Pizza Hut is suing one of its largest franchisees, EYM Pizza, for allegedly not paying royalties on time and for what the chain called store underperformance. The lawsuit comes after EYM sued Pizza Hut in March to keep the franchisor from terminating its franchise agreements, but a judge dismissed the complaint in April.
The 142-unit operator apparently shuttered 15 stores in Indiana this month, according to the Times of Northwest Indiana. Court documents report the franchisee also closed a Georgia restaurant in February without Pizza Hut’s approval.
The franchisor filed its suit against EYM, led by Eduardo Diaz, on June 7 in the U.S. District Court for the Northern District of Texas. Diaz owns stores in Wisconsin, Georgia, Indiana, South Carolina and Illinois. He started with Pizza Hut in 2016 and previously worked as a president of McDonald’s Mexico.
Pizza Hut reported same-store sales increased 7 percent from 2019 to 2023, while EYM’s same-store sales decreased by 10 percent in that time. The brand alleges EYM doesn’t pay its fees on time and is “among the worst” performing of all large Pizza Hut franchisees, according to the suit.
In September 2022, the franchisor sent EYM a notice of concern about the group’s consistent late payments and a missed payment to a vendor. By December, EYM was allegedly $3 million in debt to Pizza Hut and “other interested entities,” and the company encouraged the franchisee to think about selling, according to the lawsuit.
The pair went back and forth a few times, with EYM reportedly falling into debt twice in early 2023, Pizza Hut issuing notice of defaults both times and then EYM paying its debts.
The late payments were cause for Pizza Hut to terminate its agreements with EYM, it said, but the brand entered into a forbearance agreement with Diaz instead, with conditions such as paying fees no more than 20 days late and entering into a letter of intent with a buyer by November 15 of last year.
EYM allegedly “neglected to pursue multiple letters of intent” prior to November 15 and reportedly didn’t put some stores up for sale until after that deadline.
Pizza Hut terminated the forbearance and franchise agreements with EYM in February, following the operator’s alleged failure to meet conditions, according to the lawsuit.
EYM levels criticism at Pizza Hut
EYM purchased stores in Illinois for $10.8 million and stores in Indiana for $8.6 million in 2016 to get into the Pizza Hut system, according to court documents. In 2017, EYM bought its Georgia and South Carolina markets for $9 million. The group purchased some stores from a franchisee in Wisconsin for $6.8 million and 16 corporate-owned stores for $1.5 million in 2018.
Pizza Hut, noted EYM in its lawsuit, lost its status as the largest pizza chain by global sales in 2017 to Domino’s. That year, Domino’s did $12.25 billion in systemwide sales to Pizza Hut’s $12 billion. By 2022, that gap increased by nearly $5 billion.
“Pizza Hut has failed to keep up with modern times … adapt to modern business practices … keep up with new technology,” EYM’s suit claimed. “Pizza Hut has no image or identity that sticks with patrons.”
EYM claimed Pizza Hut neglected its customers and franchisees. The brand doesn’t innovate, according to EYM, and when it does, the options “flopped” and “scared off loyal customers.”
EYM in its suit also pointed to rising inflation that impacted profit margins. The cost of tomato sauce jumped by 40 percent from 2021 to 2022, while the cost of dough went up 35 to 45 percent.
The group reportedly invested $46.6 million in Pizza Hut during its time with the brand, and its outstanding debt totals $23 million, according to court documents. EYM claimed Pizza Hut tried “to force EYM to sell for pennies on the dollar.”
The franchisor allegedly offered EYM $1.5 million for 15 stores in Indiana, or $100,000 a store, while new stores cost “at least $600,000” to build.
Pizza Hut did not respond to a request for comment. The company is seeking monetary relief for damages.