CASE: Pizza Hut in Brazil

Summary:

Pizza Hut, one of the most popular food chains, opened their 10000th shops in the Brazilian

market in 1994. Pizza Hut’s parent company is PepsiCo. PepsiCo was trying to penetrate in

Brazilian market in various ways. However, the path was not as easy as assumed.

Pizza Hut faced decline in the Brazilian market. Experts said that there were two probable

reasons for this. One is Pizza Hut’s less successful introduction of new products and the second

is the low price strategy of the competitors. However, Pizza Hut had a high hope to make Brazil

as their second or third major market because Brazil had many location specific advantages like

urbanization, size, population, Gross National Product etc.

Brazil endured erratic political situations since 1964. After a long military dictatorship, a stable

political reformation was done by the year 1997.

Economically, Brazil has a mixed history as well. It has a very good economic potential. It has

access to several natural resources and well knit infrastructures. However, inflation affected the

economy very badly.

Pizza Hut entered in Brazil in 1988, during the period of high inflation. It followed the practice

of corporate franchise. Later, Pizza Hut bought some of the franchises. But still different

problems arose like- difference in cultures, cost of maintaining large pool of employees and of

course inflation.

Gradually, the inflation rate of Brazil normalized. People made more informed decisions and

Pizza Hut began to flourish. However, in 1995, sales of Pizza Hut dropped. As a mean of

counterattack, Pizza Hut took two different strategies. One was to cut the price by 25% and

another was to announce various sales related decisions by mingling with local cultures like

Samba dance. But both of the plans failed miserably. In these ways, Pizza Hut struggled to

succeed in the Brazilian market.

Question No. 1: What are the location specific advantages that Brazil has to offer? How do

these advantages differ from those offered by others markets in Latin America?

The location specific advantages Brazil has to offer are:

1. Size of the Country: With its expansive territory, Brazil occupies most of the eastern part of

the South American. The only countries in the world that are larger are Russia, Canada, China,

and the United States (including Alaska). That means it has a large market for Pizza Hut. All the

other countries of Latin America (including Argentina, Chile) have smaller market compared to

Brazil.

2. Population: Brazil has the largest population (190,732,694) in Latin America. The others

countries have much less compared to Brazil. For example: Colombia (45,787,000), Argentina

(40,091,359), Peru (29,461,933). This large population can be served as a major market and

Pizza Hut could employ more skilled workforce.

3. Natural Resources: Compared to the other countries of Latin America Brazil is abundant in

natural resources. Myriad agricultural products are also grown in brazil as it has a vast variety in

the climate. This would help pizza hut to reduce the cost of bringing both the food ingredients as

well as the fuel items from other countries. The major natural resources are: Platinum, Uranium,

Petroleum, Timber, Hydroelectric Power and major crops are: Sugarcane, Corn, Potatoes, Cocoa

Peanuts, Soybeans, Coffee, and Tomatoes.

4. GDP and GNI: Among the countries of Latin America, Brazil has the largest GDP ($2.517

trillion nominal, $2.309 trillion PPP). In terms of GNI Brazil is the third country of Latin

America (10,920) preceded by only Argentina and Chile.

5. Large Urban Area: The major target market of Pizza Hut is the urban dwellers who like to

spend time with their friends and families. So Pizza Hut would get success in the country that has

the largest urban area. And Sao Paolo of Brazil is the 8th largest urban area of the world

(population: 20,395,000).

So, these are the location specific advantage of Brazil compared to the other countries of Latin

America.

Question No. 2: Should Pizza Hut put more of its effort in expanding in Brazil or

somewhere in South East Asia? Why?

Pizza Hut should put more emphasis on Brazil instead of expanding business somewhere in

South East Asia. The reasons for which Pizza Hut should do that are discussed below.

1. Location Specific Advantages: The location specific advantages of Brazil were discussed

earlier. Brazil has more geographic advantages than any of the countries of the South East Asian

region. Except for Indonesia and Burma, all other countries of South East Asia have a relatively

small population. If we take the other geographic advantages like: Natural resources, climate

condition or from the agricultural point of view, Brazil is a way ahead potential market than the

South-Eastern part of Asia.

2. Changing Political Situations: Brazil had a very erratic and uneven political condition in the

past. It was ruled by military dictatorship and the transition of democracy was not smooth in the

early days. However, the political situation is changing and it is providing much incentive for

Pizza Hut to operate their business.

On the other hand, most of the countries of South East Asia are having a bizarre political

situation. Countries like Burma and Cambodia are being ruled by almost dictatorship. Vietnam

and Laos is practicing communism which would impede the freedom of Pizza Hut in that region.

So, in terms of politics Brazil is comparatively safer than South East Asia.

3. Shift in Economic Standpoint: Brazil had a lot of obscurity in the financial and economical

standpoint. Pizza Hut was badly affected by the inflation, debt crisis, trade barriers set by

Brazilian government. However, The Brazilian economy’s solid performance during the

financial crisis and its strong and early recovery, including 2010 growth of 7.5%, have

contributed to the country’s transition from a regional to a global power.

Only three countries of South East Asia: Malaysia, Indonesia and Thailand have a considerable

GDP and economic condition. Other countries like Burma, Cambodia, Laos or Brunei are not

economically stable enough. So Pizza Hut will face more complexity in operating their business

in this area.

So Pizza Hut should put more effort in Brazil rather than moving business in South East Asia.

Question No. 3: What dimensions of the local political and economic environment have an

impact on Pizza Hut’s success in Brazil in volume, revenue, and profitability? How could a

change in those dimensions affect Pizza Hut’s future success?

Pizza Hut was politically affected by the factors discussed below.

• Mutation from a military dictatorship to a democratic government was cumbersome.

Although the government changed, there was a huge problem to make the transition fully

in effect. Different institutions as well as the established political norms and practices

were not very favorable for Pizza Hut.

• Even though democracy replaced dictatorship, however, the path of democracy was not

very even from the very beginning. The nascent democracy spread slowly. Pizza Hut

faced difficulty in the initial stage of the democratic governance.

• Brazil had a very centralized political system which was not in favor of Pizza Hut.

The economic factors that affected Pizza Hut are discussed below.

• Inflation was the main problem that affected Pizza Hut’s profitability.

• Protective tariff barriers and non tariff barriers like import quota set by government.

• High interest rate restricted Pizza Hut to source enough financial resources.

• Price inflexibility and exchange rate policies were not favorable.

• Brazil was hit by recession in 1981 which resulted in devaluation of currency, rising real

interest rate, real wage reductions and a widening federal deficit. All these made the

economy fell by 2%.

The political reformation would bring success to Pizza Hut. If proper democracy and free market

economy prevails in Brazil, it would help Pizza Hut to implement their business without any

barriers set by the visible hands of government. Both tariff and non tariff trade barrier would be

withdrawn and there should not be any restrictions set by the government. On the other hand,

when Brazil’s economy would be reliable in terms of inflation, exchange rate and federal

deficits, Pizza Hut will be successful in sourcing and using the financial assets more effectively.

So the change in political and economic condition can bring change in these ways.

Question 4: Why did Pizza Hut decide to purchase some stores in Brazil instead of

continuing to expand through issuing franchises? What are the strengths and weakness of

this strategy?

To expand sales in Brazil, Pizza Hut undertook a corporate franchise system. That means Pizza

Hut gave the whole territory to a specific franchise. (Like Pizza Hut’s Transcom franchise in

Bangladesh). Before 1993, Pizza Hut had no equity interest on any of their stores. Gradually,

Pizza Hut realized, the franchises are lacking the adequate operating knowledge and expertise.

So, to implement the required knowledge, to track revenues and taxes and to dig into the cost

structures of business, Pizza Hut decided to purchase some of the stores in Brazil instead of

continuing to expand through issuing franchise.

This strategy has both strength and weaknesses. They are argued below.

Strengths:

• Purchasing some stores of Pizza Hut gave the owners better understandings about

different economic and financial standpoints.

• Pizza Hut could easily track the sales, revenues, taxes and overall cost structures of the

business.

• Pizza Hut could apply its vast accumulated experience and expertise of operating

business throughout the world and make success in Brazil.

Weaknesses:

• The main weakness is the inability to deal with Brazilian economy. The economy was

erratic and high inflation was prevailing on that time. Pizza Hut was not very apt to face

this kind of economic features.

• Inability to adopt the management culture by the top level executives of Pizza Hut.

• Staff at the stores of Brazil was more than the usual number at other countries. So the

related costs and hidden costs were higher than the anticipation of the managers of Pizza

Hut.

• There was cultural difference. Pizza Hut’s top managers started to operate with the US

brand image in mind which was not congruent to the Brazilian culture.