What Pizza Hut’s “sham” practices mean for Australian investors

Credit: Dennis Wilkinson

Pizza Hut finds itself under intense heat following allegations that its franchisees are using so-called “sham” contracts to pay delivery drivers.

Indeed, reports suggest that Australia’s second-biggest pizza chain has been underpaying delivery drivers whilst also failing to pay them superannuation or provide them with WorkCover.

One contract obtained by the Fairfax press even showed that a driver can earn just $6 per delivery, with a maximum of two deliveries per round trip (totalling $12 per hour), whilst also requiring the driver to provide the car and fuel and to pay for insurance and vehicle maintenance.

Fairfax also reported that under the current Enterprise Bargaining Agreement (EBA), full-time drivers at Pizza Hut are to be paid $20.35 per hour, while casual drivers are to be given that amount plus a 25% loading. A fee of $2.13 per delivery is also mandatory to cover vehicle costs.

Pizza Hut is the latest chain to become embroiled in such a scandal after service station and convenience store chain 7-Eleven also found itself in hot water in recent months. Various other businesses have also been guilty of the practice, often taking advantage of international students, although few have been as high profile as 7-Eleven or Pizza Hut.

The pizza delivery business has been locked in an intense battle with key rival Domino’s Pizza Enterprises Ltd. (ASX: DMP), both of which are desperate to lock up a greater share of the market.

Domino’s is clearly winning with the company experiencing incredible growth in recent years, both locally and internationally. The company’s shares have risen 92% over the last 12 months and 717% over the last five years to trade at $49 each.

However, Domino’s isn’t Pizza Hut’s only competitor. Various brands under the Retail Food Group Limited (ASX: RFG) umbrella, such as Crust and Pizza Capers also offer more ‘upmarket’ pizzas which are also growing in popularity, forcing Pizza Hut to take desperate measures to reduce costs and keep a foot in the game.

Foolish takeaway

Indeed, there are plenty of benefits available to companies wanting to franchise their operations, including the ability to expand faster and to access better talent.

As an investor however, there are also risks, one of which is the parent entity maintains less control over managers of individual stores. Neither 7-Eleven nor Pizza Hut trade on the local share market, but there are plenty of franchisor companies that do.

Again, there are plenty of benefits to investing in these kind of companies, and investors shouldn’t try to avoid them altogether. However, investors must also be sure to only invest in companies that have a strong and reliable history for properly managing these kinds of risks, including Domino’s and Retail Food Group themselves.

While I believe that Retail Food Group could be one of the best stocks to buy on the ASX right now -- especially with its forecast 5.9% fully franked dividend yield, there is one other stock you should seriously consider adding to your portfolio today.

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Motley Fool contributor Ryan Newman owns shares of Retail Food Group Limited. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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