Papa Johns Navigates the Complex World of Pizza Pricing

April was the toughest month, in terms of comp sales performance, since Rob Lynch joined Papa Johns roughly four years ago as CEO. There were a few stressors, from decreased tax refunds over 2022 to general macro pressures. But more than anything, it reflected an unseen period of inflation for a pizza category that’s always held hands with value differently than most.

If you go back 30 years in the business, Lynch says in an interview with QSR, the typical cost inflation per year was closer to 1–2 percent. Brands, in turn, would take 1–2 percent pricing to mitigate. Yet when you face 12–16 percent inflation, “it’s really hard to take 12–16 percent in pricing in a year,” Lynch says. “The customer just doesn’t accept that. So if you’re managing on a rate basis, it can get you in some trouble, and I think that’s what’s happening with our franchisees.”

Papa Johns’ same-store sales tugged in different directions in Q2. North America figures decreased 1 percent overall. But company-owned units lifted 2 percent, while franchise stores declined the same amount.

The U.S. corporate stores saw year-over-year ticket and transaction growth. Franchisees observed ticket expansion, but it was offset by lower transactions.

The pricing effect is where the divide split. Franchisees prioritized margin over transactions as they guarded inflation, interim CFO Chris Collins told investors Thursday. It’s something Papa Johns identified and began working with operators on to optimize revenue management. The brand said its entire system then began to witness sequential sales improvement throughout Q2, with positive North America comps in June. And it’s carried into Q3.

But going back to the overall category picture, pizza isn’t navigating today’s high-cost puzzle like the rest of quick service. Eighty-five percent of Papa Johns’ business flows across digital channels (15 percent goes into phone calls to a centralized center, which then comes in digitally). So, essentially, everything the brand does is online.

Q1 REWIND: Even After Record Sales, Papa Johns Sees Plenty of Upside Ahead

In quick service, when a guest pulls into a drive-thru, Lynch explains, and looks at a menuboard, the price is what they pay. Pizza is more of an ecommerce arena where it’s planned ahead and shopping takes place.

As customers arrive into the “storefront,” or what’s now become digital channels for Papa Johns, they see what’s offered, both from a new product standpoint as well as a special slash discount angle. Pizza brands often boast more than 20 percent discounts applied on average to each transaction.

In other terms, when it comes to balancing revenue, it’s not as straightforward as telling franchisees to take prices up or down. How Papa Johns’ menu interacts with offered specials, with promotions running nationally and at the local level, is an algorithm that has to work together.

“So as we work with our franchisees, we're not just going in and saying, ‘hey, you have to take your prices down on your regular menu price,’” Lynch says. “It's how they show up in pricing on the aggregators, it's how they execute their e-deals and the discounts that they offer through the digital channels.”

CHECK THE RANKINGS: Where did Papa Johns come in on this year's top pizza chains?

“All of that is in play, even carryout specials as some volume shifts a little bit from delivery into carryout, making sure you have the lay offering there,” he adds. “So, we are working with them not just to come in and tell them how they can maximize their margin, it's really how they can build the successful long-term relationship between all those different facets of revenue management.”

As nuanced as it all might be, Lynch likes where Papa Johns stands. Quick-service chains, according to Revenue Management Solutions, produced net sales of 4.8 percent in Q2 of this year. However, it stemmed from check increases of 6.7 percent, year-over-year, as traffic declined 1.8 percent. Average price jumped 10.6 percent, which was actually a slight dip from the previous quarter of 13.8 percent.

Either way, quick-service as an industry has simply become more expensive in a relatively thin window of time.

But unlike pizza, Lynch says, it’s a mostly static change. If a chain moves taco prices from $1.49 to $1.69, for instance, they’re not coming back down. They might launch value promotions or bundles into the sphere, but the broad price line typically only moves one direction—up.

“Traditional [quick service] is not really discounted,” Lynch says. “Really, the only pricing lever you have is your menu pricing. Here [in pizza], we have a lot of different facets. You have your e-digital deal, you have your loyalty program, you have your aggregator pricing, you have regular pricing. Then, we have national promoted pricing. So, there’s a lot of different ways to affect pricing and revenue management in the pizza category that isn’t there in [quick service].”

WHAT DO CUSTOMERS THINK OF PAPA JOHNS PRICING? A look back at survey data

He offers an example: Instead of a drive-thru menuboard, a pizza brand would run, say, a $7.99 carryout special. That can go up to $8.99. If transactions slide, the promotion comes right back down. “There are opportunities for us to influence the franchisees and give them council and direction on how they can better the holistic algorithm around how they go to market with prices around just regular menu price,” Lynch says.

Speaking of aggregators, Papa Johns has worked in the space going on four years. Pricing has been an interesting evolution within the third-party marketplace as well, Lynch says. Historically, aggregators skew less toward price sensitivity and value seekers. As they’ve scaled, behaviors and affinities have inched closer to the general population, Lynch says.

So like many chains, Papa Johns worked to create a dichotomy where its organic channels offer repeat customers better value, primarily through loyalty and rewards. The end result generally means much of Papa Johns’ aggregator volume is incremental because its best customers order through direct channels. “I don't know that the consumer price sensitivity is significantly different across the channels at this point. I think it was early on as you had early adopters coming in,” he said. “… but we are always going to aspire to offer a better value than they can in our organic channels.”

Lynch also addressed the headliner that was Domino’s recent decision—after years of resisting the space domestically—to tap Uber Eats as a partner. What’s different, however, from Papa Johns and Pizza Hut’s foray into the space, is Domino’s plans to still fulfill the orders that come through third-party with organic drivers. Lynch said, naturally, Papa Johns would like to service all of its transactions with staff members. That being said, though, some markets still heavily rely on DoorDash Drive to bring pizza to guests. That’s particularly true on the West Coast where the cost and accessibility of labor continues to flash. “I don't see DoorDash Drive ever going away,” Lynch said. “I think labor on demand is a great asset that we've leveraged for a long time, but optimally we would be able to leverage our organic drivers to a larger extent moving forward.”

And more broadly, Lynch says, Papa Johns has competed with tens of thousands of pizza shops since day one. That first included mom-and-pops and fast casuals. It grew to involve Little Caesars’s white-label and Pizza Hut. “I get that Domino’s is the big player,” Lynch says, “but I feel like we’ve been there four years, we know the business model. … I don’t see our business being significantly impacted by what they’re doing.”

Papa Johns’ menu innovation continues to march on, too. The brand launched a proprietary Doritos Cool Ranch Papadia at $7.99 in May. Lynch says it ignited double-digit growth in digital sessions at the start of the promotion. Franchisees experienced improving weekly transactions while ticket remained constant with the prior year.

“We saw a change in the trajectory of our business when we launched that,” Lynch says.

Then Papa Johns rolled to the other side of its barbell with its New York Style Pizza alongside at $12.99. “This layered approach to our national promotions contributed to the positive franchisee comparable sales that we began to see by the end of the quarter and to our overall higher sales this past month,” Lynch said.

More recently, the chain expanded its stuffed crust platform to include a Garlic Epic version that takes one of Papa Johns’ core equities and puts it inside crust, on top of it, and on the side as usual with the chain’s signature dipping sauce. A spicy version is on deck for later this month.

Papa Johns

The Cool Ranch Papadia jumped interest and transactions in Q2.

New terms of growth

When Lynch arrived at Papa Johns, the brand was coming off two negative domestic unit growth calendars in 2018 and 2019. In North America, 128 locations shuttered in 2018 versus 79 opens. A year earlier, 186 franchises closed, along with seven corporate stores. And due to COVID, the brand opened just five net new stores stystemwide across 2020.

Papa Johns’ record-setting runs in the months to come led to higher AUVs and restaurant-level profitability—both building blocks to reroute that pace. The brand opened net 37 U.S. stores last year at AUVs of $1.169 million. Across 2021, the figures were 30 and $1.147 million, respectively. Going back to pre-COVID life in 2019, Papa Johns boasted AUVs of $837,000 and had just closed 57 U.S. venues year-over-year.

Overall, as a system this calendar (including international), Papa Johns is on track to open between 270–310 net new units. This represents a 5 percent increase at 2023’s midpoint. Early last year, Papa Johns introduced a multi-year development goal of 1,400–1,800 net locations between 2022 and 2025, or global growth between 6–8 percent for fiscal years 2023 through 2025. Since, however, Lynch says Papa Johns weathered surprises in the forecast just like other restaurant chains, from the “extended war in Ukraine” to material global inflation to permitting and construction delays within North America that continue to sit like an anvil on operators’ timelines. Higher financing costs due to interest rate increases slowed ROI as well. Lynch says, despite roadblocks, Papa Johns plans to still grow at an elevated rate, like a recent agreement to bring 650 units to India over the next decade. As of the end of the Q2, Papa Johns reported an 8 percent increase in net new unit growth within its international markets when compared with a year ago.

But it won’t quite match the 2022 projection. Papa Johns reset the outlook to 5–7 percent and 1,150–1,400 units.

In June, Papa Johns established a corporate portfolio in U.K. with the acquisition of 91 locations. It also recently bought 27 addition stores in July, bringing the total ownership up with 118 restaurants. The U.K. market, which boasts more than 450 Papa Johns, has been challenged in recent quarters (international comps declined 1 percent in the quarter). “We’re trying to build a strong infrastructure there that we can continue to grow in the future off of, whether it's us or we refranchise those restaurants,” Lynch says of the U.K. “We feel like that’s a market we can be successful in.”

The wide view for Papa Johns, Lynch continued, looks optimistic as the brand’s product and innovation cadence continues to resonate. “Our growth right now is transaction growth. It’s not check growth. We are killing it on transactions,” he says. “So when you ask about the state of the consumer, yeah, I think there’s a lot of macro things that would tell you the consumer spending has to go down because of some of these challenges, but we’re actually seeing our consumers ramp up and dive into pizza transactions in a much bigger way.”

“We're not just winning by taking pricing or increasing our revenues, it's about bringing more customers,” Lynch adds. “And so there is a lot of demand for our products, and that's what gives us a lot of confidence in the back half of this year and moving forward.”