Pizza Hut Is About To Face A PR Nightmare

The fast-food industry strikes again when it comes to disgusting. The most recent incident takes place at a Pizza Hut in West Virginia, and it’s probably going to make you lose your appetite.

Feb 22, 2014 at 12:00PM

Do you remember the Domino's Pizza (NYSE:DPZ) incident back in 2009? You know, the one where the Domino's employee picked his nose and included what he found with his food preparation? There were some other disturbing aspects of this viral video, but no need to go into further details.

Domino's has since recovered, and all is well. In fact, over the past five years, Domino's has top-line and net-income growth of 26.09% and 113.6%, respectively. Over the past three years, the stock has appreciated 362%. Keep these numbers in mind when you read about the Pizza Hut incident below.

The recovery wasn't easy for Domino's. This recovery even included a television ad with Domino's admitting that its pizza stinks. In the end, the incident led to better pizza (relatively speaking) and more kitchen visibility for customers so they didn't have to worry about disgusting employee actions. Now it's Pizza Hut's turn.

The picture below might look appetizing now, but it might not once you have the facts.

Big Dinner Box

Source: pizzahut.com 

Prepare to lose your appetite

Location: Kermit, W. Va. (Mingo County)

Offense: Urinating in a sink that's also used to clean utensils

Culprit: District Manager (name not provided)

Potential for public relations nightmare: Moderate to high

The video of the employee was aired on local television station WOWK-TV and is likely going viral as this is being written. Contrary to what Pizza Hut, or its parent company Yum! Brands (NYSE:YUM), states publicly, this incident is a problem.

With the popularity of online videos, you can't stop a video from going viral. People love sensationalism. Once they find a sensational video that will create conversation and feedback, they will spread it faster than a contagious disease. Hence the name "viral."

In this instance, we have a Pizza Hut employee urinating in the sink. If you like to look at negative situations with a glass-half-full attitude, then at least it took place after business hours. If you look at things from a face-value perspective, then it's likely to lead to negative press for Pizza Hut. If it's anything compared to what Domino's went through, it could be a significant event.

Yum! Brands now relies on the international market for the majority of its growth. However, this news is already international, and traffic and sales declines in the United States will still hurt the bottom line.

There's a good chance that many consumers will be turned off to Pizza Hut by this incident. If the video goes viral, which is likely, then that's a guarantee. This won't just lead to traffic and sales declines. It will also trigger increased costs for Pizza Hut related to marketing that promises quality to customers and the potential for redesigned locations with increased full-kitchen visibility for customers. 

Fortunately, there is a positive angle here. 

Every misfortune leads to opportunity
As far as Yum! Brands goes, this is yet another hit to the gut after dealing with quality-chicken scares at KFC, and the bird flu, in China. However, Yum! Brands is still the fastest growing quick service restaurant abroad. Therefore, the company's long-term potential is still high. That said, the most recent incident won't help, and it might hurt the quick service industry in general.

Consumers are fed up with unhealthy food and unclean dining environments offered by quick service brands. That's why many consumers are turning to Subway, Panera Bread (NASDAQ:PNRA), and Chipotle Mexican Grill (NYSE:CMG).

What do these three fast casual (not quick service/fast food) brands have in common? Answer: You can watch everything that's taking place in the kitchen. Due to recent events and consumer distrust, this will likely be the future format at all fast casual and quick service restaurants. Therefore, Subway, Panera, and Chipotle are all ahead of the curve. Their food is also in high demand. And here's where it gets interesting.

You might be thinking that Panera and Chipotle don't serve pizza, but you're only correct on one account. Chipotle now owns Pizzeria Locale. It's currently only available in Colorado, and it's in its infant stages. But initial results are excellent, the atmosphere is clean and welcoming, and you can watch your food being cooked. And, of course, as a Chipotle brand, it only uses high-quality ingredients.

While this is well down the road, if Chipotle were to expand this brand given its early success, it would likely steal market share from Pizza Hut, Domino's, and Papa John's. Today's consumer is very demanding and wants quality product and service at all times. Pizzeria Locale would have a better chance at delivering than Pizza Hut, Domino's, and Papa Johns. Perhaps most important, it would be seen as unique.  

The Foolish takeaway
Yum! Brands might take a short-term hit for this recent incident. If the video goes viral and the news becomes international on a big scale (relative to the industry), then traffic and sales at Pizza Hut will decline, forcing Yum! Brands to put out the fire with increased costs for marketing and restaurant redesigns. Over the long haul, Yum! Brands should be fine. It's the fastest growing quick service brand outside of the United States. That should be enough to wet any investor's palate. Just be prepared for a bumpy ride.

If you're really looking to invest in pizza for the long haul, and you desire massive growth potential, then Chipotle's Pizzeria Locale is still in its infant stages. Based on initial success, it's logical to assume that Chipotle will eventually expand the brand. Please do your own research prior to making any investment decisions. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill and Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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