Papa Johns announced Friday that it signed an agreement to open more than 1,350 stores in South China, making it the largest deal in company history and one of the biggest in the pizza industry overall.
The move, which is in partnership with Hong Kong-based private equity firm FountainVest Partners, extends into 2040 and would expand the chain's global unit count by 25 percent. In addition to opening those units, FountainVest also purchased a majority stake in Papa Johns franchisee CFB Group, which operates roughly 160 stores in Shanghai and across southern China.
“This partnership with FountainVest marks another major milestone in achieving Papa Johns global growth potential, reflecting both the scale of our brand’s global opportunity and the quality of franchisees that are investing in our future,” Papa Johns CEO Rob Lynch said in a statement. “Papa Johns has enormous global development whitespace in the US and in attractive growth markets, especially relative to our peers."
In an interview with QSR Friday afternoon, Lynch referred to the deal as "transformational."
"It’s not only the biggest deal we’ve ever done, it’s by a factor of probably six times the largest deal we’ve ever done. And one of the largest deals, I think, in quick-service history," he says.
Lynch views China a primary growth market; the CEO has said on multiple occasions that it could hold at least 1,000 restaurants. Competitors in the quick-service pizza hold the same belief. In Q3, 15 percent of Pizza Hut's system sales came from China, the most among any country outside the U.S.
In Q2 2020, Domino's invested $40 million to acquire a minority interest in Dash Brands, the chain's master franchisee in China. And then at the start of 2021, former Domino's CFO Stu Levy noted the brand had more than 360 stores in the country, but potential for 1,000.
"If you look longer term, we fully expect a market like China, at some point, it's going to be our second-largest market behind the U.S.," Levy said in January 2021. "There is so much growth potential out there, and the formula for success across all of them quite honestly is pretty similar. And that gives us a ton of confidence in terms of our ability to continue to grow, to continue to gain share, and to continue to leverage the successes we've had in these markets for years to come."
For Papa Johns, the deal was the outcome of about two years of work, Lynch says. "And I’m excited to say it’s hopefully the first of a lot of these deals," he says. "We just have a lot more expansion opportunity because we’re a lot less penetrated globally. Even though we’re in 50 countries, our competitors are in 100. This is the model that we’re pushing moving forward."
Papa Johns' historic deal comes after an impressive year of development in which the brand signed the largest U.S. agreement in company history. Franchisee Sun Holdings signed on to open 100 stores across Texas through 2029. Also, In late June, the pizza chain agreed with PJ Western Group to open 250 restaurants in Germany, and two months later, the company inked a deal with Drake Food Service International to debut more than 220 stores, across Latin America, Spain, Portugal, and the U.K.
The pizza chain ended Q3 with 5,569 restaurants systemwide, including 3,323 in North America and 5,569 internationally. Papa Johns expects 80 percent of its future growth to come outside of North America going forward.
“FountainVest is exactly the kind of partner we look to help grow our brand internationally," said Chief Development Officer Amanda Clark. "They are well-capitalized, experienced operators with deep knowledge of their local market. They clearly recognize our brand’s promising outlook and strong unit economics. Together, we will bring our BETTER INGREDIENTS. BETTER PIZZA. promise to millions of new customers in one of the largest [quick-service restaurant] markets in the world.”
Clark told QSR Friday Papa Johns international strategy is a twofold approach. "One is pure whitespace in the countries we’re not in," she says, "and we’re trying to be as focused as we can to go after those really big opportunity countries. Those are the countries with, obviously, a lot of people who eat a lot of pizza. And, of course, we’ll always look at some smaller opportunistic countries that come up. But really being a little bit more laser focused and choiceful on that."
"And then," she adds, "what are the countries that we’re currently in that we can really maximize our presence. So when we thought about that for a two-pronged approach internationally, China really fell into that second bucket. We had maybe 200 stores. And you look at our competitors and they have over 1,000. Even more. China stood out as an opportunity to say, hey, we’re not doing something right. This is an opportunity for us to really grow. What we’re focused on is getting well-capitalized, well-funded investors with a deep knowledge of the local market, and that’s something that our new investors FountainVest brings to the table, which is fantastic."
It hasn't that hurt Papa Johns continues to fire up results. Total company revenues increased 8.4 percent to $512.8 million in Q3, and global systemwide restaurant sales lifted 11.2 percent to $1.2 billion. Same-store sales hiked 6.9 percent in North America, or a two-year stack of 30.7 percent.
"We certainly have the benefits of strong economics on our side," Clark says. "We’ve had quarters of record growth and that certainly makes any development person’s job a lot easier to bring in those investors and bring in folks who are really interested. Because, honestly, the payback is amazing at this point. There’s not a better time to own a Papa Johns."
In terms of the landscape in China, Lynch says the consumer is changing, just as they are stateside. Before COVID, China, as well as the Middle East and some parts of South America, he says, were viewed as ideal markets to build out large units with dine-in-focused footprints. Pizza Hut, for instance, enjoys a robust four-wall business in China. "With the pandemic and the rapid conversion of consumer behavior to delivery and takeout, that dynamic is shifting—in both China and the Middle East," Lynch says. "And so that’s a benefit for us. Because it’s a lot less expensive to build a delco model and you can scale those a lot more rapidly and reach a lot more customers with those models than you can with big sit-down restaurants. The pandemic has definitely evolved the consumer behavior in those geographies. And I think we’re well positioned to take advantage of that."