Loss-making Pizza Hut Korea files for rehabilitation

Money-losing Pizza Hut Korea Ltd., the Korean master franchisee of the giant US pizza franchisor, has filed for corporate rehabilitation in Seoul in a bid to avoid a cash crunch after it was slapped with a court order to compensate its local franchisees over 20 billion won ($15 million).

Pizza Hut Korea announced on Tuesday that it filed for corporate rehabilitation proceedings with the Seoul Bankruptcy Court the day before.

Immediately after its filing, the South Korean bankruptcy court made an automatic stay order that prevents the debtor, or Pizza Hut, from dissipating its assets and the creditors, the franchisees, from enforcing their claims against the debtor until the rehabilitation proceedings formally begin. 

A rehabilitation proceeding is a reconstructive insolvency procedure seeking to rehabilitate debtors in financial distress via means such as debt rescheduling.

The court noted that Pizza Hut Korea has filed for rehabilitation as its local franchisees have been seizing its bank account to recover their money since Sept. 4, hampering the daily operations of Pizza Hut Korea's business, like salary payments to employees.

In early September, the country’s high court upheld the lower court’s decision in favor of the 94 franchisees who filed suit to claim their money, which, they argued, was unfairly taken by Pizza Hut Korea.

The court ordered Korea’s oldest pizza franchise operator to return the franchisees' 21 billion won in the company’s profit from selling main ingredients and supplies to franchise owners from 2016 to 2022.

The franchisees accuse Pizza Hut Korea of selling such ingredients and supplies to them at extremely high prices without proper negotiations.

After the high court’s decision, Pizza Hut Korea has appealed to the Supreme Court.

The company also filed for an autonomous restructuring support (ARS) program with the bankruptcy court. With ARS,  the court supports smooth negotiations between debtors and creditors before the decision to begin corporate rehabilitation proceedings and place troubled firms under court-led debt restructuring.

If Pizza Hut Korea and its franchise owners settle through ARS, the company will not begin rehabilitation proceedings.

CASH SHORTFALLS AFTER PIZZA SALES DROP

Pizza Hut Korea founded in 1991 has been grappling with cash shortages after logging an operating loss for the second straight year last year. Its loss came at 4.5 billion won in 2023, jumping 15-fold from the prior year’s loss.

“Its sales and profit shrank together after consumers turned their backs on the brand following a series of price hikes due to inflation,” said an unnamed Korean food and beverage industry official.

Instead of pricey Pizza Hut pizzas, Korean consumers are opting for cheaper frozen pizzas or supermarket deli pizzas.  

Pizza Hut franchise stores have also been on the decline in the past few years, falling 18% to 332 as of October this year from 403 at the end of 2021.

Pizza Hut forayed into Korea with its first store in Itaewon, Seoul in 1985, jumping to 43 stores in the country in five years.

Since the establishment of Pizza Hut Korea in 1991, its shareholders, however, have constantly changed.

In 2017, Yum! Brands Inc., the U.S.-based fast food chain operator, sold its 100% stake in its Korean unit of Pizza Hut to Orchard One Inc., an affiliate of Korean investment company KH Investment Inc., in 2017.

Pizza Hut Korea under Orchard One has continued operations through a master franchise contract with the US headquarters.

The Korean operator of Pizza Hut said its local stores are remaining open and operating as usual despite the rehabilitation filing.

“We will continue to talk with the franchisees to reach an amicable settlement under court mediation so we can resolve the account freeze as soon as possible,” Pizza Hut said in a statement.

Write to Hun-Hyoung Ha at hhh@hankyung.com

Sookyung Seo edited this article.