The Huts That Pizza Built
Pizza Hut, the world’s largest pizza chain, has 12,000 stores in 84 countries and boasts one of the most successful franchise systems anywhere. But no one unfamiliar with chain would have known that two college kids baked the first of what would later become America’s favorite pizza, and used $600 in borrowed money to start selling it in Wichita, Kansas, in 1958. Dan and Frank Carney had belonged to a family of 12 children and were always on the lookout for a chance to make money to pay their way to school. So when a landlord encouraged them to open a pizza store – having heard about the popularity of pizza in New York – the brother jumped at the chance. They’d tasted pizza only once, so they asked a neighbor, John Bender, to help them with a pizza recipe. Bender remembered the recipe for the sauce but not for the dough, so he just rolled the bread and accidentally came up with the first thin crust. Next, the brothers had to pick a name but did not want to spend more on signage, so they used the previous store’s. After scrawling the word Pizza on it, they found they had no more than three letters to fill it up, so they added the word Hut. Pizza Hut was born.
Their sales for the first year were dismal. No one had heard about Pizza Hut before, so to drum up sales, the brothers invited Wichita State University’s football team to eat at Pizza Hut, and then gave away prizes. That started customers lining up daily for a bite of their pizza.
The brothers started franchising in 1959, granting the license for their seventh store to Dick Hassur, the manager of their third outlet. The brothers lent him money for franchise, and soon they began granting more franchises to people who already knew the system – a procedure followed to this day. Many former Corporate Office staff who left or retired became franchisees. One such was Mike Dart, who had worked part-time at Pizza Hut while a student, was offered a position in the Corporate Office on his graduation, and later became vice president of financial services. When he left Pizza Hut, Dart formed Daland Corporation with other former Pizza Hut employees. Daland now owns 154 Pizza Hut stores in Florida, Alabama, Georgia and Louisiana.
When Pizza Hut started franchising, the Carney brothers admitted that they simply gave out licenses to people with the desire and capital to start. They had no system, and during their first five years of franchising, no two Pizza Hut stores were the same. They wrote deals on napkins and sealed them with handshakes. They charged only $100 in franchise fees and no more than $50 in royalty fees. The brothers started charging higher fees only after their full support system and operating standards were in place.
Soon, Pizza Hut was ripe for a public offering. A franchisee had suggested that Pizza Hut must expand its company-owned units, and to do that it could fist offer shares of stock to existing franchisees in exchange for their territories and stores. That came to pass, and the private placement went down in the history of the U.S. Securities and Exchange Commission as the largest for a Class B organization. Pizza Hut made the private offer in 1968. the next year, it made its initial public offering of its shares at $16 a share, and in three days the share price went up to $32.75. All Pizza Hut franchisees became millionaires overnight. (What’s interesting is that many of the franchisees who had traded their outlets went back to buying franchises for stores in new territories.) to strengthen the business, Dan and Frank Carney sold Pizza Hut to Pepsi Co Inc. in 1977. they’d been looking for a strategic partner who would let them run Pizza Hut as they saw fit, and Pepsi filled the bill. Eight years later, the company decided to introduce its delivery service to boost profits. It came up with the idea because half of all its sales were carry-out, and though many franchisees balked initially – fearing risk and change – these soon agreed. “Franchisees make a company better because they have to pay royalties; and if they are going to give you an opinion about where you are going,” Frank Carney had said early on. “As a result, there are going to be inherent agreements and a lot of disagreements over direction.” Despite the disagreements, Pizza Hut’s acknowledgment of the role that franchisees play in the system has proven to be the single most important factor in its growth. Indeed, 40 percent of Pizza Hut’s stores are owned by franchisees, and the average age of a franchisee outlet in the system is 13 years.
The Carney brothers hardly knew anything about pizza when they started out, but their spunk and precocious ability to know where their strength lay, and the determination to use it to chart their growth strategy, allowed them to conquer America – where the pizza segment is a $25 billion business – and the world. Imagine our loss if they hadn’t wanted for money to finish college!