FEDERAL COURT OF AUSTRALIA

Diab Pty Ltd v YUM! Restaurants Australia Pty Ltd [2016] FCA 43

ORDERS

THE COURT ORDERS THAT:

1.    Proposed orders, by consent or as proposed by each party, be sent to chambers by 19 February 2016.

2.    Any proposed redactions to the reasons, said to be confidential, be sent to chambers by 19 February 2016.

3.    The matter be stood over to 23 February 2016 at 9.30am.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

TABLE OF CONTENTS

BENNETT J:

1    These proceedings, brought by Diab Pty Limited (DPL), a franchisee of Pizza Hut outlets, concern a decision made by Yum! Restaurants Australia Pty Limited (Yum), the franchisor. That decision, which was announced to Pizza Hut franchisees on 10 June 2014 and implemented on 1 July 2014, was to reduce the ranges of Pizza Hut pizzas from four to two and reduce the prices in the available ranges to two price points: $4.95 for “Classics” pizzas (from $9.95) and $8.50 for “Favourites” pizzas, formerly called “Legends” pizzas (from $11.95). Yum’s strategy was known as the Value Strategy (VS) and the reduced price points were predicated on various iterations of a model prepared by Yum personnel (the Yum Model). DPL brings its claim against Yum as the representative applicant of all persons who were franchisees under an International Franchise Agreement (IFA) with Yum to operate Pizza Hut outlets as at 1 July 2014 (Franchisees; singular: Franchisee).

2    A range of terminology and definitions are used in these reasons. Accordingly, a glossary of terms is attached in Annexure A. Further, the parties provided a series of chronologies, following the hearing, and a summary chronology of the events relevant to this matter is attached in Annexure B. That chronology, submitted by the parties, is not agreed as to all of the facts as provided but serves only to provide a convenient reference of the relevant date. DPL provided the original chronology, which is represented in black in Annexure B, and Yum made changes to DPL’s chronology and those changes are represented in blue in Annexure B.

1.    THE PARTIES

1.1    DPL

3    DPL is a Pizza Hut franchisee which owns and operates six Pizza Hut outlets in the Greater Macarthur region of south-western Sydney, pursuant to a separate IFA for each outlet.

4    DPL was formed in 1986. Mr Danny Diab is the majority shareholder and managing director of DPL. Since 1995, Mr Diab has had an extensive involvement in all aspects of the Pizza Hut business in Australia, including as a franchisee director of Pizza Hut Adco Limited (Adco), a body that, in conjunction with Yum, is responsible for marketing and promotional activities and promoting the Pizza Hut business, brands and products in Australia. Mr Diab was a director of Adco until April 2014 and was a representative on many of Yum’s joint councils with Franchisees. Mr Diab is also a director of Restaurant Brands New Zealand Limited (RBNZ), the New Zealand Pizza Hut master franchisee.

5    When compared to the national average, all of the current DPL outlets are high volume stores. Mr Diab gave evidence that DPL outlets have a 2-to-1 advantage over the Domino’s stores in the Greater Macarthur region. This is not the case with other Pizza Hut outlets. The importance of this numerical advantage and scale was recognised within Yum as seen in an email of 11 August 2013 from the senior planner of Yum in the USA. In the period February to June 2014 DPL outlets were experiencing increasing sales with a “run rate” of approximately 3.55% increase in sales growth. Mr Diab gave evidence that he advised Yum of the positive progress that DPL was making. DPL states that since the implementation of the VS, it has experienced a significant decline in its sales and profitability.

1.2    Yum

6    Yum is an Australian subsidiary of Yum! Brands, Inc. (Yum US), which is a publicly listed company on the New York Stock Exchange and is among the world’s top 250 companies on the Fortune 500 list. Yum operates the Pizza Hut business in Australia. Yum called key personnel involved in the launch of the VS to give evidence. The personnel included:

    Mr Graeme Houston, the General Manager of Pizza Hut South Pacific (SOPAC);

    Ms Lynne Broad, employed by Yum as the Head of Finance and Supply Chain, Pizza Hut;

    Mr Kurtis Smith, employed by Yum in July 2013 as the Head of Operations of Pizza Hut SOPAC and in January 2014, he became the Market Director for Pizza Hut in Australia until January 2015;

    Ms Fatima Kamali-Syed, employed by Yum as the Head of Marketing; and

    Mr Devesh Sinha, employed by Yum as the National Operations Manager from January 2014 until 15 July 2015.

7    Mr Houston has been a director of Yum since 21 December 2011. Ms Broad became a director in December 2014. Mr Smith and Mr Sinha no longer work for Yum; however, both have roles in Yum US’ Dallas headquarters. Mr Smith is the Senior Director of Development of the USA Pizza Hut business and Mr Sinha is now the Senior Manager of Operations for what has been described as Pizza Hut Global.

8    Mr Houston gave evidence that, as at 27 November 2014, there were approximately 210 Pizza Hut franchisees in Australia, of which approximately 45 were franchisees which operated more than two outlets and approximately 4 were franchises which operated more than 5 outlets.

9    In terms of its own financial reporting cycle, Yum provides quarterly reports to the Chief Financial Officer (CFO) of Pizza Hut Global, Mr Enrique Ramirez, commencing each year with a forecast known as Q0F, which is then updated in subsequent periods by forecasts known as Q1F, Q2F and Q3F. According to Ms Broad, these forecasts are then built into a consolidated forecast for the Pizza Hut business as a whole.

10    In terms of business and financial planning, Yum commences this process in about July of each year when Yum, with every other business unit which is a subsidiary or related entity around the world, submits a market growth plan which outlines store build and profit targets, which are agreed with the Pizza Hut Global CFO. In about October of each year, there is a conference between Yum’s leadership team and the Yum US senior leadership team. During this conference, Yum presents its business strategy known as the Annual Operating Plan (AOP) to the Yum US senior leadership team. The AOP meeting for the 2014 Yum year took place on 9 October 2013.

1.3    Representative proceedings and group members

11    These representative proceedings were commenced by DPL under Part IVA of the Federal Court of Australia Act 1976 (Cth) (the FCA Act). The group members are defined as the Franchisees who suffered loss as a result of the introduction of the VS. Opt-out notices were sent to all potential group members on 10 October 2014, as a result of which only 11 of the Franchisees opted out. It follows that approximately 190 of 200 of the Franchisees are group members for the purposes of the proceedings.

12    In accordance with s 33H(1)(c) of the FCA Act, DPL has specified the questions of law and fact common to the claims of all group members in the Amended Originating Application dated 2 April 2015 (the application): (Merck Sharp & Dohme (Australia) Pty Ltd v Peterson [2009] FCAFC 26 at [6]).

13    DPL submits that, other than questions relating to the quantification of damages, there is a very high level of commonality between the claims of DPL and each of the group members – essentially because Yum’s conduct involved the introduction of a single, national strategy and Yum’s legal relationship with the Franchisees was and is conducted pursuant to a standard form IFA. However, other group members may have separate claims that they may wish to advance against Yum pursuant to s 33R of the FCA Act. These separate claims would be in addition to the claims made in the Amended Statement of Claim dated 2 April 2015 (ASC). Also, it is probable that each group member would have to establish his, her or its damages if liability is established.

14    It should be noted that, in [26] of the ASC, DPL has clearly specified that it claims damages on its own behalf as an individual claim, which includes the quantification of its loss as to which it has led evidence from both Mr Diab and Mr Potter. DPL particularised, in [27] of the ASC, that ‘[p]articulars of the loss and damage suffered by the [Franchisees] will be provided after the determination of the common issues relating to liability and the determination of the individual damages claim of [DPL]’. That is, if the Court finds in favour of DPL and awards damages to DPL, the judgment will enure for the benefit of all group members as findings on the common questions, other than in respect of the quantification of damages. The Court’s power to award damages to DPL only at this time is established by s 33Z(1)(e) of the FCA Act. The Court may then take submissions as to the appropriate orders or directions to be made in respect of the damages claims or assessments to be made in respect of all other group members under s 33Z(1)(g) or s 33ZF of the FCA Act.

2.    THE IFA

15    Mr Diab, and each Franchisee, executed the IFA for a term of 10 years with a right of renewal for a further 10 years, subject to certain conditions of compliance (clause 18). The IFA provides in clause 14 that the Franchisee cannot sell or transfer any interest in the IFA without Yum’s prior written approval of the proposed transferee.

16    Clause 1.1 provides that Yum grants to the Franchisee the right to use a comprehensive restaurant system (the System). The Franchisee agrees to use its best endeavours to develop the Business (defined as the business of preparing, marketing and selling the products) and to increase the Revenues (defined as gross receipts received by the franchisee as payment for the products and for other goods and services) (clause 1.2). By clause 2.3, the initial and annual payments made by the Franchisees are in consideration of the rights granted in clause 1.1 and not for Yum’s performance of any specific obligations or services.

17    Also relevant are clauses:

5.2    Franchisor may, by notice to Franchisee, at any time change or withdraw any Approved Product or add new Approved Products. Franchisee will implement such changes, withdrawals and additions within the period specified in the notice.

…

6.1    Franchisee will not execute or conduct any advertising or promotional activity in relation to the Business or the System without Franchisor’s prior written approval.

6.2    Franchisee will participate in such national and regional advertising, promotions, research and tests as Franchisor from time to time requires and Franchisee will not have any claim or action against Franchisor in connection with the level of success of any such advertising, promotion, research or test.

…

23.1    This Agreement constitutes the entire agreement between the parties with respect to its subject matter and supersedes all prior negotiations, agreements or understandings.

18    “Approved Products” are defined, in schedule A of the IFA, as ‘the products from time to time approved by Franchisor for sale in the Business.’ Yum also points to the “franchisee’s representation” which forms part of the IFA:

(a)    Franchisee has reviewed this Agreement with the assistance and advice of independent legal counsel and understands and accepts the terms and conditions of this Agreement;

(b)    Franchisee has relied upon its own investigations and judgment in entering this Agreement, after receiving legal and financial advice, and no inducements, representations or warranties other than those expressly set forth in this Agreement, have been given in respect of the System, the Business or this Agreement; and

(c)    Franchisee acknowledges that establishment and operation of the Business will involve significant financial risks and that the success of the Business will depend upon the skills and financial capacity of Franchisee and also upon changing economic and market conditions and that such risks, skills and conditions are not in any way guaranteed or underwritten by Franchisor.

19    The key clause with respect to the exercise by Yum of its power to fix the prices pursuant to the VS is clause C1 the IFA. This clause provides:

MAXIMUM RETAIL PRICE

Franchisee will not permit any Approved Product to be sold at the Outlet at any price exceeding the maximum retail prices advised by Franchisor to Franchisee from time to time.

3.    THE STATEMENT OF CLAIM/THE ASC

20    There are certain matters as to the IFA that are not in dispute on the pleadings:

    The IFA provided the structure for the System.

    The Franchisees agreed to comply with specifications concerning the operation of the System, which provided for uniform operation of all restaurants within it.

    The matters set out in clause 1.1 of the IFA.

    The Franchisee is an independent contractor and no fiduciary relationship exists between the franchisor and the Franchisee.

    The Franchisees will not permit any Approved Products to be sold at any price exceeding the maximum retail prices advised by the franchisor to the Franchisees from time to time.

    The franchisor may, by notice to the Franchisees, change, withdraw or add new Approved Products.

    The Franchisees will participate in advertising and promotions as the franchisor requests, with no claim in connection with the level of success.

    The Franchisees will spend an amount on advertising as directed by the franchisor, being 6% of revenues, as defined, payable to the Adco or as directed by Yum and 0.5% of revenues on local advertising and promotions approved by the franchisor.

21    DPL’s pleaded case in contract has two related components:

(1)    DPL pleads that on the proper construction of clause C1, Yum was obliged to set profitable prices – being prices that would enable a Franchisee to make, maintain or increase its profits;

(2)    DPL pleads that Yum was subject, in any event, to the following implied duties owed by Yum under the IFA to DPL and to each Franchisee:

(a)    A duty to cooperate with the Franchisees to achieve the objects of the IFA; and

(b)    A duty to comply with standards of conduct that are reasonable having regard to the interests of the parties to the IFA.

22    Diab also pleads that ‘for the purpose of the Implied Duties and/or for the purpose of construing Yum’s powers under the IFA’ the following, in summary, applies:

    The object of the IFA is to generate profits for DPL and for each Franchisee performing in accordance with the IFA.

    The benefit of the IFA for DPL and each Franchisee, and their interest under the IFA includes:

    the ability to make and increase profits after covering operating costs, overheads and cost of capital, from developing the business and by investment of capital, time, skill and labour using a proven business system and brand developed by Yum, without having to share those profits with Yum except by way of fixed royalty percentage;

    the ability to market, sell and transfer the business and reap a capital gain; and

    the collective marketing of the Pizza Hut brand to consumers in Australia, in relation to which all Franchisees contribute.

4.    THE WITNESSES

4.1    Mr Diab

23    Mr Diab is the managing director and the majority shareholder of DPL. Mr Diab has been involved in the pizza business since 1987 and has been involved with Pizza Hut since 1989. His involvement with Pizza Hut includes:

    Over the last 25 years, he has overseen the development and operation of DPL’s Pizza Hut outlets.

    From 1998 to 2011 and from 2012 to May 2014, Mr Diab was a franchisee director of Adco.

    He was a franchisee representative of a number of other Yum bodies including the Pizza Hut Purchasing Council, the Pizza Hut Operations Council, the Pizza Hut Development Council and the Customer Service Centres Council.

    Between 2009 and 2012, Mr Diab was President of the Australasian Pizza Association Inc, which is a representative body for approximately 150 of the Pizza Hut franchisees. Further, between 2000 and 2008, Mr Diab was the President of the National Pizza Association, which was the predecessor of the Australasian Pizza Association Inc.

    Since 2013, Mr Diab has been a director of RBNZ. Prior to 2013, he worked as a consultant to RBNZ and advised it in relation to its acquisition of the Eagle Boys chain in New Zealand during 1999-2000 and in relation to its acquisition of 51 Pizza Hut Outlets in Victoria in 2002, which it subsequently sold in the 2007/2008 financial year.

24    Mr Diab also holds a Diploma in Company Directorship from the University of New England and the Australian Institute of Company Directors (AICD), and a Graduate Diploma in Corporate Management from the Institute of Corporate Managers, Secretaries and Administrators (ICMSA). Further, Mr Diab is a Foundation Fellow of the AICD, since 1991, and a Fellow of ICMSA, since 1995.

4.2    Mr Houston

25    Mr Houston is employed by Yum as the General Manager Pizza Hut South Pacific (SOPAC) and has held this position since 2011.

26    Mr Houston was awarded a Bachelor of Commerce from Canterbury University in New Zealand in 1986. He has been employed by Yum, or its related entities, since 1990. His various roles have included:

    From 1990 to 1994, he held various Area Manager Positions in Auckland and Dunedin in New Zealand and Wollongong, New South Wales in KFC Operations (which is a division of Yum). At that time KFC was part of Pepsi Co International.

    In 1994, he was promoted to the position of Operations Manager New South Wales KFC.

    In 1995, he was promoted to market manager for Pizza Hut New Zealand and this was the most senior position in Yum that was based in New Zealand.

    In 1997, Mr Houston was promoted to Market Manager KFC Victoria, Tasmania and South Australia where he was responsible for 90 company owned restaurants and 48 franchised outlets.

    In 2002, he was promoted to Chief Supply Chain Officer for both KFC and Pizza Hut, based in Sydney. In that role he reported to the Managing Director Yum SOPAC.

    In 2003, Mr Houston became the General Manager Pizza Hut Operations SOPAC, in which he led the Operations team for Pizza Hut in Australia and New Zealand.

    In 2006, Mr Houston became the Vice President of Pizza Hut Delivery Operations of Yum! Restaurants International (which is a division of Yum US). Mr Houston was responsible for developing the Pizza Hut delivery business for all countries in which Pizza Hut did business except the USA and China. He held this job until 2011. During this period, Mr Houston also participated in the Global Pizza Hut Brand Council, which is an annual meeting of “key thought leaders” from the global Pizza Hut brand to help develop and refine the Pizza Hut brand strategy.

27    From 2013, Mr Houston has also assumed responsibility for establishing and developing the Pizza Hut brand in Russia. This role was expanded from 2014 as Pizza Hut Africa was added to his portfolio.

4.3    Ms Broad

28    Mr Broad is employed by Yum as the Head of Finance & Supply Chain, Pizza Hut and has held this position since the middle of 2013 and reports to Mr Houston. Ms Broad has held the position of Head of Finance since January 2011. Ms Broad commenced employment with Yum in April 2007 and has held the following roles: Group Taxation & Treasury Manager, Finance Manager and Commercial Planning Manager. Ms Broad was awarded a Bachelor of Commerce from the University of Sydney and Graduate Diploma from the Institute of Chartered Accountants in Australia. Ms Broad is currently a director of Yum and was appointed in December 2014.

4.4    Ms Syed

29    Ms Syed is the Head of Marketing of Yum and a member of the Leadership Team. Ms Syed has held these positions since January 2013. She has seven employees in her team, five in the Marketing Team and two in the Research and Development Team. Mr Richter is the Marketing Manager and the most senior person reporting to Ms Syed. Ms Syed began working for Yum in November 2010 as the Group Marketing Manager.

30    Ms Syed was awarded a Bachelor of Business Degree by the University of Technology, Sydney, in 2000 and was awarded a Masters of International Business Degree from the University of Sydney in 2001. She has worked as a marketing professional in Australia for 12 years, in the following roles:

    Assistant Brand Manager at Nestlé Australia Ltd from 2002 to 2004.

    Brand Manager at Reckitt Benckiser Healthcare Australia Pty Limited from 2004 to 2006.

    Brand Manager at PepsiCo Australia and New Zealand from 2006 to 2008 and Senior Brand Manager from 2008 to 2010.

    Group Marketing Manager at Yum from 2010 to 2012.

4.5    Mr Sinha

31    Mr Sinha was the National Operations Manager of Yum from January 2014 until 15 July 2015.

32    Mr Sinha had extensive work experience before joining the Yum system, including:

    From 1994 to 1995, he was a Hotel Operations Management Trainee at the Taj Mahal Hotel in Mumbai, India.

    From 1995 to 1996, he was the Managing Partner of Zodiac – Multicuisine Restaurant in India.

    From 1996 to 1998, he was the Executive of Hotel Services at Eurest Radhakrishna Hospitality Services Pvt. Ltd in India.

    From 1998 to 2000, Mr Sinha was a District Manager of Domino’s Pizza India.

33    Mr Sinha first worked in the Pizza Hut system in India in 2000 as the Restaurant General Manager for Favorite Food India (which was a subsidiary of Wybridge, the Master Franchisor for Pizza Hut in Indonesia), where he opened and managed Pizza Hut stores in Mumbai. In that capacity, Mr Sinha had personal experience in making, and supervising the making, of pizzas in a Pizza Hut store. Since 2000, Mr Sinha has had many roles associated with the Pizza Hut business. These include:

    In 2002, Mr Sinha was the Area Coach in Wellington for RBNZ, in which he managed the operation of the Pizza Hut Stores. He stayed at RBNZ until 2006.

    From 2006 to 2009, he had the position of Franchise Business Coach and EDI Operations Leader for Yum Restaurants International in India.

    From 2009-2011, Mr Sinha was the Area Manager of Southern Restaurants Pty Ltd in Melbourne, Victoria.

    In 2011, Mr Sinha became the Pizza Hut State Operations manager for New South Wales with Yum.

34    In January 2014, Mr Sinha was promoted to National Operations Manager. Each State Operations Managers reported directly to Mr Sinha and the operations team was responsible for maintaining operational standards across all Pizza Hut stores in Australia. Mr Sinha reported directly to Mr Smith. Mr Sinha had the overall responsibility for all operational matters that impacted customers, including such matters as food preparation, food and operational safety and customer service.

4.6    Mr Smith

35    Mr Smith is the Senior Director of Development in the Pizza Hut USA business and has held that position since January 2015. At the time of the hearing before Jagot J, Mr Smith was employed as a Market Director by Yum and held this position since January 2014. The role required him to oversee day-to-day operations at Pizza Hut Australia and he reported to Mr Houston.

36    Mr Smith was awarded a Bachelor of Science in Business Administration, majoring in Accounting, from the University of Richmond, in Virginia in the USA, in 2002. Further, in 2007, he was awarded a Masters of Business Administration from the University of Chicago – Booth School of Business.

37    Mr Smith’s professional background is, as follows:

    From 2002 until 2005, Mr Smith worked as an Associate at Deloitte.

    From 2006 to 2009, he was a consultant at Bain & Company.

    From December 2009 until October 2010, he was the Senior Manager, Strategy, at Hewlett Packard.

    Between October 2010 and July 2013, Mr Smith was employed by Yum! Restaurants International in which he held a range of positions including Manager, Strategic Planning (from October 2010 to June 2011), Senior Manager, Strategic Planning (from June 2011 to December 2011) and Director Financial and Capital Planning (from January 2012 to July 2013).

38    Mr Smith joined Yum in July 2013 as the Head of Operations, Pizza Hut SOPAC.

4.7    The experts

4.7.1    Mr Potter

39    Mr Potter qualified as a Chartered Accountant in 1990. He is now the principal of Axiom Forensics Pty Limited. Mr Potter’s relevant experience to this matter is, as follows:

    He was a trainee accountant in Perth for two years, before obtaining a Bachelor of Commerce at the University of Western Australia.

    He was a graduate accountant in Perth for three years and worked as a Chartered Accountant in Perth and Sydney for 24 years. Mr Potter’s experience in that time included 13 years in insolvency and reconstruction accountancy specialisation and 16 years in forensic accounting, which has included investigations for regulators on issues including valuation, valuation disputes and competition related disputes, pricing decisions and/or valuation matters, damages assessments and consulting assignments.

4.7.2    Mr Gower

40    Mr Gower is a Chartered Accountant and has been a director of GoweJones & Co Pty Limited since 2009. Mr Gower’s professional background is, as follows:

    Between 1977 and 1982, Mr Gower was employed by Arthur Young in South Africa and Australia.

    In 1982, Mr Gower joined Duesbury’s (a predecessor firm of Deloitte Touche Tohmatsu).

    From 1987 to 1993, Mr Gower was a Partner off Duesbury’s and from 1993 to 1998 he was a Partner of Deloitte Touche Tohmatsu.

    Between 1998 and 2003, Mr Gower was a sole practitioner at GCA Gower & Co and he became a director of GCA Gower & Co from 2003 until 2009.

41    Mr Gower has provided accounting support across a range of areas, including:

    Analysis of the fairness of the acquisition considerations to be paid.

    Valuation of businesses.

    Due diligence investigations.

    General financial analysis and advice in respect of the preparation of forecasts, feasibility studies and evaluation of the benefits of transactions.

    Litigation engagements, involving providing evidence in respect of accounting matters generally and quantification of economic loss.

5.    FACTUAL BACKGROUND AND SUBMISSIONS ON THE FACTS

42    DPL has analysed Yum’s closing submissions by subsequently providing a comprehensive table of responses to various of those submissions, and Yum has responded to these comments. Nonetheless, this section will summarise facts asserted and, where appropriate, the parties’ submissions as to the facts as presented prior to the table being provided by DPL. I will then turn to my consideration of the facts asserted and submissions advanced by the parties, taking the table, with Yum’s responses, into account as relevant.

5.1    Chronology of pricing

43    DPL provided a useful table that compared headline prices for Pizza Hut and Domino’s before the VS and at 1 July 2014 when the VS was implemented. Relevantly to the calculation of loss and damage, the analysis is of the prices of Pizza Hut pizzas before the VS, the prices due to the implementation of the VS and the prices of pizzas during the period of loss. Accordingly, the prices of the ranges of Pizza Hut pizzas, with a delivery fee of $8.00, before the VS were:

44    As at 1 July 2014, the date of the implementation of the VS, the delivery price was increased to $8.95, the Legends range was changed to Favourites (with the number of pizzas increasing from 8 to 11 in the range) and the Mia and Signature ranges were removed. The prices of the ranges of Pizza Hut pizzas as at 1 July 2014 were:

45    Yum says that major price adjustments were made to the ranges of pizzas following the implementation of the VS. Yum relies on Ms Syed’s affidavit dated 13 July 2015, which is relevantly summarised as follows:

    On 14 August 2014, Yum increased the delivered price for the Classics range from $4.95 to $8.95, increased the delivered price for the Favourites range from $8.50 to $11.95 and the delivery fee was decreased from $8.95 to $4.95.

    On 30 September 2014, Yum increased the delivered price for the Classics range from $8.95 to $9.95.

    On 2 December 2014, Yum increased the pick up price for the Favourites range from $8.50 to $10.95. A new tier of pizza range was also introduced, which was called the Loaded Classics range. The price for this range was $7.95 and the delivered price was $10.95.

    On 22 December 2014, Yum increased the fixed delivery fee from $4.95 to $7.95.

    On 5 May 2015, Yum increased the pick up price for the Classics range from $4.95 to $6.95 (except on its website), increased the pick up price for the Loaded Classics range from $7.95 to $9.95 and increased the pick up price the Favourites range from $10.95 to $11.95.

5.2    Characterisation of the VS

46    DPL describes its characterisation of the VS in [13] of the ASC, which is as follows:

On 10 June 2014, Yum advised the Applicant and the other Franchisees (Advice), that:

(a)    On an from 1 July 2014, it was reducing the maximum prices that could be charged for pizzas sold at Pizza Hut Outlets for takeaway and delivery to two price points (Reduced Prices):

(i)    “Classics” pizzas at $4.95 (including GST) – being a reduction of approximately 50% from the preceding price of $9.95; and

(ii)    “Legends” pizzas at $8.50 (including GST) – being a reduction of approximately 29% from the preceding price of $11.95.

(b)    On and from 1 July 2014, Yum was reducing the range of Approved Products to be sold at Pizza Huts to the “Classics” and “Legends” ranges of pizzas (removing the “Signature” and “Pizza MIA” ranges of pizzas);

(c)    Yum had made its decision to implement the Reduced Prices in (a), the change in the range of Approved Products in (b) and certain other changes, including changes to delivery prices (Reduced Price Strategy) on the basis of trials of a reduced price strategy at Pizza Hut Outlets in the ACT and experience in New Zealand, which it asserted had provided evidence of a significant increase in sales revenue in those markets in response to those trials;

(d)    On an from 1 July 2014, Yum would initiate a public marketing campaign of the new Pizza Hut prices as being for a limited time only, for the purpose of achieving a spike in sales, when it was not Yum’s intention that the prices be for a limited time only;

(e)    The introduction of the Reduced Price Strategy would be accompanied by an advertising program lasting 1 month only with financial support from Yum’s US parent company;

(f)    Yum would provide $1,000 per Outlet to each Pizza Hut franchisee in Australia by way of assistance to cover stock write offs arising from the deletion of the “Signature” pizza range;

(g)    Yum would not otherwise provide any compensation to franchisees for any loss of profits they may incur in implementing the Reduced Price Strategy.

47    Paragraph 13 of the ASC refers to ‘Reduced Prices’ as providing the foundation of the VS. As described by DPL, the VS comprised four main elements:

    the “Reduced Prices” – being the new price points for pizzas, which in fact became $4.95 for “Classics” and $8.50 for “Favourites” (previously called “Legends”);

    a menu reduction to two ranges of pizzas, by eliminating the “Signature” range and the “Mia” range;

    an advertising campaign to support the launch of the VS. A media booking authorisation form from Mediacom dated 20 May 2014 indicated approval for media spending of XXXX XXXXXXX; and

    a provision of assistance to the Franchisees of $1,000 including GST per outlet in relation to the launch.

48    Yum criticises DPL’s characterisation of the VS as it contends that DPL seeks to confine the VS to only the elements enumerated in the ASC. Yum submits that it has always said that the VS was an integrated market strategy that contained many elements, ranging from menu design, to an aggressive and attention catching marketing campaign, to reducing and simplifying the price points at which products could be purchased. In particular, it was always intended by Yum, as part of the VS, that Yum would be first into the market with an everyday value proposition of full sized pizzas at $4.95 all day every day. Yum says that these elements are not acknowledged by DPL, as DPL has isolated one aspect of the strategy by naming it the ‘Reduced Price Strategy’ in [13] of the ASC. Accordingly, Yum submits that this terminology diminishes the significance of the remaining elements of the VS, in particular, being first to market with an all-day every day value proposition.

5.3    ACT Test

49    Yum used a test in the ACT to trial the VS before its implementation (the ACT Test). It was commenced on 4 February 2014 and concluded on 28 April 2014. The ACT franchisee, who owned all 8 outlets in the ACT market, implemented the VS during this period with the assistance of Yum. Yum agreed to underwrite any losses suffered by the ACT franchisee during the test period. As a result of the ACT Test, Yum paid the ACT franchisee the sum of $143,000 to make good his losses. The ACT franchisee continued to implement the VS after 28 April 2014 and Yum also paid him $51,000 to make good the losses in this period after the completion of the test.

5.3.1    Appropriate to test

50    The parties are not in dispute that Yum’s decision to test the VS in the ACT was appropriate. The test was appropriate for the following reasons:

    Yum believed that there was a “value” problem in Australia and it wished to see whether adopting the New Zealand $4.90 strategy would increase sales, transactions and Franchisee profitability.

    Conducting a trial of a strategy, such as the VS, was an appropriate action by a franchisor acting responsibly towards its franchisees, particularly where it had the cooperation and support of the participating franchisee and had agreed to indemnify him.

    The ACT was an appropriate place to conduct such a test because it was a distinct media market with its own signal, there was a single franchisee who owned all 8 outlets in the market, the franchisee was one of the better performing franchisees and the low average current level of per store average (PSA) sales meant that there was significant room for improvement.

5.3.2    Mr Diab’s response to being informed of the ACT Test

51    DPL submits that Mr Diab’s response on being informed of the Act Test at the Adco meeting on 12 February 2014 was measured and appropriate, as he advised his franchisee colleagues in an email on 13 February 2014:

These tests are quite radical and have strong long term implications on our business, however we will assess the results carefully and decide whether this is the right thing for our businesses – if these tests are unsuccessful then we would have put the discount strategy fight to bed once and for all. I reiterate the Adco directors are currently opposed to these strategies, however have agreed to examine and scrutinise any results, at the end of the day it will require significant hard evidence to determine the viability or failure of either of these tests.

5.3.3    Profitability of the ACT franchisee

52    DPL contends that Yum asserted that profitability of the ACT franchisee improved during the ACT Test and that this was presented to the Franchisees on 14 and 15 May 2014 and repeated without qualification in the evidence presented before Jagot J during the Franchisees’ interlocutory application to prevent Yum from implementing the VS. Yum represented to the Franchisees, in a presentation on 14 May 2014 entitled “Franchisee Update May 2014” (the Franchisee Update), that there had been a $425 per week per store improvement ($425 improvement) in comparable profit in weeks 5 – 10 of the ACT Test. Yum submits that weeks 1 – 4 were not included in the presentation to the Franchisees on 14 May 2014 because the results in that period were not in a “steady state” and this issue was not challenged by DPL. Yum also submits that weeks 11 and 12 were not included because of the impact of the Easter and ANZAC Day holidays. At the time of the presentation, Ms Broad did not have profit and loss statements from the ACT franchisee; however, Ms Broad agreed that she did have sales information for that period but could not recall why same store sales growth (SSSG) was not presented. DPL contended that this calculation of the $425 improvement was ‘simply a product of financial engineering by Ms Broad that does not withstand reasonable scrutiny’. However, DPL did not establish that Ms Broad engaged in deliberate “engineering” of the results but did establish that the presentation to the Franchisees did not include relevant data, which may have affected the conclusions that could be drawn.

53    DPL submits that the true position, which was neither revealed to the Franchisees nor to Jagot J, was that the ACT franchisee incurred a loss during the test of approximately $140,000, for which it was compensated by Yum pursuant to the indemnity or “backstop” arrangement. Furthermore Yum had also agreed to pay the additional $51,000 to the ACT franchisee for its post-test losses on the basis that it maintained the VS prices following the conclusion of the test.

54    DPL submits, relying on the Franchisee Update, that there were two elements that comprised the calculation of the alleged $425 improvement:

(1)    An alleged post-launch profit for weeks 5 – 10 of $155 per week per store; and

(2)    A prior year loss of $270 per week per store.

5.3.3.1    Alleged post-launch profit

55    Ms Broad concedes that the $155 per week per store figure was taken from the adjusted profit and loss figures for weeks 5 – 9 (in Exhibit AO) not weeks 5 – 10 as stated in the above presentation document. In cross-examination, Ms Broad, stated that the calculation of $155 was only until week 9 and then Yum ‘double-checked to see if week 10 made a difference to that number’. DPL contends that Ms Broad invented this answer in the witness box to ‘attempt to cover up this relatively trivial slip’.

56    Nonetheless, the figure of $155 per week per store was calculated using 1.5% of sales for local store marketing (LSM) costs. DPL argues that Ms Broad arrived at this figure by “stripping out” LSM costs in excess of 1.5% and that this approach was not according to normal accounting practices of “matching” expenses and revenues. DPL analysed the full 12 week profit and loss for the ACT franchisee who incurred a 1.8% charge for ‘Local Store Marketing – Leaflet’ costs and a 4% charge for ‘Additional LSM’. On this basis, the ACT franchisee incurred costs equating to 5.8% of sales during the ACT test which were as a result of LSM.

57    Ms Broad explained that the 4% additional LSM was not actually spent by the ACT franchisee on LSM but was paid by it to Yum as a contribution to the overall marketing budget for the ACT Test. Nonetheless, DPL contends that Yum failed to account for all marketing expenses when determining net profit and arbitrarily cut off the expenses at 1.5% of sales rather than accounting for the 5.8% in total marketing expenses. It follows, DPL says, that if Yum had taken the full cost into account, the amount of extra cost would have been at least three times the amount calculated for LSM expenses in the Franchise Update, and an overall loss would have been calculated. Ms Broad did not object to this proposition if DPL’s calculation was correct and if it was appropriate to take the additional LSM into account.

58    Yum acknowledges that the ACT franchisee did provide 4% additional LSM. However, it contests the argument that the 4% should have been taken into account when analysing whether the ACT Test was profitable. Ms Broad said that she was ‘trying to get an understanding of what would happen to the [profit and loss] of a store if we launched the pricing strategy nationally’ and that the 4% additional LSM was required to replicate the marketing budget that would be used nationally. Yum submits that the “matching principle” was not appropriate in the circumstances because Ms Broad was analysing the impact on profitability that the VS would have upon a national rollout and the 4% Additional LSM would not be replicated on a national level. That is, the expense would not be incurred by the Franchisees on a national level, as the Franchisees’ contribution to the overall marketing budget would be what they currently paid.

5.3.3.2    Prior year loss

59    Ms Broad acknowledged that the prior year loss of $270 per week per store presented to the Franchisees in the Franchisee Update did not reflect her own estimate for period 3 of 2013 which she calculated as a loss of $257 per week per store. DPL suggests that the most likely explanation for the $270 per week per store figure is that it was based upon an average of the ACT franchisee data from period 5 to period 11 in 2013, which showed an average weekly loss per store of $273. DPL contends that this figure included a deduction for head office costs which, if removed, would have resulted in a profit of $239 per week per store for the ACT franchisee in 2013. That is, if this profit figure were used, there would have been a loss of approximately $980 per week per store, comparing 2013 and weeks 5 – 9 of the ACT Test.

5.3.3.3    DPL’s conclusion on the presentation of the ACT Test during the Franchisee Update presentation

60    DPL concludes that Yum actively engaged in a “public relations exercise” by presenting manipulated data to the Franchisees, which presented a false picture of the profitability of the ACT Test. Further, DPL contends that even if Yum did not have the full 12 weeks of data at the date of the presentations to the Franchisees on 14 and 15 May 2014, it certainly did have data at the time of the interlocutory hearing before Jagot J and it failed to make any qualification or explanation to the Franchisees or to the Court. It follows, DPL says, that Yum was in breach of its implied obligations to act reasonably and cooperatively in relation to the exercise of its power to set maximum prices under clause C1 of the IFA, because the true result of the ACT Test was that the VS prices caused the ACT franchisee to make a loss and thus Yum had no justification for reducing the price points for the Franchisees by application of the VS.

5.3.4    ACT sales results

61    DPL contends that Yum presented misleading sales results in the Franchisee Update, as it compared an SSSG of -5%, from the 12 weeks before the ACT Test to a range of increases in sales during the ACT Test, ranging from 14% to 48%. DPL argues that the presentation of SSSG in the Franchisee Update was misleading for the following reasons, as put to Ms Broad:

    The prior 12 week period was never a valid comparison, as it included Christmas and the January holidays, which as times when Canberra sales are traditionally low due to Parliament not sitting, school holidays and the public service shuts down. The trend is clear when one assesses the decline in PSA sales in the past two years over this period.

    The 48% increase in Week 6 reflected an abnormal dip in the prior year, which was associated with the transition period prior to the ACT franchisee taking over control of all the ACT outlets.

    Weeks 7 and 8 in 2014 were inflated due to the misalignment of Easter dates between the two years. That is, in 2014 Parliament was sitting in both of those weeks, whereas in the prior year Parliament sat for only one of those weeks as the other was during Easter.

62    Yum challenges DPL’s criticism that the prior 12 week period was never a valid comparator. Yum relies on Ms Broad’s explanation that the 12 week period before the ACT Test was used because:

    Ms Broad had the profit and loss statements for that period and the data were better, relying on assumed data.

    Ms Broad did not regard a failure to adjust for Christmas as a serious failure.

    Mr Houston believed that it was the only rational period to use and did not see anything that was not representative of the business, even though Christmas fell in the period.

63    Following the ACT Test, the ACT franchisee continued to implement the VS with Yum’s consent. The ACT franchisee experienced poor sales results after week 12 of the ACT Test. Yum attributed this to Yum ceasing advertising and the fact that Domino’s was not advertising on television. DPL contends that this assertion cannot be sustained in light of the Nielsen reports, which show that there was continued advertising by Yum and Domino’s following week 12 of the ACT Test.

5.3.5    Replication of the ACT Test

64    DPL contends that to the extent that there were any positive results generated by the ACT Test, they were not replicable because of the amount of money that was spent by Yum on advertising to generate those profits. DPL argues that, as Yum knew as at 14 May 2014 when the Franchisees briefings commenced, the only conclusion to be drawn from the sales results in the ACT was that extensive advertising could increase sales significantly in the absence of any response by Domino’s. Pizza Hut outspent Domino’s by 2:1 on media spending during the ACT Test, which contrasted the usual spending ratio, where Domino’s outspent Pizza Hut by 2:1. DPL says that there was simply no basis for Yum to have formed the conclusion as at that date, with all of the data which were then available, that the ACT test had been a success in terms of sales. By 10 June 2014, when the VS was announced to the Franchisees, the situation in the ACT was worse, and the negative trend was continuing as at 24 June 2014 when an interlocutory hearing took place before Jagot J.

65    Yum strongly denies DPL’s assertion that Yum’s large advertising budget during the ACT Test meant that the results were not replicable. Yum relies on Ms Syed’s evidence. Ms Syed stated that she believed that ‘[t]he plan could be replicated nationally’ even though additional funds may be required ‘to support the launch’.

66    DPL’s theory was that the expenditure on marketing for the ACT stores must be calculated and then that figure multiplied by stores nationally. Ms Syed rejected this theory as she said that media is replicated based on ‘reach and frequency as opposed to looking at a dollar amount and working from there’ and Yum contends that there is no evidence to support the theory that Yum did not believe that the strategy could be replicable nationally. Further, Yum submits, Mr Houston stated that “replicate” meant achieve the media outcome achieved in the ACT, not the dollars actually spent. That is, focusing on the actual dollars spent was not the correct approach in assessing whether the ACT Test could be replicated. The VS as formulated included provision for an increased national marketing budget. This was not available upon implementation as planned, as it required not only Adco approval but also extra contribution from the Franchisees, which were not forthcoming.

5.3.6    Summary of the ACT Test

67    On 8 March 2014, during week 5 of the ACT Test, Ms Broad sent an email to Mr Smith, Mr Houston and Mr Sinha providing her opinion as to the success of the ACT Test. Ms Broad stated the following opinion, based on three weeks profit and loss data:

My opinion at this stage is that the test was well worth doing and the marketing team should be congratulated – the sales growth and transaction growth we have achieved in this test have proven beyond doubt that velocity pricing is the path we need to head down. … Having said that, from a profitability stand point, I believe it’s marginal – this is one of our best Franchisee groups and I don’t believe they are making the same amount of money they were previously – it’s borderline at best at this stage.

…

From my perspective, looking at these numbers, our underlying business model doesn’t support velocity pricing… and I believe we should stop the test at the end of week 6…

68    DPL concludes that Ms Broad’s statement was vindicated by the national rollout of the VS, as the sales data after its inception show a negative downward trend, which is very similar to the negative downward trend in PSA sales for the ACT from the time of Domino’s intervention in the ACT. It follows, DPL says, that Ms Broad’s conclusion ‘was and ought to have been obvious to any reasonable and fair minded observer conscious of Yum’s duties to act reasonably and cooperatively under the [IFAs]’.

69    Yum argues that DPL’s reliance on Ms Broad’s email is misplaced for the following reasons:

    Ms Broad’s view was based only on three weeks’ profit and loss. Profitability did not improve until the fifth week of the ACT Test.

    Data for the first four weeks of the ACT Test were not representative, as a steady state had not been reached. Yum argues that a steady state was reached in weeks 5 – 10 of the ACT Test.

    Ms Broad made it clear in her affidavit evidence that subsequent results of the ACT Test allayed her concerns about the VS.

    Ms Broad acknowledged that after 3 weeks it was only a profitability point that prevented her from supporting the implementation of the VS.

70    DPL submits that Yum cannot escape a finding of breach of the implied duties of reasonableness and cooperation, on the basis of selective information and manipulated data, by turning a clear and catastrophic loss result produced under otherwise ideal conditions in the ACT into evidence which was sufficient to justify the imposition of the VS upon DPL and all other Franchisees.

5.4    The Yum Model

71    Prior to 10 June 2014 and after the ACT Test, Yum prepared a model for deciding whether to implement the VS (Yum Model). Mr Houston stated that Ms Broad was responsible for the Yum Model and that Mr Smith’s role was to ‘validate and refine it’.

5.4.1    Operation of the Yum Model

72    In its written submissions, Yum describes the Yum Model’s operation, as to which Yum’s witnesses gave evidence:

242.    Firstly, the Yum Model is an Excel model. The model itself is an electronic Excel document, not a paper document. It is comprised of various pieces of data and assumptions contained in different cells on different worksheets. Various cells are linked to other cells (often on different worksheets) by means of formulas which also form part of the model. It is the data, assumptions and formulas, as embodied in the electronic document, which constitute the Yum Model.

243.    The Yum model contains numerous input cells, into which different inputs could be placed. In some cases, if an input is changed in one input cell it automatically changes the inputs in certain other cells. For example, upon selecting a particular store in the store selector drop-down box, the “Store Profile” inputs (such as the average value of sales, number of transactions, and so on) automatically update. In other cases, each input cell needs to be altered manually. The input cells which require manual alteration are shaded yellow in the Yum Model.

244.    The Yum model operates by applying the chosen inputs to the existing data, assumptions and formulas to produce certain outputs. Every time that an input or multiple inputs are changed, the outputs are recalculated by the model.

245.    Once the Yum Model was created, it was used in an iterative process. That is, over the period in late May and early June 2014, on numerous occasions Mr Sinha and Mr Purcell altered various inputs in order to see what outputs would result. Their ultimate goal was to determine what level of transaction uplift or increase would be required, following the introduction of the Value Strategy, in order for the National Average store to maintain the same EBITDA level as it had before the introduction of the Value Strategy.

246.    Every time a “version” of the Yum Model was saved, emailed or printed out, what was saved, emailed or printed included the particular set of inputs and the resultant outputs in the model at that particular time. The model itself, however, continued to exist in electronic form.

73    Yum also commented in its submissions on different versions of the Yum Model in evidence:

247.    [DPL] has put into evidence 5 emails from Mr Purcell, at different points in time, which attach a particular “version” of the model – i.e. containing particular inputs and outputs. This is only evidence that Mr Purcell had placed particular inputs into the model, resulting in particular outputs, at a particular point in time and had reason to email the results, either to Mr Sinha (Ex[hibits] V, W and X) or to Yum’s LT (Ex[hibits] G and H).

74    DPL contends that it put into evidence every version of the model that was discovered by Yum, so that Yum’s statement that there were “only” 5 emails is an unfair characterisation.

5.4.2    Purpose of the Yum Model

75    DPL describes the purpose of the Yum Model and its contents in [13C] – [13F] of the ASC, as follows:

13C.    The Yum Model:

(a)    Was constructed by Yum as a model of the profitability at a store EBITDA level for each Pizza Hut Outlet in Australia;

(b)    Included 52 weeks of data available to Yum from its Micros system in relation to sale and transactions at each Pizza Hut Outlet in Australia;

(c)    Calculated sales and transactions for a “National Average” Outlet in relation to sales and transactions at all Pizza Hut Outlets in Australia from its Micros system;

(d)    Included a calculation of the weekly “National Average” store level EBITDA for the 52 week period covered by the data referred to in (b) above;

(e)    Included a model for calculating the cost of labour by reference to the different types of labour used in an Outlet, including the number of hours and pay rates for management and crew members (Labour Model);

(f)    Included a provision for comparing current levels of Outlet performance with future levels of Outlet performance and for the “National Average”, based on different assumptions, designated as “Now” and “Future”, including in relation:

(i)    The elements used to determine the sales revenue, and in particular sale price, transaction composition in terms of pizzas per order and sides per order, transaction mix and delivery mix;

(ii)    The elements comprising the Labour Model, and in particular the number of hours and pay rates for management and crew members, and a rate for driver costs per day of the week.

13D.    On the basis of the Yum Model, and prior to providing the Advice to the Applicant and the other Franchisees on 10 June 2014, Yum determined that the “break even” increase in transactions for the “National Average” Outlet upon the assumptions made in the Yum Model was 34.5% (Break Even Transaction Level).

…

13F.    The Break Even Transaction Level for the “National Average” in the Yum Model was based on the following assumptions in relation to the effect of the Reduced Prices and/or Reduced Price Strategy:

(a)    There would be an increase of 218 transactions per week;

(b)    Thirteen (13) additional labour hours for crew members would be required to produce the additional 218 transactions per week;

76    Yum characterises the Yum Model somewhat differently. Yum’s characterisation of the purpose of the Yum Model is that ‘it was in essence a “break even” model’. That is, Yum used the Yum Model to ascertain the level of increase in transactions required for the national average store to retain the same EBITDA level of profitability after the introduction of the VS as it had before the VS. Yum says that the Yum Model relied on data derived from Yum’s records about the operation of the notional national average store for the 12 months from May 2013 to May 2014 and assumptions about the likely impact of the VS derived largely from the experience during the ACT Test.

77    Through an iterative process of entering various inputs, Yum relied on the conclusion based on the Yum Model that transactions would need to increase by approximately 34.5% for the national average store to “break even”. This was an increase of 218 transactions per week (from 635 transactions to 853 transactions per week). Yum submits that this result was one of the factors which it considered in deciding whether to proceed with the VS. Yum points out what the Yum Model was not used for, including:

    Yum did not attempt to predict what would happen if the VS was implemented. For example, the Yum Model did not predict what increase in transactions or profits would result from implementing the VS. Its purpose was to predict what increase in transactions would be required for profit levels to remain the same and to assist in evaluating the likelihood of whether there would be an increase in transactions sufficient to maintain or increase profits by reference to other matters.

    The Yum Model was not a pricing model. Yum contends that the Yum Model did not attempt to calculate what prices should be charged for pizzas (or any other products) under the VS and that the decision concerning prices was determined independently of the Yum Model. That is, the Yum Model simply applied the prices which were provided as input into the model in order to do the “break even” calculations.

5.4.3    Usefulness of the Yum Model

78    DPL does not criticise all aspects of the Yum Model, as DPL states that it was ‘a very useful EBITDA model for Australian Pizza Hut outlets, and was capable of being [sic] to evaluate the impact of the VS upon those outlets through the consideration of the “national average” outlet’. To this extent, DPL says, it accepts Ms Broad’s evidence that ‘[m]odelling a store on a national average basis is a standard financial average technique used in the business’.

79    DPL accepts all of Yum’s inputs into the 34.5% Yum Model other than the input for “variable labour”. Yum made an assumption in the Yum Model that an additional 13 hours of variable labour would be required to process the additional 218 transactions that would occur if there was a 34.5% increase in transactions. That is, the 34.5% was the “output” of the Yum Model designed to identify the break-even point of the Franchisees’ profitability.

80    DPL and Yum have used different rates to determine variable labour: DPL relies on “dockets per hour”, whereas Yum relies on “minutes per docket” (MPD). Mr Sinha’s described MPD as follows:

The MPD value is derived by dividing the total amount of variable labour employed (expressed in minutes) by the number of transactions. The higher the MPD figure, the less efficient the labour is.

(emphasis added)

5.4.4    Assumption of 13 additional labour hours

81    Mr Sinha placed the additional 13 hours of variable labour assumption into the Yum Model. Yum summarised how Mr Sinha derived his assumption as follows:

    Mr Sinha first calculated the minimum number of weekly labour hours which would be required to staff a Pizza Hut outlet, given Yum’s rules about minimum staffing levels. This was 97 hours of management, 70 hours of team member time and 40 hours of delivery drivers who also assist in the store. That is, the total was 207 hours. Mr Sinha formed the view that these hours were more than sufficient to service the pre-VS transaction level of 635 transactions per week. Mr Sinha gave evidence that 70 team member hours when divided by 635 transactions, gives an MPD of 6.6 and his reasoning was that it was less efficient than the New Zealand benchmark of 5.6 and the results achieved during the ACT Test. That is, Mr Sinha concluded that an MPD of 6.6 was reasonable and, therefore, that his estimates of 70 team member hours was also reasonable.

    Mr Sinha then allocated the 218 additional transactions on a day-by-day basis during the week, maintaining the same relativities on a day-by-day basis as before the VS. This resulted in a different number of additional transactions for each day, ranging from 20 additional transactions on a Monday to 41 additional transactions on a Friday.

    On the basis of Mr Sinha’s own experience of utilising labour in Pizza Hut outlets, he formed the view that the existing minimum labour hours would not be fully utilised before the VS. In other words, in Mr Sinha’s opinion the minimum 207 labour hours used before the VS was capable of producing more than 635 transactions per week.

    Mr Sinha then assessed the quantity of additional transactions on each day. He formed the view that the existing level of labour was sufficient to cover the additional number of transactions on Mondays, Wednesdays, Thursdays and Sundays (which ranged from 20 to 28 additional transactions per day). He also formed the view that the additional number of transactions on Tuesdays, Fridays and Saturdays (which ranged from 37 to 41 additional transactions per day) would require additional labour and allocated additional hours on those days, totalling 13 additional hours for the week.

82    Mr Sinha calculated that an additional 13 team member hours resulted in an overall MPD of 5.84. Mr Sinha noted that MPD rates for the ACT stores during the ACT Test from week 4 of the ACT Test onwards were below 5.6. As the MPD of 5.84 was higher (and therefore less efficient) than both the New Zealand benchmark and the results in the ACT Test (from week 4 onwards), Mr Sinha was satisfied that his calculations of 13 additional labour hours was a reasonable one.

83    Mr Sinha was the internal Yum expert responsible for modelling labour hours and allocating the correct labour hours and Mr Houston and Ms Broad relied on his expertise in this area. Mr Sinha’s evidence is that Mr Travis Purcell had primary responsibility for the structure of the Yum Model and for entering data into the model and that Mr Sinha assisted in preparing some parts of the Yum Model, including preparing the labour cost figures.

5.4.5    Variable labour as a balancing item

84    DPL argues that Yum’s “break-even” position is that if ‘more than 13 hours of labour were required, [the F]ranchisees would lose money if there was a transaction uplift of 34.5%’. That is, if more than 13 hours of additional labour were required, the break-even transaction uplift would be greater than 34.5%.

85    DPL contends that Mr Sinha’s evidence in support of the 13 additional labour hours ought to be rejected for the following reasons:

    Mr Sinha regarded an MPD of 5.6 as an appropriate “benchmark” for measuring labour efficiency during the ACT Test. This decision was based on an email that Mr Sinha received from Mr David Hill, the sole New Zealand franchisee, (dated 16 February 2014) about the New Zealand experience. DPL submits that the benchmark figure of 5.6 MPD was an ‘aspirational target’ and was a forecast rather than an actual result achieved by the various New Zealand outlets in question.

    The actual MPD rate for those outlets, contained in the material sent to Mr Sinha, was 6.69. When Mr Sinha was asked why he relied on the benchmark rather than the underlying data, his response was: ‘[w]hen I got 5.6, I had an opportunity of testing it in ACT and that’s how I got confirmed that yes, that’s a reasonable benchmark… And when we started achieving [the benchmark], I didn’t really have any reason to go back to the New Zealand data because we were achieving better results in ACT’. DPL contends that ignoring the actual data was ‘an inexcusable misuse of the data’ and that Mr Sinha’s attempts to explain why the data were not used were unacceptable and should be rejected.

    Even though the New Zealand data represented a limited sample of high volume stores in 2 weeks in Christchurch, Yum has not explained why it did not seek full data directly from RBNZ so that it had a comparable data set for the NZ outlets for the purpose of analysing the ACT Test or for use in the Yum Model. Yum argues that Mr Sinha did not assess whether particular stores in New Zealand met the benchmark as this was irrelevant to him; rather, he concentrated on the benchmark figure.

    Extra deliveries were being made by drivers but were not being converted into labour hours and were ignored in determining the MPD rate from the ACT Test, which included only the actual team member hours. DPL contends that this produced MPD rates for all ACT outlets other than Erindale of less than 5.6, which resulted in Mr Sinha concluding that the ACT outlets had been more efficient in their labour usage than New Zealand.

    The Court is entitled to find that the true position is that the ACT franchisee was using delivery drivers as proxy crew members, and paying them on the basis of $14 per hour, being the rate of 2 deliveries at a contract rate of $7 per delivery. If the extra deliveries in the ACT Test were accounted for on the basis of 2 extra deliveries being equivalent to 1 hour of team member labour, and additional team member labour were added to existing team member labour, the average MPD of the ACT Test was 8.70.

    Mr Sinha said that the ACT franchisee was guaranteeing two deliveries to a driver per hour as a bare minimum and if the driver did not get the two deliveries, then the ACT franchisee would guarantee the money. DPL submits that the effect of this explanation is that the ACT franchisee was prepared to pay drivers to do nothing in its stores and, to the extent that they substituted for team members, Mr Sinha was not prepared to account for it in his calculations.

86    Yum argues that DPL’s proposition advanced in submissions that the labour records produced to the Court did not accurately reflect these extra hours, is false. (In the table of asserted inaccuracies served after the conclusion of the hearing, DPL says that it did not mean to state that the labour sheets were inaccurate but rather that there was an inconsistency in the hours recorded for the ACT franchisee stores in the labour sheets, in terms of how total labour was comprised or allocated. Yum says that this is irrelevant and (see [94]) that Mr Potter selected Erindale to the exclusion of other ACT stores for a specific reason and that this was not due to the extra delivery issue). DPL did not call any evidence to prove that the records were inaccurate; rather, it relied on Mr Potter’s assumption of inaccuracy based on an exhibit, Exhibit Y, where Mr Sinha said: ‘Most stores have drivers who can help out so it makes sense to put extra of those when either the Kitchenhand is new or is not available’. Mr Potter’s criticism relies on the view that the ACT labour records understate labour hours and Yum argues that Mr Potter has no expertise which would enable him to form any judgment on the appropriateness of the labour rate. Yum argues that the statement at its most ‘suggests that on limited occasions drivers were asked to help out. It says nothing about the accuracy of the labour records. It does not say that any entry in the records for the extra deliveries was a payment for work done as a kitchen hand’. Further, Mr Sinha gave evidence that Mr Singh (who worked for the ACT franchisee) confirmed that it was an exceptional occasion where ACT outlets were using additional driver hours as crew hours and if these drivers were working in stores, then they should have been converted to drivers who work in the store and are paid an hourly rate.

87    Yum rejects DPL’s criticism of Mr Sinha and DPL’s submission that Mr Sinha’s evidence was in effect developed only in cross-examination.

88    Yum criticises Mr Potter’s reliance on Exhibit Y as the foundation for his criticisms of the Yum Model. Exhibit Y is an email exchange between Mr Sinha and the ACT franchisee about the use of delivery drivers in the kitchen. As a result, Yum provided a lengthy explanation in its submissions of the email correspondence. The explanation is as follows:

(i)    The cause of the email correspondence is Mr Sinha’s concern about the high number of extra deliveries (i.e. deliveries being paid for but not done) in the ACT stores – see email of 27.3.14, 8.04 pm.

(ii)    Mr Sinha was concerned to know whether new leaflets would help increase delivery sales and thus reduce the extra delivery numbers – email of 28.3.14, 12.06 am. This directly corroborates Mr Sinha’s evidence of his understanding of extra deliveries as a minimum payment guarantee for delivery drivers. If it was a minimum payment guarantee, then increasing the number of delivery transactions would reduce the number of extra deliveries paid. If, however, extra deliveries constituted payment for drivers working as kitchen hands, then increasing the number of delivery transactions would not decrease the number of extra deliveries (and could well increase them if those extra delivery transactions had to be processed by drivers working as kitchen hands).

(iii)    Mr Singh told Mr Sinha that the number of actual deliveries during the ACT Test was decreasing during non-peak times, which partly explains the increase in extra deliveries compared to before the ACT Test.

(iv)    Mr Singh explained that, with respect to the Kingston store, he needed to have two delivery drivers engaged even though there were only three deliveries to be done, as one driver could not do those deliveries in the required time, but that also meant he ended up paying for extra deliveries – email of 28.3.14, 11:52 am. This is again consistent with extra deliveries being a minimum payment guarantee to drivers.

(v)    Mr Singh stated to Mr Sinha that, when stores had drivers available to help out (i.e. when they were not doing deliveries) it made sense to utilise them as kitchen hands if a kitchen hand was new or not available – email of 28.3.14, 9:19am. Mr Sinha responded by asking Mr Singh to identify where the under-utilised drivers were working so that Mr Sinha could see if there was an opportunity to utilise them more effectively – email of 28.3.14, 11:29am. This was a request by Mr Singh to be allowed to use delivery drivers as a form of kitchen hand labour in certain limited circumstances, given the pressures he was under. It is not evidence that this was in fact a common practice.

(vi)    Under cross-examination, Mr Sinha accepted that the use of drivers as kitchen hand labour may have been occurring occasionally in the ACT, but he was not aware of it being a regular practice, he instructed Mr Singh to make sure it was not happening and he was told by Mr Singh “That’s taken care of”.

89    DPL criticises Yum’s submission in (iii) above. It submits that Mr Sinha’s evidence that he was told delivery transactions were decreasing in the ACT as part of his “guaranteed delivery” explanation, is false. DPL contends that there is no evidence to corroborate Mr Sinha’s attempt to corroborate this hearsay evidence from Mr Singh. Yum disagrees with DPL’s analysis. It argues that Mr Singh’s response in various emails makes it clear that the reason for the increase in “extra deliveries” was the requirement to have sufficient drivers on hand always and to pay them, even when there were no deliveries. Further, Yum submits that it is incorrect that there is no other evidence to corroborate Mr Sinha’s evidence to the effect that decreasing deliveries were a reason for the increase in extra deliveries, as Yum says that Mr Sinha sent an email to the Yum leadership team stating that Mr Sinha would work with Mr Singh to minimise extra deliveries but that delivery sales had been sluggish in comparison to takeaway sales.

90    DPL contends that the “true position” is that variable labour was used as a balancing item in the Yum Model. DPL states that this is an explanation for variable labour being allocated across a range of values between 2.1 hours to 39 hours in the six versions of the Yum Model and why all other models, other than the final Yum Model, made no allocation of the variable labour across the different days of the week.

91    On 5 May 2014, Mr Russell Creedy of RBNZ sent Mr Houston an email that stated that the “secret” to the strategy is to maintain the labour hours despite the higher volumes and that in New Zealand they were able to prevent an increase in labour costs to meet the additional transactions. DPL noted that Mr Smith acknowledged the need to control labour costs and it argued that this reflected Mr Smith’s mindset about additional labour. DPL argues that this mindset would explain why variable labour was treated as a balancing item, as it would make the Yum Model look “reasonably credible”, rather than providing a genuine and reasonable estimate of the additional labour costs required to implement the VS.

92    On 28 May 2014, Mr Purcell sent an email to Mr Sinha stating that the ‘model is completed just to finish entering some semis and fixed costs but overall it is working’. Attached to this email was an Excel document containing the model and at that point the transaction growth percentage was at 60%. DPL submits that the Court is entitled to infer from this email that Yum knew that the true breakeven point for the VS was 60%, as Mr Purcell modelled, and that Yum’s own model showed that the failure of the VS was inevitable, irrespective of a reaction by Domino’s.

93    Yum relies on Mr Sinha’s labour calculations and his fundamental assumption that the minimum weekly labour hours to operate a Pizza Hut were capable of processing more than the 635 transactions of the national average store before the VS. That is, the existing labour hours had significant capacity to process some (but not all) of the additional transactions which would result from a 34.5% transaction increase, which means that as transactions increased, the labour efficiency (measured as the number of transactions processed for every hour of labour) would also increase. Yum contends that Mr Potter has effectively assumed that there is no spare capacity, meaning that labour efficiency rates would essentially stay the same, regardless of the level of transactions. Yum says that this is contrary to the ACT data that clearly show that as the overall number of transactions increased during the ACT Test, labour efficiency also increased.

5.4.5.1    Mr Potter’s calculation of variable labour

94    Mr Potter concluded, in his calculations, that the additional labour required by the Yum Model ought to be 52 hours rather than the 13 hours stipulated by Yum. DPL contends that Mr Potter’s calculation should be accepted over that of Yum’s because of the following evidence:

    Labour data from the ACT Test from the store at Erindale in the ACT, which was the outlet least affected by the “extra delivery” issue. Mr Sinha conceded that the labour hour statistics for Erindale were more reflective of what should actually happen in a well-run store.

    An analysis done by Mr Potter in relation to the actual New Zealand labour data, which showed that the actual New Zealand rate of MPD was substantially higher than the benchmark rate assumed by Mr Sinha (see [85] above).

    A sensitivity and regression analysis done by Mr Potter in relation to ACT data, including the “extra deliveries”, that indicated that the labour costs experienced in the ACT test were substantially higher than those used in Mr Sinha’s assessment of an appropriate cost.

95    Mr Gower disagrees with Mr Potter’s calculations of the additional labour hours. DPL comments on Mr Gower’s basis of disagreement as follows, in summary:

    Mr Gower argues that “extra deliveries” should be counted for the purpose of determining actual team member hours in the ACT Test. DPL contends that this is a false premise, as Mr Gower converted “extra deliveries” into team member hours when he should not have done so.

    Mr Gower treats Erindale as an “outlier” because it has a different labour cost profile to the other ACT stores in terms of team member hours. DPL agrees that Erindale is different from other ACT outlets; however, DPL argues that it is only different because it has a more conventional approach to labour than the other ACT outlets in the ACT Test, and includes the least amount of “extra deliveries”. DPL concludes that Erindale is a good proxy for the national average outlet used in the Yum Model because the PSA sales for Erindale during the ACT Test fell within the “Now” and “Future” sales range of the national average outlet, and the average ticket price also fell within the ranges in the Yum Model.

96    Yum submits that the other stores’ labour efficiency hours need to be taken into account and that if they are taken into account, it is difficult for DPL to contend that Mr Sinha’s labour calculation was not reasonable. Further, Yum argues that the Court should disregard DPL’s decision to rely on the Erindale store (which had fewer extra deliveries), for the purpose of its analysis, as Erindale had fewer extra deliveries than the store at Dickson in the ACT because Erindale had delivery drivers who were allowed to work in stores, whereas other stores had drivers that were not allowed to work in the store. It follows, Yum says, that having drivers that can work in the store does not make Erindale any more representative of the national average store with respect to labour usage and efficiency.

5.4.5.2    Yum’s criticisms of Mr Potter’s analysis

97    Yum argues that, in preparing his report, Mr Potter had available to him the actual dockets per hour rates for 13 Pizza Hut outlets in Australia: DPL’s five delivery outlets (after introduction of the VS) and the eight ACT outlets during the ACT Test. DPL’s stores had an average dockets per hour rate of 4.5. The eight ACT outlets had an average dockets per hour rate of 4.85. Mr Potter was also aware that the average dockets per hour rate for the New Zealand stores was 4.71. Yum criticises Mr Potter for using the dockets per hour rate of 3.89, which was the rate of one ACT store, the Erindale store, as the more appropriate rate for the national average store. Mr Potter dismissed the other rates as unreliable on the bases that he had limited knowledge of the New Zealand stores, that they may not be comparable, and that the DPL stores were too small a sample size to form the basis for any conclusions.

98    DPL submits that on the assumption that Erindale was a good proxy for the national average store, the pre-VS rate was 3.8 (which is taken from the Yum Model in the “now” column) and post-VS (under the ACT Test) was 3.89. That is, the impact of the VS was to produce some change in the dockets per hour rate, but that it was only relatively small. DPL criticises Mr Sinha’s approach, as the Yum Model predicted a change from 3.8 to 4.74 dockets per hour.

99    Yum criticises DPL’s argument that labour efficiency improved from 3.8 to 3.89 dockets per hour, as the 3.8 figure was taken from Mr Sinha’s calculation and the 3.89 figure was achieved by the Erindale store. That is, Yum says, the figures measure different things and are not directly comparable. Accordingly, Yum says that reliance on Erindale as being representative of the national average store is incorrect and that Mr Potter merely asserted that the other stores in the ACT Test could not be analysed. Yum argues that Mr Sinha’s docket per hour rate of 4.74 in the Yum Model was more likely to be accurate than the rate relied upon by Mr Potter.

5.4.5.3    Non-inclusion of depreciation and return on capital

100    Yum highlights evidence that Mr Potter initially expressed the view that depreciation and a return on capital element should have been included in the Yum Model because he had formed the view that it was a cost plus based pricing model, which is a model used to determine prices by asking what all the relevant costs are and what target return on investment is required. Mr Potter now accepts that the Yum Model was not a cost plus based pricing model; however, he maintains the view that depreciation and return on capital should have been included.

101    Yum claims to have adopted a different approach in determining its pricing, as it adopted the market based pricing approach. The market based pricing approach determines what price should be charged by reference to the state of the market (with the behaviour of consumers and competitors both being relevant factors). It follows, Yum submits, that it was unnecessary to create a model which included matters such as depreciation and a return on investment.

102    Yum notes that DPL does not contend that a market based pricing approach was inappropriate. Accordingly, Mr. Potter’s view on this aspect is not relevant to the preparation of the Yum Model or its implementation. DPL contends that the suggestion that Mr Potter’s views on this topic are not relevant is misleading, as it is a question of fact for the Court as to how Yum determined its prices and it is a question of expert opinion whether those prices were profitable or not.

5.4.6    Was $4.95 was an unprofitable price for the Classics range?

103    DPL submits that Mr Potter has demonstrated that $4.95 was an unprofitable price for selling “Classics” pizzas when using the Yum Model and its original assumptions, including 13 additional labour hours. Further, Mr Potter concluded that if the number of additional hours increased to 52, the Classics range would remain unprofitable and the national average EBITDA for Classics would also be negative.

104    The Yum Model draws a distinction between two sales channels, take-away and delivery, as it recognises that customers have different behavioural patterns in these two channels. The parties agree that delivery customers are less price-sensitive than take-away customers. For example, delivery customers were considered more likely to pay the higher drinks’ price than were take-away customers. Mr Potter’s analysis and reworking of the Yum Model resulted in a calculation of the EBITDA of the two core product lines: Classics and Favourites. Mr Gower criticises this approach, as he argues that the Yum Model was not designed to be a product/cost model but rather a sales/EBITDA model. DPL submits that Mr Gower’s argument is ‘simplistic’, as a business can be modelled in different ways, either on a product basis or on a sales channel basis.

105    Mr Potter created the product/cost model by:

    allocating revenue and cost items on an initial basis of 51% to Classics and 49% to Favourites, as he relied on Mr Houston and Ms Broad’s evidence that the 51:49 split was a constant allocation factor used in the Yum Model.

    calculating a price for sides as between takeaway and delivery, using the existing Yum data. Although this produced a higher price for sides on delivery than takeaway, this observation is consistent with Yum’s own recognition that its delivery customers were less price sensitive than its take-away customers. Given that sides account for only a small proportion of the ticket prices, and there are a range of different items that are grouped together under the heading “sides”, Yum’s approach is a practical approach to the modelling exercise and Mr Potter ought not be criticised for applying that approach.

    allocating labour costs on the basis of transaction numbers. Mr Potter gave evidence that he believed that volume is the relevant driver of the costs incurred by the business – DPL contends that the difference, from a labour perspective, in terms of the time taken to top a Favourites pizza and a Classics pizza, is negligible. Further, DPL submits that there is no evidence to suggest that more labour is involved in producing sides for different types of pizzas and the fact that the sides are sold at different prices does not imply that labour costs are any different.

    allocating other costs to product lines. The experts did not agree on how to allocate all labour. Mr Gower acknowledged in his 7 September 2015 report: ‘it is incorrect to assume (as Mr Potter has done) that all labour is employed in the manufacture of pizzas’. Mr Potter argued that the Yum Model should recognise the full costs of the product, as it is necessary in setting long term prices and if this is not done ‘the company is in danger of not seeing the right price… and it may fail’. Mr Potter, also, justified his decision to allocate costs fully because the national average store only existed to produce and sell pizzas (and other approved products).

106    Yum argues that Mr Potter has not shown that a retail price of $4.95 would be unprofitable. Yum contends that what Mr Potter has shown is that:

(a)    if one assumes a transaction increase of 34.5%;

(b)    if one then allocates every single pizza sold into one of just four types of transactions, made up as follows:

(i)    a take-away transaction containing 2.17 Classic pizzas and 0.56 sides;

(ii)    a take-away transaction containing 2.17 Favourites pizzas and 0.56 sides;

(iii)    a delivery transaction containing 2.54 Classic pizzas and 1.79 sides; and

(iv)    a delivery transaction containing 2.54 Favourites pizzas and 1.79 sides;

(c)    if one then assumes that the average price per side in a take-away transaction is $1.86 but the average price per side in a delivery transaction is $4.25; and

(d)    if one then allocates all costs of the store (including not just the food costs and costs of labour involved in making up the transaction, but also all overhead costs and labour costs not directly referable to processing the transaction) in the manner in which Mr Potter has done so,

then the take-away transaction comprising 2.17 Classic pizzas and 0.56 sides is unprofitable.

107    That is, Yum argues, Mr Potter has shown that a particular transaction, constructed in the way he has constructed it and allocating costs in the way he has, will be unprofitable. Yum says that he has not shown that a Classics pizza sold at $4.95, as such, will be unprofitable. Yum argues that for Mr Potter’s conclusions to have any weight, there are many unproved assumptions that need to be accepted as correct, including:

    It is not possible to conclude from Mr Potter’s calculations that a $4.95 Classics pizza is necessarily or inherently unprofitable. Mr Potter accepted that the Yum Model did not predict the number of transactions that might occur if the VS was implemented, but for the purpose of his modelling he assumed there would be 853 transactions. Mr Potter accepted that he needed a reliable assumption as to the volume of pizzas sold in order to determine profitability. There was no basis on which he could conclude that the 853 transactions was the correct number to use to determine product line profitability.

    The transactions constructed by Mr Potter assumed that any transaction, regardless of whether it was take-away or delivery, would contain only Classics pizzas or only Favourites pizzas, not a mixture of the two. Yum submits, there is nothing in the Yum Model to suggest this is the case and it is an assumption Mr Potter has made without any evidential basis.

    The Yum Model indicates that the average number of pizzas in a take-away transaction is 2.17 and in a delivery transaction is 2.54 and the number of sides in a takeaway transaction is 0.56 and in a delivery transaction is 1.79. Yum submits that the Yum Model does not say whether or not this remains the case even if a transaction contains only Classics or only Favourites pizzas. Mr Potter has assumed that it does, but without any basis in the Yum Model.

    Mr Potter assumes that the average price per side in a take-away transaction is $1.86 but the average price per side in a delivery transaction is $4.25. These values were created by Mr Potter; they do not come from the Yum Model. As Mr Gower demonstrates, Mr Potter derived these values as a balancing item for his other calculations. Yum argues that what the Yum Model does show is that the average cost per side is $1.14, regardless of whether it is sold in a take-away or delivery transaction.

108    Yum states that even if Mr Potter’s cost allocations are accepted, his ultimate conclusions cannot be accepted because they are based on a series of assumptions which are not in the Yum Model. That is, it cannot be said that the calculations that Mr Potter has done were able to be derived in their entirety from the Yum Model or that the Yum Model as it existed projected or predicted the calculations which he has undertaken. Accordingly, Yum says, the Yum Model was not designed to undertake this task and it did not do so. Even if all of Mr Potter’s assumptions are taken at face value, Yum argues that Mr Potter has only demonstrated that a take-away transaction of 2.17 Classics pizzas and 0.56 sides would be unprofitable and has not shown that $4.95 Classics pizzas are in themselves inherently unprofitable.

5.5    4 June 2014 meeting and implementation decision

109    Mr Houston gave evidence that he made the decision ‘on 4 June 2014 to launch the strategy’. DPL argues that there is simply no basis for the Court to make a finding based on the objective evidence that any decision was made about the VS on 4 June 2014, beyond some minor implementation issues in relation to drinks prices and delivery fees.

5.5.1    Versions of the Yum Model

110    There are six iterations of the Yum Model in evidence and DPL tendered a summary comparison of those models. The Yum Model was brought into existence in late May 2014 and refined in early June 2014. Yum submits that the Yum Model first emerged on 28 May 2014 and was worked on from that date to 3 June 2014. DPL contends that even though Mr Houston said that the decision to launch the VS was made on 4 June 2014, the inputs for the Yum Model were not finally settled until 19-23 June 2014, when the 34.5% Yum Model was produced for the purpose of exhibiting to Mr Smith’s affidavit for the hearing before Jagot J, where her Honour heard and determined an interlocutory application by A & A (Sydney) Pty Ltd and 80 applicant Franchisees, including DPL, seeking to restrain Yum from implementing the VS (the A & A proceedings). DPL argues that this result is clear from the change in the labour rate from the $15 per hour rate that applied up to 19 June 2014, to the $14 rate appearing in the 34.5% Yum Model.

111    DPL notes that Mr Houston conceded in cross-examination that the Yum Model in the form presented to Jagot J was changed after 4 June 2014 and did not have 13 labour hours; rather it had 9 labour hours, as recorded on 6 June 2014. Further, DPL referred to an email from Mr Purcell to Mr Smith on 19 June 2014, that contained a figure of 10 hours as input into the Yum Model. DPL put to Mr Sinha that that was the latest version of the Yum Model and that the assumptions in it were being made at that time. Mr Sinha disagreed with this contention, as he said that the assumptions were made on 4 June 2014.

112    Yum argues that the difference between 9 and 13 hours, in terms of cost, is $60; that is, 4 hours at $15 per hour, which is immaterial to the costs assumptions made in the Yum Model and to the calculation of the transaction uplift of 34.5% and that the real dispute between the parties is whether the Yum Model should have included 13 hours or 52 hours, according to Mr Potter’s analysis. Further, Yum submits that the Yum Model was discussed on 3 and 4 June 2014 and displayed on a screen and points out that Mr Sinha gave evidence that 13 additional hours were included in the Yum Model during the course of the meeting on 3 and 4 June 2014 and that he had no further consultation with any person after that concerning labour hours. Yum argues that there is no reason not to accept this evidence, as the discussion about labour hours at the 4 June 2014 meeting occurred when the Yum Model was on a screen and the document was not saved at that date. Even though the 6 June 2014 version contains 9 hours and the 19 June 2014 version contains 10 hours, Yum argues that this does not contradict Mr Sinha’s evidence, because his evidence is that 13 hours was not saved as an input at the time of the 4 June 2014 meeting.

5.5.2    4 June 2014 meeting

113    DPL accepts that a meeting of some description took place on 3 and 4 June 2014 and that the then current state of the Yum Model was discussed at that time. This finding is supported by the following evidence:

    A model produced on 3 June 2014. The main difference between it and the prior model of 29 May 2015 was the reduction in assumed transaction uplift from 60% to 34%, with a corresponding reduction of variable labour from 24 hours to 2.1 hours.

    A drop-down input box to substitute a $5.95 price for a $4.95 price for Classics pizzas. On 3 June 2014, Mr Houston sent an email to Mr Bergren, in which Mr Houston referred to the possibility of a $5.95 price.

    On 6 June 2014, Mr Purcell sent Mr Houston and others a copy of the updated model.

114    DPL says that it is probable that meetings on 3 and 4 June 2014 did include a discussion about the $4.95 versus $5.95 price, the delivery minimum and delivery fee, and the drinks price. Further, DPL argues that it is possible that the discussion also considered the 60% versus 34% expected transaction uplift shown in the model. However, DPL concludes, having analysed Mr Smith’s email to Mr Purcell of 8 June 2014 about the revised model circulated by Mr Purcell on 6 June 2014, that the modelling was incomplete and had not been completed by 10 June 2014, when the announcement of the VS was made to the Franchisees, and even then the model did not contain the assumptions that Mr Sinha and Mr Smith say that it contained at that time.

115    DPL argues that the most likely date for any internal decision within Yum in Australia to launch the VS was Wednesday, 16 April 2014, with the implementation locked in by 12 May 2014. DPL submits this, based on the following evidence:

    On 14 April 2014, Ms Eliane Setton, Counsel for Yum Restaurants International, advised Mr Houston that the Franchisee Policy Committee (FPC) was ‘directionally aligned’ with Yum with respect to the VS.

    On 15 April 2014, Mr Richter of the Marketing Department sent out the “Value Launch Plan” to the Yum Australia leadership team. The covering email referred to the ‘key decisions that need to be made tomorrow in our meeting regarding the value launch’.

    On 16 April 2014, Yum’s leadership team met.

    On 23 April 2014, Mr Ramirez confirmed that he and Mr Houston were ‘fully aligned’ on the VS proposal and funding requests and that ‘Scott has signed off as well’. This approval prompted Mr Houston to respond:

Thanks Enrique, appreciate the support. We are very excited about the ability to change the game once and for all in Australia and this goes a long way to ensuring success. Given the test result of 30% growth and the probability that we can replicate this nationally we are confident that it will not impact plan for balance of yr.

Game on!!

    By 9 May 2014, it had become clear that Adco would not be reconstituted following the resignation of the Franchisee directors.

    On 12 May 2014, Yum signed its first media booking in support of the launch of the VS (called “Project Seek”) for the week commencing 24 June 2014. On 20 May 2014, Yum signed a revised media booking, which extended the media from 27 July to 2 November 2014.

116    Yum contends that Mr Richter’s email sent on 15 April 2014 was the evidentiary high point of DPL’s theory that the implementation decision was made on 16 April 2014. Yum argues that DPL’s theory is untenable because:

    the extent to which Mr Richter could unilaterally impose a timetable on the whole of the Yum leadership team is not explained.

    the meeting approved the presentation to Adco, which was sent out on 17 April 2014.

    DPL provides no explanation, if the decision was in fact made on 16 April 2014, for the absence of any steps being taken to implement it until well after the proposed date for the Adco meeting.

117    Yum argues that acceptance of DPL’s theory requires the Court to reject the evidence of Mr Houston, Mr Smith, Mr Sinha and Ms Syed, as each of whom deposes to the events of 3 and 4 June 2014, Mr Houston in particular, in detail. Yum notes that Mr Houston gave evidence that:

    his purpose in attending the meeting was specifically to decide whether to launch the VS.

    he was particularly concerned as to whether the proposed price points of $4.95 and $8.50 would achieve the intended results of increasing transaction volumes enough to increase franchisee profitability.

    the possibility of setting a price point of $5.95 instead of $4.95 was raised, he believes, by Mr Smith.

    at the end of the meeting on 3 June 2014, he was unsure as to whether $4.95 or $5.95 would be the most appropriate price point, so he requested further modelling to be done, as well as modelling on different drinks and delivery pricing to show the impact of such variations on margins.

    the next day, the further modelling was considered at the meeting and towards the end of the meeting Mr Houston asked each participant whether he or she agreed with the VS and no-one disagreed with it.

    he took those views into account to make his decision to launch the VS on 4 June 2014.

118    Further, Yum notes that:

    Mr Smith refers to specific matters addressed at the meeting, including that he raised the possibility of a $5.95 price point being preferable to $4.95 and the impact of a $4.95 price point on outlets with a high ratio of deliveries to takeaway.

    Mr Sinha refers to the way in which the model was used during the course of the meetings.

5.6    Showing the Franchisees the Yum Model

119    DPL argues that there was never any genuine consultation with the Franchisees about the introduction of the VS and DPL proposes that on no occasion was the Yum Model shown to the Franchisees.

120    Mr Sinha gave evidence that he participated in meetings with the Franchisees in New South Wales and Victoria, at which the Yum Model was demonstrated to them by inputting data from their stores and then analysing the results. Mr Sinha gave the following details about these meetings:

    On or about 10 June 2014, Yum issued an invitation to the Franchisees, under which a Yum representative would take them through the Yum Model and show them the expected impact of the VS on their net profit.

    On 18 June 2014, Mr Sinha attended the two morning sessions of the meeting at Bonnyrigg Training Centre in New South Wales. The Franchisees in attendance included the Seven Hills franchisee, the Merrylands and Canley Vale franchisee, the Ashfield franchisee. The first session included introducing the Franchisees to the VS and sharing the modelling tools kit that Yum had created for the Franchisees to run their store better when the VS would be launched. The second session involved was a “one-on-one” session, where the Franchisees worked with individual Franchise Office Consultants, who were responsible for a cluster of Pizza Hut stores and worked with the Franchisees on a day-to-day-basis.

    Mr Sinha attended another meeting in Melbourne at the Restaurant Support Centre, which was similar to the Bonnyrigg meeting but was organised by the Victorian team. The Victorian team and Mr Sinha met with Franchisees and spoke to them about the changes in value and menu of the VS and spoke about the modelling tools kit. The Franchisees were also taken through the Yum Model.

121    DPL put to Mr Sinha, in cross-examination, that on no occasion on 18 June 2014 was the Yum Model shown to the Franchisees and that his evidence was invented so as to cause the Court to believe that the Yum Model was available as at 18 June 2014. Mr Sinha disagreed with these propositions. Further, Mr Sinha gave evidence that it was his understanding that Mr Simon Cook of Yum took Mr Edwin Lopez through the Yum Model on 16 June 2014. Yum points out that DPL has not called Mr Lopez, or any other Franchisee who was at the meetings, to deny that there was a discussion about the Yum Model or to contradict Mr Sinha’s evidence.

5.6.1    Showing Mr Diab the Yum Model

122    Mr Sinha gave evidence that Mr Diab did not respond to Yum’s invitation on 10 June 2014 to have the Yum Model shown to him. Mr Sinha agreed with Mr Diab that he met with Mr Diab on 13 June 2014 and that he brought with him a laptop computer as he ‘believed Mr Diab may have been interested in seeing the results from the Model’. Mr Sinha gave evidence that he did not show Mr Diab the Yum Model on his computer, as Mr Diab ‘was irrational’ and Mr Sinha did not believe that they would have a productive and reasonable discussion on that day. DPL put to Mr Sinha that Mr Sinha lied about his meeting with Mr Diab to discredit him and it relies on a follow up email that Mr Diab sent to Mr Sinha, stating that he would like to put his data into the Yum Model demonstrating Mr Diab was not irrational.

123    DPL’s argument, conveyed in its cross-examination of Mr Sinha, was that the Yum Model was not settled on the day of the meeting with Mr Diab on 13 June 2014 and that is why it was not shown to Mr Diab. Mr Sinha provided the same response each time this proposition was put to him, which was that the Yum Model was settled and he did not show it to Mr Diab because Mr Diab ‘was irrational’.

124    Additionally, it is worth noting that no evidence was adduced to show that any of the Franchisees raised a complaint about the Yum Model when it was shown to them.

5.7    Consultation with the Franchisees

5.7.1    Blowing up Adco

125    Adco had existed since 1998. Yum described it as ‘a forum that allowed franchisees to have input into how Advertising Contribution was spent and provided a mechanism for Yum to consult with franchisees on marketing, through their elected representatives, on marketing’. On 9 May 2013, at an Adco meeting, Adco directors resolved to increase the marketing services administration fee, to have effect on 1 December 2013. Minutes of the meeting show that Mr Diab voted in favour of the resolution and that two of the Franchisees’ Adco directors voted against it. Mr Houston gave evidence that he knew of no challenge to the accuracy of those minutes.

126    At the Adco meeting on 18 February 2014, Yum presented the extent of decline in transaction growth for 2013 and 2014 and the directors discussed the ‘current value perception’ of Pizza Hut. A resolution was sought to approve an increase in Adco’s administrative contribution to Yum as a result of an updated marketing agreement between the parties. The votes on the resolution were equally in favour and against the resolution. As a result, Yum exercised its casting vote, pursuant to clause 44 of Adco’s Constitution, and the updated marketing agreement was approved. On 30 April 2014, the Franchisees’ representatives on Adco resigned.

127    There is a dispute between the parties as to why the Franchisees’ representatives resigned from Adco. Mr Diab said that it was because they did not want Yum to convey to the Franchisees that Adco approved the change in price. Yum suggests that Mr Diab refused to attend the next meeting scheduled on 1 May 2014 so that he could obtain control over pricing, which was not a power conferred on him under the IFA. On 29 April 2014, Ms Syed confirmed that pricing would not be raised at the Adco 1 May 2014 meeting. Yum contends that Mr Diab was not content with this assurance and it argues that that is the reason for his resignation and why Adco “blew up”.

128    There is no need to determine the reason for Mr Diab’s resignation. The fact is that he resigned.

129    Adco ceased to function or to approve marketing contributions and expenditure. Yum proceeded with the VS, without Adco’s agreement. Yum contends that it intended to share the results of the ACT Test at the Adco meeting scheduled for 1 May 2014, which did not then take place.

130    DPL contends that there was never any genuine consultation with the Franchisees about the introduction of the VS; rather, it says, Yum’s strategy was to “blow up” Adco. DPL argues that this tactic was approved by Yum US and it relies on Mr Micky Pant’s statement (as noted by Ms Anna Honey in the minutes of the AOP meeting in October 2013):

Why not go for a single price point like NZ rather than 6,8,12? If blow up adco do it for something significant. [The] Canberra test is not significant enough.

131    Prior to the 18 February 2014 meeting, DPL had sought some alterations to the terms proposed by Yum in an updated marketing agreement. These alterations included:

    On 30 October 2013, DPL sought clarification of whether the fee Adco would pay to Yum was on the basis of net contributions (which allowed for bad debts) or gross contributions. DPL preferred net contributions.

    On 16 December 2013, DPL sought the inclusion of a term that ‘any recommendation of regular and promotional pricing for PIZZA HUT products must have the unanimous support of all Adco board of directors’.

132    Neither of these proposed concessions were incorporated by Yum into the marketing agreement. Yum says that it did not agree to the changes for the following reasons:

    Administratively it would not be able to execute the change to the clause regarding net contributions and Yum disagreed with the suggestion in principle.

    On 19 December 2013, Ms Broad stated that Yum refused to incorporate the term requiring unanimous support of all Adco directors, as it would waive Yum’s right to use its casting vote and the power to set a maximum price, which resided with Yum under the IFA. Yum submits that what Mr Diab sought was something to which he was not entitled and which, if agreed, would fundamentally change the parties’ relationship.

133    DPL contends that Yum never intended to engage in any genuine consultation with Adco about the implementation of the VS. DPL relies on an email sent from Mr Houston to Mr  Bergren on 5 March 2014, which stated the following:

We have adco in 2 weeks time and will push for a decision at this meeting. I suspect it will come to a vote and we will need to use our veto vote, something that had never been used in 19 years, until 2 weeks ago where we played it to vote in the new adco agreement… we are waiting to see what the ramifications of this will be… all sorts of threats of legal action but I doubt that it will come to anything (at this stage anyway)...

134    As a result of this email, DPL argues that Yum intended to use its veto power to force through Adco approvals for expenditure of money in respect of the VS. DPL contends that Yum knew that the Franchisees would be hostile to the VS following the AOP meeting in October 2013. However, Yum expected Adco to “rubber stamp” the VS and, if it did not, Yum would use its casting vote to achieve the desired outcome, irrespective of the views of the Franchisees.

135    In any event, any consultation process was derailed by the resignation of the Franchisee directors from Adco on 30 April 2014, immediately prior to the 1 May 2014 meeting.

5.7.2    May meetings

136    Meetings on 14 and 15 May 2014 were used to update the Franchisees on the proposed VS. Yum presented the Franchisee Update and Yum says that the key information that was presented included the following:

    that the business trajectory that Pizza Hut was on was unsustainable, with PSA sales having declined by XXXX X XXXXX XX real terms since 2004;

    historical trends, market data, consumer research and customer surveys all demonstrated that Pizza Hut had a value problem with consumers; and

    the results of the ACT and WA Tests.

137    As has been explained earlier at [61], DPL argues that these meetings provided misleading information.

138    Yum submits that at these meetings it made a commitment to continued liaison with the Franchisees following the resignation of the Adco board. Yum submits that it did liaise with the Franchisees in two ways:

    On 22 May 2014, Yum convened a meeting with a group of the Franchisees in order to “brainstorm” other marketing ideas to achieve the same objectives as those sought to be achieved by the VS. However, the meeting did not yield any ideas sufficient to achieve the breakthrough in sales and transaction growth that Yum was hoping to achieve.

    Yum presented the Yum Model to various of the Franchisees so that they could input their own data into the cells of the Yum Model to see how the VS would affect them.

5.7.3    Availability of Franchisee information

139    Mr Houston gave evidence that the Yum Model was necessarily incomplete because Yum did not have access to the profit and loss information of the Franchisees. DPL asserts that this evidence is not credible, as Yum had extensive powers under the IFA to inspect and audit business records of the Franchisees at any time and the Franchisees must fully cooperate with Yum during such inspections or audits (clause 10.2 of IFA). DPL states that Yum also received the Franchisees’ information. However, from the evidence, Yum only received full year profit and loss statements when a transfer request was submitted to it to sell an outlet.

5.8    The reasons of Jagot J in the interlocutory application for injunctive relief

140    On 24 June 2014, after Yum announced to the Franchisees, in confidence, its intention to implement the VS on 1 July 2014, Jagot J heard and determined an interlocutory application by A & A (Sydney) Pty Ltd and 80 applicant Franchisees, including DPL, seeking to restrain Yum from implementing the VS (A & A (Sydney) Pty Ltd v YUM! Restaurants Australia Pty Ltd [2014] FCA 678). The interlocutory application was made on an urgent basis because Yum intended to implement the VS imminently and had made at least partly irreversible arrangements on that basis. The grounds for interlocutory relief were, in essence, that under the IFA Yum owed each of the applicants implied duties, being:

    a duty to cooperate in achieving the objects of the IFA;

    a duty to act reasonably and/or honestly in the performance of duties and exercise of rights, powers or discretions under the IFA;

    a duty to act in good faith under and in relation to the IFA, including a duty to have regard to the legitimate interests of the applicants and not to render the applicants’ interests nugatory or worthless; and

    that implementation of the VS would involve unconscionable conduct in contravention of s 21 of Sch 2 of the Competition and Consumer Act 2010 (Cth) (the Australian Consumer Law) (ACL).

141    Justice Jagot noted that, according to the Franchisees, the VS if introduced would have a detrimental or even catastrophic impact upon the profitability of their individual businesses. The evidence included the assertion that the implementation of the VS would substantially reduce the profits of the Franchisees and cause serious loss and damage extending to loss of the entire business. The applicants relied upon an expert report from Mr Potter, although it is not suggested that that report was as extensive as the report presently before the Court. However, her Honour noted that Mr Potter’s analysis did not take into account the impact on sales which might be occasioned by any competitive response by Pizza Hut’s competitors. Her Honour noted that Mr Potter considered that a competitive response was likely. Indeed, during the course of the hearing, her Honour was provided with evidence that Domino’s proposed imminently to extend their existing $4.95 offer of two days per week to every day of the week.

142    Mr Smith’s evidence before Jagot J was to the effect that the VS was developed in response to the downward trend in financial performance of the Franchisees and increased indebtedness of Franchisees to Adco. He said that by December 2013, senior executives of Yum had decided that something needed to be done urgently to turn the business around, arrest the decline in value of the Pizza Hut brand in Australia and help the Franchisees achieve higher sales and profitability.

143    The evidence before Jagot J was that Yum considered the ACT Test to be a success and that Mr Smith and other senior executives had formed the view that the results observed in the ACT would be stronger were the VS to be applied nationally with marketing support. Her Honour noted that on 3 June 2014 a meeting of Yum senior managers took place where various issues, including concerns as to the viability of the pricing in the VS, were discussed but that a decision was taken at the conclusion of the meeting, in principle, to proceed with the VS. This was affirmed as a final decision the following day.

144    Justice Jagot referred to the various briefings offered and given to the Franchisees in April and May 2014. She noted, at [18], Mr Smith’s evidence that the briefing provided was ‘necessarily at a high level because [Mr Smith] was concerned that there was a risk that the information would enter the public domain at an early stage, providing Pizza Hut’s competitors with an opportunity to respond to the strategy more quickly that otherwise been the case’ and that this had been a legitimate concern.

145    Her Honour concluded (at [26]):

There is no evidence whatsoever to suggest that Yum believed it was acting solely in its own financial interest at the expense of and without any proper or reasonable regard for the interests of the franchisees in maintaining the profitability and asset values of their franchise businesses. To the contrary, the evidence adduced by the respondent consistently discloses that Yum believed, and continues to believe, that it is acting in the financial interest of all parties to the franchise agreement and with a proper view to maintaining the profitability of the franchisees’ businesses as a whole.

146    Justice Jagot formed the view that the Franchisees’ complaint was that Yum had not cooperated in good faith because it did not consult with them about the modelling, and that the modelling undertaken by Yum was not objectively reasonable because, inter alia, Yum did not factor in a rate of return to Franchisees on their capital investment. Justice Jagot concluded that if there was a serious question to be tried on either of these bases, it was an extremely weak one. Her Honour noted that the dispute was not as to the existence of implied duties on the part of Yum but whether Yum had breached any of those duties or provisions.

147    Yum had conceded that the duty of cooperation was a duty concerned with the advancement of the interests of the business but noted that this did not grant to the Franchisees a right of veto over pricing strategy in the face of the IFA and its express provision as to the setting of a maximum price. Her Honour accepted that the process that Yum had adopted showed great care in developing the VS; and her Honour stated (at [29]) that it was not a strategy that was invented capriciously or arbitrarily. Further, the process did involve giving the Franchisees notice from as early as February 2014 in the giving of notice of the perceived need for change. Tests had been conducted overseas, in Western Australia and the ACT and her Honour said (at [30]):

With respect to whether Yum’s modelling was objectively reasonable, as I have said above, I accept Yum’s submission that, even if the modelling is wrong, it does not necessarily mean that Yum breached of any of the implied terms or engaged in unconscionable conduct. The question is whether Yum failed to act reasonably and honestly in the performance of duties and exercise of any rights, powers or discretions under the franchise agreement, or failed to act in good faith towards the franchisees under and in relation to the franchise agreement, not whether it adopted modelling with which the franchisees agreed.

148    Her Honour concluded that there were serious questions to be tried but they seemed to be extremely weak. Taking into account the balance of convenience, her Honour was not satisfied that the interlocutory injunction should be granted and did not grant it.

5.9    Domino’s reaction

5.9.1    First mover advantage

149    On 19 June 2014, Domino’s notified its franchisees of its decision to pre-empt Yum and to launch an all day every day $4.95 price point. As a result, Yum became the second participant in the market to launch this strategy and Domino’s gained the “first mover advantage” by implementing the strategy first into the market. Yum acknowledges that it was aware of the risk that Domino’s might have responded to the VS and that it had factored a form of response into its analysis. However, Yum did not anticipate that Domino’s would learn of its proposal before the launch of the VS, or that Domino’s would launch its own $4.95 all day every day strategy. Yum submits that the difference between being first and second mover is “critical” in this market. Nonetheless, it should be noted that Yum cannot make a claim that it was the “first mover” in relation to any $4.95 price point, as Domino’s had an existing offer in the market for $4.95 on Mondays and Tuesdays and had in the past offered its “value” pizza range at $4.95 on other days as well.

150    Yum contends that its executives had the first mover advantage in mind in June 2014 and it relies on Mr Brad Richter’s (of Yum) email that post-dated Domino’s entry which stated:

There goes our first mover advantage… Gulp…

151    Yum says that Ms Syed referred to the critical importance of the first mover advantage in the discussions with the Franchisees on 10 June 2014, which Mr Diab attended, and that Mr Diab never denied that Ms Syed spoke of this importance. Mr Houston and Mr Smith agreed with Ms Syed that there was a benefit in being the first mover, even if Domino’s moved immediately after Yum. Yum argues that the Court is not in a position to discount or dismiss the views of Yum’s executives as to the significance and benefits of being first to market, as DPL did not call any expert marketing evidence as to whether or not the advantage exists; rather, DPL merely suggests that the first mover advantage was an “excuse” and put to Ms Syed that it was something that she had been told to say.

152    Yum argues that Domino’s also believed that there was a first mover advantage, which was clear in the email sent by Mr William Stubbs, a Yum employee in Western Australia, who had obtained and forwarded an email on 23 June 2014 to the Yum leadership team about the intervention by Domino’s (the Stubbs email) that stated that Domino’s ‘is going to be first to market’. Domino’s predicted that it would receive a lift in sales of 15-20% within the first two months; the media reporting focused almost entirely on Domino’s introduction of $4.95, with only minor reference to Pizza Hut doing the same.

5.9.2    Marketing reaction

153    Yum did not expect Domino’s to react to the launch of the VS by marketing on television, as it thought that Domino’s would react through less effective forms of marketing, such as online and through leaflets.

154    However, Mr Creedy of RBNZ did not believe at the time that Domino’s would be as slow to react in Australia as they were in New Zealand. He sent an email to Mr Houston on 20 May 2014, in which he stated:

Domino’s were caught with their pants down and did not respond for several periods as they assumed RBL could not maintain the strategy… I suspect that Dominos will not sit back in Australia but will activate an aggressive counter strategy and with almost double the number of stores Dominos should have the advantage.

155    DPL submits that the situation in the ACT was completely different to that in New Zealand. DPL contends that in the ACT Domino’s did respond on television and it provided evidence that demonstrates this reaction:

    In Exhibit AAJ (a record of when Domino’s’ advertisement was played in the ACT), Domino’s responded on television from 2 April 2014 with advertisement DPA041404.

    A visual comparison of Exhibits AAJ and AAH (a record of when Yum’s advertisement was played in the ACT) shows that the advertisements were effectively running in parallel.

    On 5 April 2014, Mr Sinha advised Mr Smith, Mr Houston and Ms Syed:

Just heard Doms have a TV ad for $4.95in ACT… waiting on confirmation… will let you know… Thanks

    On 16 April 2014, although no reference was made to any TV advertisement as opposed to other forms of marketing, Mr Singh sought an update on Yum’s plan of action to counter Domino’s response to the ACT prices. Ms Syed responded:

I completely understand your concerns with Domino’s starting to react to our offer (they have clearly figured out it is not a short LTO,) but we need to remember that we knew they would respond & frankly the only thing that surprised me was the amount of time they took to respond but it is becoming apparent the delay was due to the fact that they probably thought we were running this offer for a short period of time & chose to ignore it initially…

    On 3 June 2014, Mediacom, a media monitoring agency, provided advice to Yum that they had heard that Domino’s were running a $4.95 advertisement on television, and also made reference to a $4.95 coupon that was available in the ACT on the internet. However, Mediacom did not confirm in that email whether Domino’s were offering $4.95 every day.

    On 13 June 2014, Mediacom forwarded to Ms Syed a copy of the Domino’s advertisement, DPA041404, which by then had been showing in the ACT for approximately 5 weeks. That advertisement was for $4.95 every day. Ms Syed advised the leadership team. Mr Richter, who reported to Ms Syed, wrote:

Hi All,

We have just managed to get our hands on this which is a Domino’s ad that is currently playing in the ACT talking to $4.95. We are pretty safe to say that if they respond to our rollout, this is what they would respond with.

156    DPL argues that, based on this evidence, it is “inherently improbable” that Yum did not know about Domino’s advertising on television from 5 April 2014, even if it did not get the actual advertisement until 13 June 2014. Ms Syed gave evidence that in April 2014 she only looked on YouTube and the Domino’s website for the television advertisement and could not identify any advertisement. DPL contends that this evidence is implausible, as Ms Syed accepted that Yum had not put its own ACT advertisement on its website and, therefore, it was unlikely to appear on YouTube. Ms Syed said in re-examination that had she known of an advertisement running from April 2014, she would have informed the leadership team of the fact.

157    Ms Syed also gave evidence that she could not find out, or request Mediacom to find out, if the advertisement had been broadcast unless she was ‘certain it ha[d] gone to air’ as it was ‘confidential information’. That is, Ms Syed said that she could not request competitor information from a media agency and from networks without knowing that the commercial was actually live and had gone to air, because it was confidential. DPL submits that this evidence is unbelievable, as no one of Ms Syed’s experience could possibly have believed that an advertisement that has been broadcast to the public on free-to-air television remained confidential information and, even if she were not certain whether it had gone to air, the networks must have been in a position to provide this information.

158    Ms Syed also gave evidence that as soon as a pizza competitor runs an advertisement, she is automatically told about it. Following 13 June 2014, when Ms Syed saw the advertisement, Ms Syed immediately spoke to Mediacom, which told her that the advertisement had been running for two weeks. It follows, DPL argues, that as the objective evidence obtained from Nielsen establishes that Dominos did broadcast the advertisement from 2 April 2014 many times during the ACT Test, Ms Syed must have known of this from when it occurred or shortly thereafter, and certainly by 16 April 2014.

5.9.3    Impact on sales growth

159    DPL submits that even if Yum did not know the precise details about Domino’s TV advertising when it first occurred, the senior executives knew by early May 2014, or at least by 3 June 2014, that Domino’s response had a significant impact on sales growth in the ACT because:

    in the SSSG chart presented in the Franchisee Update on 14 and 15 May 2014, Yum made reference to the Domino’s response from Week 9 onwards (being the week commencing 7 April 2014). This acknowledgment of Domino’s response is reflective of Yum’s awareness of the impact of that response.

    in an email Mr Houston sent to Mr Bergren of Yum US on 3 June 2014 (the Help! email), Mr Houston expressly acknowledged his concerns about Domino’s and its effect on the launch of the VS.

5.9.4    The Help! email

160    On 3 June 2014, Mr Houston sent the Help! email. This email highlights some of the factors that, Mr Houston’s view, were for and against the launch of the VS:

Scott, I wanted to give you a quick update and see if I can grab a quick call tomorrow. I know we have a call scheduled for next week but would like to talk thru some issues prior to locking away decisions.

I am up and about from 6am which is 1pm your time. I am sure your calendar is packed but I am hoping to catch a few minutes for a sanity check.

Background

We are at the decision point for the launch of value and need to make the call tomorrow.

We have been working towards a date of July 1 and are at the point of no return tomorrow.

Why the concern ??

1.    We have spent the last couple of weeks communicating with franchisees and trying to get alignment and generally the result is poor. Majority of franchisees are very nervous and reluctant to support it. Opting to maintain the status quo (despite knowing that we have no media budget and without YUM support even less). They are collecting signatures for a petition and I understand that they have approx. 120 of the 200 franchisees at this point. It is not a rational decision but that is the reality of a small owner operator model. We are pretty confident that if we launch and fail in any store we will get a law suit. We feel very confident about the due diligence that we have gone thru but the reality is big corp vs small businessman will be tough to win.

2.    We have tested the NZ model and got strong results in the ACT, 28% sales growth and 48% transaction growth. The P&L that we have relied on is from a franchisee and whilst we have sliced and diced it as much as we can none of us feel 100% confident about the data. There is nothing more we could do but the reality is we are relying on a franchisee P&L for this launch.

3.    The results in the ACT mirrored the NZ result when it came to P&L esp the COS… that gave us confidence that it was robust. What we have been working over the last 2 weeks is how replicable is that data for national launch. It is apparent that we have a number of outliers in the system that will likely need to hurdle a much higher transaction lift to break even. Nationally we need to achieve around 40% transaction lift which given the ACT result is possible… the problem is there is no tolerance for error for the outliers… some of these stores will need 70% plus trans growth... that is a serious stretch. We are working on tweaking some of the less sensitive prices to ensure that we can still deliver to the tested proposition (sides pricing, delivery min, delivery fee) to improve the margins whilst maintain the headline $4.95 price point.

I guess it is this that I want to bounce off you

We are committed to launch value on July 1. I am nervous about the ability to hit 40% transaction growth and ensure that all (or at least 90%+) of stores make more money given our current economics. I don’t think I can build enough margin protection around the outside to bring this number down to a more manageable level (will find this out tomorrow morning).

We are considering launching with $5.95 instead… I know that this sounds crazy and it may be pre launch nerves but I actually think it is the safer play from a YUM perspective.

Why $5.95

We know Doms will react to a national launch of value and we will not have the ability to sustain a $4.95 price point for more than a few weeks esp if they take our trans growth back to 20% instead of 40%... franchisees don’t have the ability to weather the storm. Whilst $5.95 leaves that price open for them to take and own we also think it is tough for them to own it everyday for exactly the same reasons it is for us… perhaps even more so because they are higher vol. At $5.95 we think our ability to sustain a value proposition for the long term is more likely. The hurdle rate is around 13% vs 40% at $4.95.

The million dollar question is what sort of sales spike can we expect at $5.95… we didn’t test this although the ACT run a test of $6, $8 and $12 for signature pizzas last year and got an 11% sales growth and a 25% transaction growth when we had media… this indicates that it would hurdle esp given the fact that it would have more media support than the test.

It is important to note that even at $5.95 and $8.50 we would be discounting our current pricing by 40% on classics and 40% on favorites… all day everyday.

I am torn between the two options and just want to bounce it off you to get your thoughts. I will check email in the morning if you can make time for a quick call.

161    DPL submits that the Court should not accept the evidence of the Yum witnesses who assert that the Domino’s reaction came as a surprise to them. DPL contends that if the Yum witnesses conceded that they knew prior to announcing the launch of the VS that Domino’s would react by matching the $4.95 price reduction and support that reaction with television advertising, Yum would have been unable to blame Domino’s for loss of the first mover advantage and the failure of the VS. It follows that Yum would have been forced to accept that the failure of the VS was its own fault.

5.9.5    Email from Mr Smith of 25 June 2014

162    On 24 June 2014, Pizza Hut’s major competitor, Domino’s, pre-empted the VS by implementing its own price changes, which were essentially limited to its $4.95 range on takeaway only and also included two new pizzas in a range called “Value Plus” at $7.95. DPL notes that Domino’s did not match the price reduction on delivered Classics pizzas by Pizza Hut. Domino’s did not reduce its $11.95 pizzas to match the price change to the Legends/Favourites price changes by Pizza Hut and did not delete any of its premium range pizzas.

163    On 25 June 2015, Mr Smith wrote to the Franchisees to ‘reaffirm that our value initiative will take effect on 1 July 2014’. DPL submits that the significance of this announcement by Mr Smith is that it was made after Yum was fully aware of the Domino’s price changes and that Yum ought not have met the $4.95 all day every day price point, as Domino’s did not match the price reduction on delivered Classics pizzas or the price reduction on Legends/Favourites.

164    Yum contends that the Court should reject this submission as it says that the pre-emption by Domino’s of the VS defeats almost all of DPL’s contentions with respect to Yum’s liability for any loss on the part of the Franchisees. Yum submits this for the following reasons:

    Whether or not Yum had earlier planned to launch the VS was immaterial after 24 June 2014, when Domino’s launched its own strategy. This is because the market leader, which was already rated more highly by consumers than Pizza Hut in respect of the key criterion of value, had improved its value profile. For Yum not to match Domino’s would have been potentially catastrophic. That is, Yum submits, Yum had no choice but to proceed with the VS. DPL argues that Yum has not established that the losses would have been worse if it did not match Domino’s pricing than the ‘catastrophic effect’ of introducing the VS on the Franchisees, which has in fact occurred. DPL criticises Yum’s suggestion that the Franchisees were better off by introducing the VS once Domino’s response was known, rather than maintain the status quo. Yum disagrees with DPL’s claim, as it states that ‘[t]he counterfactual, like all counterfactuals, necessarily involves an element of speculation’ and that in the circumstances, the people best placed to ascertain the response were of the view that matching Domino’s was necessary for a commercial purpose.

    The VS was now defensive. Domino’s internal prediction of a substantial transaction uplift corroborates Yum’s view as predicated in the Yum Model.

    The suggestion that Domino’s would not have implemented its own strategy if Yum did not implement the VS is not correct. Domino’s announced its strategy before Yum had done so and at the exact time when an application for an injunction brought by the Franchisees to stop the implementation of the VS was being heard. Yum contends that it is extremely unlikely that, had that application succeeded, Domino’s would have unilaterally abandoned the obvious advantage that it had predicted it would obtain in its email announcement to its franchisees. DPL disagrees with this inference and it argues that Domino’s did not expect to continue the strategy for more than 2 months. Yum argues in response that it “beggars belief” that a competitor such as Domino’s would abandon an advantage that it had obtained at a time when Yum had not launched and might not launch depending on the interlocutory application. Accordingly, the 2 month inference alleged is both unavailable and irrelevant.

5.9.6    Leaking of the VS

165    DPL argues that Yum in its opening sought to suggest that Domino’s became aware of the VS as a result of the action of the Franchisees, and in particular the commencement of the A & A proceedings on 19 June 2014. DPL says that this speculation on Yum’s part is not correct. It submits that although the A & A proceedings were commenced on 19 June 2014, the first public hearing took place before Farrell J on 20 June 2014. The material produced on subpoena by Domino’s reveals that Domino’s planned its response at a meeting of its Franchise Advisory Council on 19 June 2014. This was before any public hearing in the A & A proceedings and Domino’s response involved a proposal to take effect on 27 June 2014.

166    By the evening of 23 June 2014, Yum knew the full details of Domino’s proposed response having received the Stubbs email. This included:

Good afternoon all,

We’ve had word that the start of the new financial year will see a major competitor adopt an extremely aggressive $4.95 pricing strategy on its value range.

Having faced similar experience with our New Zealand family, we’re not about to sit back and watch it affect our sales and customer count again. We have a plan and we are not afraid to use it!

Domino’s is going to be first to market with an aggressive pricing position of its own.

167    DPL contends that that response was clearly the consequence of the Domino’s Franchise Advisory Council meeting on 19 June 2014 not the A & A proceedings. In written submissions, Yum does not press the argument that the parties’ attendance in Court informed Domino’s of the impending launch of the VS. However, Yum argues that the Franchisees were obviously aware that the proceedings were to be launched well before 19 June 2014 and that provided the Franchisees with the opportunity to leak the information. Yum points out that on 19 June 2014 up to 80 Franchisees were applicants in the proceedings and that it was extremely unlikely that these applicants first learnt of the proceedings on that day and agreed to join as applicants on the same day. Accordingly, as the Franchisees were told that the VS would be implemented on 10 June 2014, Yum contends that there can be no doubt that there was ample opportunity, in the hope of frustrating the VS, to communicate the confidential content of the VS and even the injunction application to Domino’s prior to 19 June 2014. Yum states that it neither intended nor facilitated the communication of the VS to Domino’s and even though it anticipated a Domino’s response, pre-emption by Domino’s was not anticipated.

5.9.7    Other evidence of Domino’s reduced prices

168    DPL states that there is no evidence to suggest that Domino’s were otherwise planning to lower their prices, or to extend their $4.95 offer from Mondays and Tuesdays to an every day offer. In 2013, Mr Houston was aware that Domino’s were considering extending their existing two day $4.95 offer to a four day offer for a limited period, but this proposal had made Domino’s franchisees ‘very upset’, according to Mr Houston. DPL says that this would explain why part of Domino’s response to the VS involved a fee reduction for franchisees and an advertising investment by Domino’s of $500,000 ‘to ensure media weights don’t drop’. Further, DPL contends that it can hardly be supposed that Domino’s would need to put its own hand in its pocket if this was a pre-planned pricing movement by Domino’s, rather than a response to the VS.

169    DPL argues that Yum is speculating as to whether, and if so how, Domino’s learnt of the prospective implementation of the VS. The evidence surrounding Domino’s decision is inadequate to draw definite conclusions as to Domino’s knowledge and reasons. The evidence is also inadequate to draw comparisons sufficient to evaluate the VS by reference to Domino’s strategy. As Yum points out:

    There is no evidence as to Domino’s food costs, other than Yum’s belief that they were higher than Pizza Hut’s.

    There is no evidence about the extent and duration of any fee relief which Domino’s might have afforded its franchisees.

    There is nothing in the material subpoenaed from Domino’s that suggests that any modelling was undertaken before Domino’s made its decision.

170    Yum contends that the evidence only supports one inference, being that Domino’s made an executive decision at short notice to pre-empt Pizza Hut’s strategy and to accrue to itself the first mover advantage. However, this does not need to be determined. The fact is that Domino’s did pre-empt Pizza Hut’s VS by making a $4.95 every day offer. Yum then had to decide whether to go ahead with implementation of the VS.

5.9.8    Whether Yum had to follow Domino’s new market prices

171    Yum asserts, in its evidence in this proceeding and asserted before Jagot J during the A & A proceedings, that once Domino’s made its announcement on 24 June 2014, Yum had no choice but to follow the new market prices set by Domino’s. DPL contends that this argument is illogical and unsupported by evidence, as follows:

    It is clear that Domino’s reacted to Yum’s decision to implement the VS, including by subsidising its own franchisees. If Yum had not proceeded with the VS, there is no evidence to suggest that Domino’s would have followed through with its response or with its own launch.

    Yum’s VS went well beyond Domino’s response which, as previously noted, was essentially limited to $4.95 pricing every day on takeaway “value” pizzas. By contrast, the VS saw substantial reductions in delivery prices and the prices of Legends/Favourites and the removal of the profitable “Signature” range. As Mr Houston acknowledged, the VS was a significant change to the Pizza Hut business model.

    Notwithstanding the above, Yum made a separate announcement in the email of 25 June 2014 to the Franchisees. To the extent that the reaffirmation involved a fresh decision by Yum in relation to the VS, it was clearly taken with full knowledge of the precise nature and timing of the Domino’s response.

172    Yum submits that it should not be criticised for meeting the price point once Domino’s decided to implement its own strategy. That is, for Pizza Hut not to respond at all and at least match Domino’s price point would have left Pizza Hut severely compromised in the market and Domino’s, XXXXX XXXXXXX XXXXXX XXXXXX XXXXX XXXXXXXXX XXX XXXXX, would be the only operator at the new, lower price point.

5.10    Post implementation of VS

173    DPL submits that it is clear from the sales data that the introduction of the VS has not had a positive impact on delivery transactions, and delivery transactions have declined gradually from 1 July 2014. DPL acknowledges that there was an initial spike in takeaway transactions after 1 July 2014; however, the trend has been downward since the implementation of the VS with the exception of a spike in overall sales around Christmas 2014.

174    Yum adjusted its prices at various times after the implementation of the VS, as set out in [45] above.

175    DPL notes that Yum has maintained the $4.95 price for Classics on-line and, therefore, that Yum continues to implement the VS. Further, DPL contends that the restoration of delivery prices and price changes on pizza ranges ‘has not reversed the negative impact of the VS’ and that Ms Syed acknowledged in cross examination that ‘you can’t go straight back to where you were’ on price and that ‘you had to do gradual moves’. That is, merely altering the original price points of the VS did not prevent DPL from suffering loss, as the changes were gradual over time.

176    Yum contests DPL’s allegation that loss was suffered from the original alleged breach, notwithstanding Yum’s adjustment of the original price points. Yum submits that this allegation is untenable for the following reasons:

    Yum operates in a competitive market and its ability to set prices unilaterally is constrained by the conduct of other market participants. Domino’s, the market leader, was the first mover to the $4.95 all day every day price point. Yum in the exercise of its business judgment, must compete in the market as it finds it.

    DPL’s apparent case is that irrespective of whether there is any continuing breach, there is ongoing loss caused by the alleged breaches on 10 and 25 June 2014. This contention does not account for the effect of subsequent increased prices on the calculation of such loss. The logical conclusion of this contention would be that Yum would be held liable for losses suffered as a result of Domino’s taking market share from the Franchisees from 27 June 2014, even if Yum did not implement any aspect of the VS. Yum submits that such a conclusion would be irrational.

    DPL pleaded that the contractual obligation in the IFA is to allow the Franchisees to make “profits” over a 12 month period, with there being a reasonable period of measurement of Profits and Outlet Costs of 12 weeks. It follows that if Yum were to adjust any price within the reasonable period of measurement, then setting a price that would otherwise be in breach could not contravene the alleged term. Yum submits that it did adjust the pricing of delivered Classics and delivered Favourites within about 6 weeks of implementation and of delivered Classics again within about 12 weeks of implementation. That is, even if there were a term construed or implied as alleged in [9] – [9D] of the ASC, there has been no breach according to its terms in respect of delivered Classics or delivered Favourites.

5.11    The role of the Yum US

177    DPL contends that the decision to implement the VS was imposed on Yum by Yum US, following the approval of the US FPC. DPL’s pleading on this issue is as follows:

24H.    On 14 April 2014, Yum was advised by an officer of Yum! Brands Inc in the United Stated that:

(a)    The PFC [sic] approved in principle:

(i)    the establishment of a two-tiered pricing for pizzas in Australia, being $5 for “Classic” pizzas and $8 for “Legend” pizzas;

(ii)    a simplified menu from 37 to 16 items;

(b)    Mr Ramirez would be in contact directly with Mr Houston to finalise the mechanics/amounts of the 3 funding requests made by Yum and referred to in paragraph 24G(c) above.

…

24I.    The advice provided to Yum from its US parent referred to in paragraph 24H (US Approval) represented:

(a)    approval for the national implementation of Reduced Prices;

(b)    recognition that Yum could now proceed to implement the balance of the plan, or alternatively the back up plan, devised by the US Leadership Team at the AOP Presentation as set out in paragraphs 24C to 24CB above, having initiated the ACT Test as outlined at the AOP Presentation; and

(c)    a commitment on the part of Yum’s US parent company to fund the national implementation of the Reduced Prices, subject to mechanics and amounts being determined between Mr Ramirez and Yum.

…

24P.    By making the “final decision” referred to in paragraph 24O, Yum gave effect to the US Approval referred to in paragraph 24I and the request made by the US Leadership Team at the AOP Presentation as set out in paragraphs 24C to 24CB above.

5.11.1    AOP meeting on 9 October 2013

178    Yum presented its 2014 business strategy to Yum US’ senior leadership team at the AOP meeting on 9 October 2013. DPL relies on the notes of Ms Anna Honey (in-house lawyer at Yum), who was in attendance at the AOP meeting. The notes were sent to the Yum leadership team but did not record Yum’s presentation or any responses made by Yum’s leadership team. DPL argues that the VS was not presented by the Yum leadership team to the Yum US senior leadership team; rather, the VS arose out of directions given by the Yum US senior leadership team during the teleconference on 9 October 2013. That is, DPL says that the idea that the VS would be implemented in Australia during the 2014 Yum year was conceived by the Yum US senior leadership team. Ms Honey noted the following:

    Mr Pant (Yum US senior leadership team) said: ‘Why not go for a single price pt like NZ rather than 6,8,12? If blow up adco do it for something significant’.

    Three of the Yum US senior leadership team discussed the need for a ‘painful price point’ not just ‘simple pain but complex pain’ and that ‘$5 is not persuasive enough’.

    Mr Pant said: ‘At end of 2014, if still missing plan, need to do something radical. Business is getting worse. Tried lots of ideas, except for NZ idea. Only reason we aren’t doing is franchisees. Not prepared to give a royalty holiday but would cover losses’.

    In the wrap up of the AOP meeting, Mr Pant said that the stakes are high and that people look to Australia. Further, Australia could be used to learn for other markets. Mr Pant concluded that Yum should go ahead with the “Canberra Test” (the ACT Test) and that Yum US would help with funding, provided that the New Zealand model or a simpler model was tested. As a result, the contribution from Yum US would be $3 million.

179    DPL contends that Yum US overruled the Yum leadership team at the AOP and relies on Ms Broad’s email to a colleague on 10 October 2013, in which she said:

It was a tough AOP for us. We’re certainly heading in a direction in the back end of 2013 that isn’t completed [sic] aligned with Dallas, so it made for some good robust discussion!!!

180    Yum states that if it had been overruled by Yum US, Ms Broad’s communication with a Yum US leadership team member immediately after the AOP meeting would not highlight the misalignment between the two management groups but would acknowledge Yum’s “error” and the correction.

181    DPL notes that Mr Smith, who previously worked in Dallas, came to Australia in August 2013 at the commencement of the AOP period and it argues that he seems to have had a major part in the planning of the VS.

182    Yum denies DPL’s theory that the VS was imposed on Yum by Yum US and that it was conceived to expose the Franchisees to harm in order to achieve an increase in royalty revenue for Yum. Yum submits that, as Mr Houston stated, the 2013 AOP meeting was not a decision making forum and that the Yum US leadership team did not impose any particular strategy on any business unit. Further, Yum states that DPL’s characterisation must fail for the following reasons:

    It wrongly characterises the purpose and effect of the AOP meeting.

    The direction theory does not accord with the plain words of Ms Honey’s notes.

    It is contradicted by the evidence of Mr Houston, Ms Broad, Ms Syed and Mr Smith, each of whom was actually there. When it was put to Ms Syed that the idea for a $4.95 pizza was first raised at the October 2013 AOP, Ms Syed responded ‘not exactly’ and she denied that Yum US directed Yum to do anything. This evidence was corroborated by Ms Broad and Mr Smith.

    It is inconsistent with the subsequent course of events, including the implementation of the existing planned pods, the conduct of the ACT Test and the WA Test, the attempt to obtain alignment with the Franchisees, Yum’s decision to contribute $1,000,000 to the eventual launch, and the creation of a model that could be used by the Franchisees to assess the impact of the VS on them and which would assist in Yum’s eventual decision to launch the VS.

183    Yum contends that DPL mischaracterises Ms Honey’s notes by treating them as the recording of a direction to implement a strategy nationally. Yum says that it is plain from Ms Honey’s notes that the suggestion made by Mr Pant was to “conduct a test” in the ACT that would be funded by Yum US in the event that existing strategies, including the free delivery strategy, did not succeed. Yum also notes that Mr Roger Eaton on two separate occasions referred to the proposal of a test, in the ACT, and that it would follow free delivery. Accordingly, Yum argues that Ms Honey’s note makes clear that the AOP meeting was not the genesis of a decision to launch the VS, but a suggestion to test the successful New Zealand strategy in Australia.

184    Further, Yum submits that DPL’s theory that the AOP meeting constituted a direction by the Yum US leadership team is also contradicted by the subsequent conduct of Yum, which includes:

    Yum did not take steps in relation to testing the VS but proceeding with the planned free delivery pod.

    There is nothing in contemporaneous documents to suggest that the Yum US leadership team wanted to impose the VS on Yum, or that Yum was acting in accordance with any such perceived wishes. Yum notes that DPL advances no basis to demonstrate that Yum was compelled to do so and no reason for Yum to choose to do so.

    Yum’s planned free delivery promotion proceeded and Yum argues that it devised a carefully thought out strategy which it would not jettison on the basis of a few comments in the course of a 2 hour presentation of the AOP, in circumstances where the Yum US leadership team clearly deferred to Yum’s local expertise at various points.

5.11.2    Initiation of the ACT Test

185    In November 2013, Yum sought funding from Yum US to conduct what was to become the ACT Test. Yum submits that it did not move to implement the VS following the October 2013 AOP meeting, which would have been expected if it had been directed by the Yum US leadership team. Yum points out that the decision to implement the ACT Test directly contradicts DPL’s argument. Yum presented the ACT Test to various members of the Yum US leadership team, as seen by the powerpoint presentation attached to an email sent by Mr Houston on 7 November 2013. In preparing the slides for this presentation, Yum relies on the fact that Mr Houston gave consideration to and analysed the New Zealand experience, where a similar strategy had been adopted. Mr Houston’s analysis explained why the New Zealand model would not work in Australia and gave consideration to a likely Domino’s response and the importance of leveraging cost of labour in order to ensure that the Franchisees could ultimately afford to implement the VS, if the strategy was implemented.

186    Yum argues that it required the involvement of the Yum US leadership team to conduct the ACT Test only because it sought relief from its AOP commitments, as Mr Pant said during the AOP meeting that Yum US would help fund such a test.

187    On 13 November 2013, Yum presented to the Yum US leadership team the “Step Change Canberra” presentation. DPL relies on the following observation in the “Summary” that says:

If we can demonstrate that this will influence broader community and mitigate need for more costly support in the future when we do roll nationally.

188    DPL argues that this summary point implies that it was always a question of “when” the VS would be implemented not “if”, depending on the results of the ACT Test. Yum criticises DPL’s characterisation of this presentation. Yum submits that this is not a fair reading of the “Summary” as it argues that “rolling nationally’ is conditional on demonstrating success in accordance with the criteria set out in the balance of the presentation. Yum submits that reading the presentation as whole contradicts DPL’s interpretation as the presentation demonstrates that:

    no more than a test in the ACT had been raised by the Yum US leadership team during the AOP meeting;

    the communication related to funding, not to approval for the conduct of the test itself;

    Yum was alive to the competitive challenge from Domino’s; and

    Yum was keenly conscious of, and concerned for, the financial position of Franchisees. It was the concern for the financial position of the Franchisees that underlay the whole testing regime.

189    Further, Yum points out that in December 2013 it initiated the WA Test in which a different value strategy was trialled. Yum relies on this test as it argues that its very existence is significant for the following reasons:

    it contradicts DPL’s theory that the VS had been established early as a result of the comments of the Yum US leadership team in the AOP meeting in October 2013, because if the course had already been set, there would have been no WA Test.

    the WA Test was initiated and conducted without any approval from the Yum US leadership team or the FPC. This was because no funding was sought in order to conduct the test. In the absence of a request for funding or a deviation from a standard policy, neither the Yum US leadership team nor the FPC had even a limited role in approving operational decisions of Yum.

5.11.3    Approaching the FPC

190    Mr Houston gave evidence describing the FPC:

The [FPC] is a committee of senior Pizza Hut Global executives in Dallas who consider special requests from Yum business units around the world for the provision of incentives to franchisees outside the parameters of the IFA. The FPC’s role includes the review and approve any proposed incentives or deviation from the IFA.

(errors in the original)

191    On 13 April 2014, Yum approached the FPC in order to obtain plan relief in conjunction with what Yum was now beginning to consider would be the launch of the VS nationally. However, Yum states that no decision to launch had yet been made, as the ACT Test was not complete and alignment with the Franchisees was being sought. Yum argues that it knew that the Franchisees’ representatives on Adco were implacably opposed to any such strategy.

192    Yum submits that it has always had the power to change elements of the AOP without obtaining Yum US approval, as was demonstrated when it implemented the WA Test in December 2013. Yum contends that only when overall financial parameters of the AOP are changed or there is a deviation from a standard policy does Yum need approval from the FPC. Yum argues that the FPC’s role in April 2014 in relation to the then contemplated launch of the VS was to consider the request from Yum for the provision of incentives to the Franchisees. These incentives included $1,000,000 in benefits or incentives to the Franchisees over and above Yum’s obligations under the IFA. That is, Yum says, the FPC did not approve or disapprove the VS.

193    DPL relies on an email that Ms Setton, writing on behalf of the FPC, sent to Mr Houston on 14 April 2014 as the ‘most concise description of the VS’. The email is as follows:

The [FPC] is directionally aligned with setting up a two-tiered value pricing ($5 for “classic” pizzas and $8 for “legend” pizzas) and simplified menu (from 37 to 16 items) for the Pizza Hut system in Australia. Enrique [Ramirez] will contact you directly to finalise the mechanics/amounts for the 3 requests you sent through (AdCo contributions ($1MM), SCM write-off ($300K) and G&A for “spend smarter” expert ($100K)).

194    Yum argues that this characterisation of Ms Setton’s email is incorrect, because Ms Setton was not concerned to record the parameters of the VS; she was communicating the parameters of the plan relief sought by Yum, which had been approved by the FPC. It follows that, as the FPC was not concerned with approving the VS as a whole, the communication of its approval of Yum’s provision of an additional $300,000 in direct payments or credits to franchises and $700,000 in additional advertising was confined to those financial aspects.

195    Further, Yum argues that the FPC’s position is put beyond doubt by Mr Houston’s email to Mr Mahboobani, Pizza Hut Global’s General Counsel, on 1 April 2014, which attached a short deck of slides entitled “Pizza SOPAC FPC Request – Velocity Pricing Launch”. Yum argues that the slide deck identifies the support requested and its estimated cost. That is, it establishes that the FPC’s role was extremely limited and did not extend to conferring head office approval of the VS.

5.12    Value problem

196    Mr Diab agreed in cross-examination that during 2013 sales and transactions of the Franchisees had been declining as compared to prior years. He agreed that Mr Smith had told him, in December 2013, that the system was in ‘a bad place’ and that Yum needed to do something about it. Ms Syed gave evidence that sales had declined year on year since 2012. Yum says that the value problem was a matter of concern to Yum’s management from at least the middle of 2013. Mr Houston gave the following evidence summarising the situation:

    In the early 2000’s, Pizza Hut was still the largest pizza brand in Australia based on outlet numbers.

    From 2004 to 2011, Pizza Hut had closed about 40 outlets.

    Between 2011 and 2014, Pizza Hut added 40 new outlets. However, average weekly sales declined XX and transactions declined XX in 2012 and a further decline in sales of XX and XX in transactions was suffered in 2013.

    In the first half of 2014, the downward trend worsened with a XX decline in sales and a XX decline in transactions.

197    DPL accepts that over the course of the preceding 10 years, Pizza Hut had generally lost market share to Domino’s. However, DPL argues that it has not lost market share in the Greater Macarthur region. DPL acknowledges that the significance of Domino’s achieving a 2:1 dominance nationally was that Yum US’s internal assessment was that Domino’s revenues would be enhanced by this dominant position and that Pizza Hut’s would decline. However, even though the loss of market share was a long-term problem, DPL says that it was not a crisis requiring a short term pricing fix of the nature embodied in the VS.

198    DPL contends that the objective evidence does not support the assertion that the Pizza Hut system in Australia was experiencing a sales decline in, and preceding, the first half of 2014. This evidence includes:

    The data for the first two quarters of 2014 show a relatively stable business for Pizza Hut in Australia. SSSG for quarter 2 was XXXXX, which was an improvement on quarter 1’s SSSG of XXXXX. Net sales were trading within XX from quarter 1 to quarter 2 XXXXXXX in quarter 1 compared to XXXXXX in quarter 2. DPL argues that this evidence is consistent with Mr Houston’s acknowledgement that Mr Diab’s favourable results in 2014 ‘would be pretty consistent with the whole system… last pod has been positive and sales have grown, with no discounting’.

    Ms Syed acknowledged that there had been two good years of sales growth in 2011 and 2012 and that the 2013 year had been disrupted by one off events that were unlikely to be repeated, as Domino’s was able to obtain Yum’s marketing calendar which set back Yum’s marketing efforts for the year.

199    Accordingly, DPL submits that the Franchisee Update was highly misleading, as it portrayed a system in crisis. The graph was adjusted so that PSA sales were stated in 2013 dollars and DPL suggests that it was meaningless unless comparative cost and price information were also included to show a change in business performance. Further, DPL argues that the 5 year average SSSG was only XXX, which is more reflective of Ms Syed’s evidence, and that the business was in a steady-state but experiencing a decline in market share.

200    Yum submits that value is a matter of consumer perceptions and if consumers do not believe that a quick service restaurant provides products at a good value, that operator will be at a comparative disadvantage to any operator in the same segment who is perceived as offering better value. Mr Diab agreed that Pizza Hut suffered from a “perception issue”. This concern was corroborated by Yum’s guest experience surveys at the time. These surveys are not evidence of the facts they purport to interrogate but they were part of the material available to Yum as part of its decision making process. The guest experience surveys showed: