The shacks that pizza built

Pizza Hut, the world’s largest pizza chain, has 12,000 stores in 84 countries and has one of the most successful franchise systems in the world. But no one unfamiliar with the 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 been in a family of 12 children and were always looking for an opportunity to earn money to pay for their school. So when an owner encouraged them to open a pizzeria, having heard about the popularity of pizza in New York, the brother jumped at the chance. They had only tried pizza once, so they asked a neighbor, John Bender, to help them with a pizza recipe. Bender remembered the sauce recipe but not the dough recipe, so he just rolled up the bread and accidentally came up with the first thin crust. Next, the brothers had to choose a name, but they didn’t want to spend more on posters, so they used the old store. After scanning the word Pizza, they found that they had no more than three letters to fill it, so they added the word Hut. Pizza Hut was born.

Its sales during the first year were dismal. No one had ever heard of Pizza Hut before, so to increase sales, the brothers invited the Wichita State University football team to eat at Pizza Hut and then gave away prizes. That had customers lining up every day for a bite of his pizza.

The brothers began franchising in 1959, licensing their seventh store to Dick Hassur, the manager of their third store. The brothers loaned him money for the franchise, and soon they began to grant more franchises to people who already knew the system, a procedure that is followed to this day. Many former Corporate Office employees who left or retired became franchisees. One of them was Mike Dart, who had worked part-time at Pizza Hut as a student, was offered a position in the corporate office upon graduation, and later became vice president of financial services. When he left Pizza Hut, Dart formed the Daland Corporation with other former Pizza Hut employees. Daland now owns 154 Pizza Hut stores in Florida, Alabama, Georgia and Louisiana.

When Pizza Hut began franchising, the Carney brothers admitted that they simply licensed 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 offers on napkins and sealed them with handshakes. They charged only $100 in franchise fees and no more than $50 in royalties. The brothers started charging higher fees only after their full support system and operating standards were in place.

Soon Pizza Hut was ready for a public offering. One franchisee had suggested that Pizza Hut should expand its company-owned units, and to do so, it could first offer stock to existing franchisees in exchange for their territories and stores. That happened, and the private placement went down in US Securities and Exchange Commission history as the largest for a Class B organization. Pizza Hut made the private offering in 1968. The following year, it made its offer Initial public listing of its shares at $16 a share, and within three days the share price rose to $32.75. All Pizza Hut franchisees became millionaires overnight. (Interestingly, many of the franchisees who had changed 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 had been looking for a strategic partner that would allow them to run Pizza Hut as they saw fit, and Pepsi fit the bill. Eight years later, the company decided to introduce its delivery service to increase profits. He came up with the idea because half of all his sales were takeout, and while many franchisees resisted at first, fearing the risk and change, they 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 at the beginning. “As a result, there will be inherent agreement and a lot of disagreement about direction.” Despite the disagreements, Pizza Hut’s recognition of the role franchisees play in the system has proven to be the most important factor in its growth. In fact, 40 percent of Pizza Hut stores are owned by franchisees, and the average age of a franchised establishment in the system is 13 years old.

The Carney brothers knew little about pizza when they started, but their guts and early ability to know where their strength lay, and their determination to use it to chart their growth strategy, allowed them to conquer the United States, where the pizza segment pizza is a $25 billion business – and the world. Imagine our loss if they hadn’t wanted money to finish college!

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