A class action has erupted between angry Pizza Hut franchisees and the chain's head company in the wake of a fierce price war with competitor Domino's.
The Pizza Hut franchisees say they will struggle to cover costs and earn profits after parent company Yum! Restaurants Australia ordered the chain's cheapest pizzas sell for $4.95 and its most expensive for $8.95.
The move represents a price cut of as much as 50 per cent for some pizzas and signals a discounting battle with market leader Domino's, as the two takeaway giants fight for a bigger slice of Australia's $3.5 billion pizza industry.
The class action comes after a group of 80 franchisees failed to get an injunction in the Federal Court in June to stop the price cuts, claiming the move could put some of them out of business.
Since both Pizza Hut and Domino's lowered their prices on July 1, the companies have launched an advertising blitz to promote the low-cost pizzas and attract customers away from other cheap fast food options.
According to an originating application filed with the Federal Court, the franchisees are seeking to find out if Yum! breached their franchise agreement and engaged in "unconscionable conduct" by cutting its prices.
There are also claims over whether Yum! owed a duty of care to its franchisees when setting the reduced prices. The group is seeking damages from Yum! to cover the lost profits since the discounts were introduced.
One Pizza Hut franchisee, who did not want to be named, has struggled to stay afloat and hoped the class action would get Yum! to "just listen to us for once".
"Everyone's struggling, it's a financial nightmare," the franchisee said. "It's been ongoing since before the price cuts, this just puts the final nail in the coffin."
The applicant of the class action is a company run by Sydney businessman Danny Diab, regarded as one of the leading Pizza Hut franchisees in Australia.
The class action launched in the Federal Court is an opt-out, meaning it could engage hundreds of Pizza Hut franchises around the country in action against its own parent company.
Australasian Pizza Association president Jim Kartsounis is acting as solicitor for the franchisees, however he and Yum! declined to comment on the action while it is before the courts.
Last month, Pizza Hut general manager Graeme Houston said the court action was "not ideal" but hoped increased sales would prompt a change of heart from the franchisees.
"Results will always be the ultimate scorecard," he said.
Mr Kartsounis argued in the previous injunction hearing that, while the discounted pizzas might increase sales, it would not increase profitability due to the reduction in sale price and increase in cost of sales.
The franchises are not an insignificant investment. According to the Pizza Hut website, franchisees are required to invest as much as $300,000 to open a new store, plus a start-up fee.
Franchisees are also required to pay a monthly royalty, advertising contribution and purchasing contribution to Yum!, which are based on a percentage of a store's sales.
It's not the first time a major fast food company has found itself in a battle with its own franchisees over pricing strategies.
In the United States, hundreds of Burger King franchisees took their head company to court over a requirement to sell a double cheeseburger for $1.
A directions hearing has been set in the Federal Court for October.
