Pepsi Franchisee Turns to Coke in Fight Over Rights

A 5-year-old battle between Pepsico’s Pizza Hut unit and one of its largest franchisees escalated Tuesday when the franchisee said it will stop serving Pepsi soft drinks in its 240 restaurants and switch to Pepsi’s archrival, Coca-Cola.

The announcement again cast a spotlight on a dispute that has become increasingly troublesome for Purchase, N.Y.-based Pepsico because the franchisee, Pizza Management Inc., is owned by a prominent Latino businessman who has repeatedly accused Pepsico of trying to destroy his business.

The fight began in 1986, when Pepsico refused to allow Arturo Torres to take his San Antonio, Tex.-based Pizza Management Inc. public. Torres sued Pepsico for damages and Pepsico countersued. The two sides have been unable to come to a settlement, but meanwhile bitter charges of racism and insensitivity to minority-owned businesses have drawn the attention of the Congressional Hispanic Caucus and the U.S. Hispanic Chamber of Commerce.

Pizza Management’s announcement Tuesday made no mention of the legal battle with Pepsico. “More than anything else, Coca-Cola has demonstrated a real commitment to helping us strengthen our business,” Torres said in a statement.

According to Pizza Hut spokesman Roger Rydell, about 3% of the 7,000 Pizza Hut restaurants don’t sell Pepsi. Coca-Cola spokesman Randy Donaldson said Coke has 60% of the restaurant business around the country, including a few of the franchisees of Pepsi’s Kentucky Fried Chicken unit. Pepsi has about 20% to 25% of the restaurant business, Donaldson said.

Pepsi spokesman Kenneth Ross indicated that this particular switch was about more than what brand of soda to sell with pizza. “He’s (Torres) simply using today’s action as a lever in this (legal) matter,” Ross said.

“We’re engaged with Mr. Torres in an ongoing legal dispute over actions he’s taken to break his contract,” Ross said, referring to the long-running battle over franchise issues.

Pepsi has maintained that the dispute is simply about enforcing the franchise contract. “Mr. Torres wishes to break fundamental tenets of a contract that he signed with Pizza Hut requiring all franchises (to) maintain a 51% stake in their operation. This ensures that franchises remain focused on the business, not financial deal making.”

Torres’ attorney, Larry Klenda, said that Torres purchased the franchise before Pepsico became Pizza Hut’s owner and that the contract allowed him to take the company public. He claimed Pepsi had agreed to allow Torres to proceed under the original contract but changed its mind when he began to make plans for the public offering.

Pepsi has argued that the issue is not whether Torres could take the company public, but that Torres’ public offering plan would have been in violation of the contract by selling more than 49% of the company to the public.

The Cuban-born businessman believes that there are racially biased motives on the part of Pepsico, said Jim Grossman, a spokesman for Torres. “Mr. Torres believes if he wasn’t Hispanic, Pepsico would have settled the case a long time ago. He believes Pepsico and Pizza Hut are insensitive to the livelihood and lives of Hispanic people.”

Pizza Management is one of the largest Latino-owned companies in the country, with operations in Texas, five other states, the Virgin Islands, Puerto Rico and Spain. The firm employs 5,300 workers, 3,500 of whom are Latino.

“This is purely a legal matter. We find (Torres’) attempts to drag us in the gutter of racial innuendo despicable. He is attempting to win in the press. Attempting to win by a smear campaign against us what he has been unable to win legally,” said Pepsico spokesman Ross.