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'Corporate Rehabilitation' Pizza Hut even sells delivery motorcycles, squeezing a dry towel

[비즈한국] Pizza Hut Korea, the symbol of the first generation of pizza franchises in Korea, is fighting for survival by even selling off its delivery motorcycles. Although it filed for rehabilitation procedures at the end of 2024, the M&A process has faced difficulties, leading to heightening concerns over a liquidity crisis. It appears the company has begun 'scraping the bottom of the barrel' by disposing of idle assets. While Pizza Hut Korea maintains that the management normalization process is proceeding smoothly, a recent Supreme Court ruling has finalized a liability of 21.5 billion won, leading to skeptical views within the industry regarding the possibility of the company's normalization.

Following Motorcycles, Application Filed to Dispose of Ingredients and Fixtures

Pizza Hut Korea has entered a phase of 'squeezing a dry towel' for survival. According to Bizhankook's coverage, Pizza Hut Korea, which is undergoing corporate rehabilitation, recently submitted an 'application for cancellation of registration of preservation measures for two-wheeled vehicles' to the Seoul Rehabilitation Court. This is a request to cancel administrative records of motorcycles owned by the headquarters, which were restricted by rehabilitation procedures, so that they can be sold or discarded. This is interpreted as a desperate measure to secure even a small amount of operating funds by cleaning up idle motorcycles that are no longer useful in business operations, and to minimize fixed costs such as insurance premiums and taxes.

Furthermore, Pizza Hut Korea has successively filed for permission for the 'disposal of obsolete assets and inventory.' The intention is to organize ingredients that can no longer be sold or fixtures piled up in warehouses, which the industry interprets as an attempt to reduce warehouse rental costs. It suggests that the headquarters, in desperate need of short-term liquidity, is in a situation where it can no longer bear fixed costs such as warehouse rent and management fees.

The backdrop for Pizza Hut Korea's decision to dispose of motorcycles is significantly influenced by the wave of closures of its franchise stores. According to the Fair Trade Commission's franchise business information disclosure, the number of Pizza Hut stores, which once exceeded 400 nationwide, plummeted to 324 in 2024. In particular, only 3 new franchise stores opened in 2024, while 40 stores closed due to contract terminations or cancellations.

The industry estimates that the number of closed franchises was higher last year than the year before. This is because, amid high inflation and sluggish consumption, brand trust plummeted as Pizza Hut Korea filed for corporate rehabilitation. As the number of closing franchises increased, the idling delivery motorcycles became a difficult burden for the headquarters, and it is interpreted as a move to quickly dispose of them to secure operating funds.

The decline of Pizza Hut, once considered a representative first-generation franchise in Korea, began in earnest in the 2010s. After opening its first store in Itaewon in 1985, Pizza Hut recorded an unrivaled market share until the early 2000s. It recorded annual sales of 400 billion won and was known as a symbol of family dining culture.

However, entering the 2010s, as the number of single-person households increased and low-cost delivery-specialized brands grew, Pizza Hut, which focused on large-scale stores, began to lose its vitality. As competitor brands such as Mr. Pizza and Domino's Pizza engaged in aggressive marketing, its market position narrowed. In 2017, the U.S. headquarters, Yum! Brands, sold 100% of its stake in Pizza Hut Korea to the domestic investment firm Orchard One.

After being acquired by Orchard One, thanks to efforts such as strengthening the delivery portion, Pizza Hut Korea saw a temporary rebound, recording 119.7 billion won in sales in 2020. However, the sales that had been maintaining the 100 billion won range began to crumble starting in 2022, dropping to 86.9 billion won in 2023 and 83.1 billion won in 2024. Operating profit also turned into a deficit starting in 2022, and the net loss in 2024 reached approximately 27.3 billion won.

'21.5 Billion Won Compensation Bomb', a Stumbling Block for M&A?

Pizza Hut Korea ultimately filed for corporate rehabilitation at the Seoul Rehabilitation Court in November 2024. Currently, it has selected Samil PwC as the lead manager for the sale and is pushing for an M&A before approval, but there are observations that management normalization through a sale will not be easy. Above all, there is a prospect that the recently finalized 21.5 billion won judgment for the return of the difference in franchise fees will act as a significant burden in the future sale process.

On the 15th, the Supreme Court confirmed a partial win for the plaintiffs in a lawsuit filed by 94 Pizza Hut Korea franchise owners against the headquarters for the return of unjust enrichment. Previously, in September 2024, the Seoul High Court ruled that Pizza Hut Korea must return all 21.5 billion won in difference franchise fees it had received from the store owners, and the Supreme Court ultimately sided with the franchisees.

The 21.5 billion won liability finalized by the Supreme Court ruling is primarily attributed to the Pizza Hut Korea corporate entity. From the perspective of a potential buyer looking to acquire Pizza Hut Korea, which is up for sale in the M&A market, a debt risk has emerged that must be shouldered in addition to the acquisition price. This is why analysts say this compensation burden will be the biggest obstacle to the sale negotiations.

Concerns are leading to actual disruptions in the sale schedule. On the 14th, Pizza Hut Korea submitted an application to the Seoul Rehabilitation Court to extend the deadline for submitting its rehabilitation plan. Accordingly, on the 15th, the court announced that it had extended the original submission deadline of the 16th of this month to February 13th.

Although it has bought about a month of time, analysts say finding a buyer will not be easy. Kim Dae-jong, a professor of business administration at Sejong University, pointed out, "With Pizza Hut Korea even receiving a compensation judgment of 21.5 billion won for the franchise fee difference, its financial burden has grown even larger. For a potential buyer, the latent debt risk has become clear, making it a structure that is difficult to approach easily.”

Meanwhile, Pizza Hut Korea stated that the rehabilitation and sale procedures will proceed normally. In a statement on the 15th, Pizza Hut Korea said, "The rehabilitation process and related sale procedures are proceeding according to plan under the supervision of the court. The company will prioritize creditor protection, stable operation of the franchise business, and maintenance of consumer trust, and will faithfully implement measures for the stable progress of the rehabilitation process and management normalization.”