with future purchases. Although the questions were basically the same between delivery and red-roof stores, the one major difference was that the dine-in surveys involved the customer calling the survey company, while the survey company called the delivery customers.
THE BONUS PROGRAM
Weekly salaries of managers of all company-owned Pizza Hut stores were competitive with the salaries of fast-food managers of other companies. Every 3 months (quarterly), however, all store managers became eligible to receive a bonus. Bonuses generally ranged from 0 to $4000 per store manager a quarter. The bonus program was a major incentive for all store managers.
Traditionally, store bonuses were based on a store’s sales growth and profitability.
With the advent of the customer satisfaction/loyalty initiatives in 1995, that index was changed. Bonus potential for store managers now depended solely on their overall quarterly customer loyalty percentage. The minimum percentage a manager needed to achieve so as to receive a bonus was 60%. A loyalty rating below 60% meant that the manager was automatically out of the running for a quarterly bonus.
Managers who received a bonus were given a flat dollar rate for each loyalty percentage point they received. Managers scoring between 60 and 64% loyalty would receive one amount; those scoring between 65 and 69% would receive a larger amount and a bigger bonus was warranted by 70 to 75%, etc. Pizza Hut perceived that a direct relationship would exist between a store’s overall operational strength and its percentage of loyal customers.
TODAY
Phil Crimmins, vice president of customer satisfaction for Pizza Hut and founder of its loyalty program, claims the loyalty initiatives have made many positive inroads. “We noticed our rating on the abundance of toppings wasn’t where it should be about a year ago,” Crimmins recently told a group of restaurant operators at a multiunit technology conference in March, 1998. As a result, the company increased food costs by $50 million by adding more toppings to each pizza. Since then, Crimmins claims that topping amounts are no longer an issue.
Crimmins also claims that the customer loyalty initiative has helped Pizza Hut identify underperforming stores. By visiting and studying the stores with high loyalty scores and comparing them to the underperforming stores, Crimmins and his team were able to develop a blueprint for success. Many underperforming stores were slowly transformed from “marginal” or “breakdown” stores into “excelling” or “standard” stores. Today, over 60% of its participating stores are considered to be “excelling” or “stable,” as opposed to only 40% when the loyalty process started in 1995.
Unfortunately, some setbacks have occurred. High loyalty scores have not always translated into high-performing stores. Conversely, many low loyalty stores continue to be extremely profitable. Area managers and store managers alike continue to discuss and evaluate the system and its deficiencies. Pizza Hut has listened to such discussions and continually strives to improve the process by making modifications. Pros and cons of the customer loyalty initiative continue to be evaluated.
QUESTIONS
1. In what ways did Pizza Hut benefit or not benefit from its customer satisfaction/loyalty initiatives?
2. In your opinion, what were the causes behind the issues in your response to the preceding question?
3. Identify the breakdowns in the process as they affected delivery restaurants and dine-in restaurants.
4. Where was the breakdown in the quarterly bonus program? What changes (if any) would you make to this system?
5. What else can Pizza Hut learn from its customers using its marketing research/loyalty process?
6. Evaluate the wisdom of the company’s introducing the loyalty programs the way that it did and the “law of unintended consequences” that soon followed.
REFERENCE
1. Rubenstein, E. (1998) Research prompts Pizza Hut to listen to its customers, Nation’s Restaurant News, April 6, 8.
2. TARP (1986) Consumer Complaint Handling in America: An Update Study Washington: White House Office of Consumer Affairs.
3. Heskit. et al. (1994) Putting the service-profit chain to work, Harvard Bus. Review, Mar.-April.
4. Reichheld, F. (1993) Loyalty—based management, Harvard Business Review, March-April.
CASE 15: