“Better ingredients, better pizza” may still be the tagline at Papa John’s, but almost everything else at the company has been changing as the pizza chain continues its turnaround from a business slump that followed controversial statements and an exit from founder John Schnatter.
Although this new course is in its early stages—and will indelibly be affected by the coronavirus—the direction under new CEO Rob Lynch is unmistakable: three consecutive quarters of same-store sales growth, increased revenues, fewer store closings, streamlined management, and strong product introductions. Margins in the last quarter of 2019 recorded their highest jump in more than a decade, and the company’s stock price rebounded to its best level since 2017.
To top all of that, Papa John's has been thriving in the midst of the coronavirus; April sales represented the strongest month in company history, with a 27 percent year-over-year sales jump. Consumer trust has returned to Papa John's at a time when restaurant brands need it the most.
“The reality is that what is happening here is amazing, and the work going on to transform this company is something everyone is proud of,” says Lynch, a brand marketing expert who joined Louisville, Kentucky–based Papa John’s in August after serving as president at Arby’s. Still, he says the turnaround is in its “very early” stages.
At the heart of the turnaround is a multipronged effort that includes repairing the company’s culture, boosting unit economics, focusing the brand’s positioning around better ingredients, using technology more effectively, and, eventually, growing the store base.
Parting with the Papa
Papa John’s problems have been well documented. The company, which recorded strong growth in the mid-2010s, was seeing slowing sales in late 2017 when its founder and then-CEO and chairman John Schnatter criticized leadership of the National Football League, which Papa John’s sponsored, over player protests during the national anthem, in essence blaming the movement for lackluster pizza sales. Within days, the company’s stock slid 12 percent, a result of both projected softening sales and public criticism of Schnatter. Within a few weeks, Schnatter was out as CEO.
The sales slowdown and accompanying stock decline accelerated the following year. Shares that traded at over $90 apiece in 2016 slid to below $50 by mid-2018. The stock fell further in July of that year after it was reported that Schnatter used a racial slur in a conference call with a marketing agency. He soon left the company as chairman, too. Once the largest shareholder of his namesake enterprise, Schnatter, who began the business in 1984 and took it public in 1993, began reducing his stake after reaching a legal settlement with Papa John’s. His ownership—about 30 percent at the time—stood at 6.1 percent in February. These days, his name and face, which graced everything from Papa John’s advertising to its pizza boxes, have been virtually eliminated from any company material. He has occasionally lobbed insults and allegations at the company, which rarely responds.
Having one individual be the centerpiece of an enterprise can be a major problem when that person incurs a negative reputation or business goes south, says Timothy Calkins, clinical professor of marketing at Northwestern University’s Kellogg School of Management.
“Papa John’s was unique because he was so front and center,” Calkins says. “It becomes hard to separate the brand from the individual and … to change the brand positioning and separate it from the individual.”
As the company works to move past Schnatter, a large part of the effort to right the ship has been rebuilding the mutual respect and trust between the company and its franchisees, who were hit hard by the sales slump that plagued the brand since 2017.
Franchise sales increased in Q3 and Q4 of 2019. “It takes time, but in a few short months … I feel we have made a ton of progress,” Lynch says. At a Franchise Advisory Council meeting in February, store owners “were asking a lot of questions, and we were giving them real answers. That fosters great discussions.”
Franchisee profitability “remains the key focus point,” says Lauren Silberman, restaurant analyst at investment bank Credit Suisse. Noting that the turnaround is still “in the early innings,” she points out that Papa John’s has made strides to boost franchise profit—evidenced with the improved same-store sales figures—although that “needs to get to a sustainable level.”
Restaurant analyst Peter Saleh of financial services firm BTIG Research echoes that sentiment in praising the steps taken so far. Most of the improvement ahead “is in their own hands,” he says. “The headwind they face is the very competitive environment.”
In 2018 alone, nearly 200 North American stores closed. By this year, when North American unit closings and openings evened out, the store count was down to 2013 levels. To help franchisees, the company began an assistance program in the form of reduced royalties, fees, and commissary prices and increased its contribution to the joint marketing fund. According to pre-coronavirus plans, the price tag at the end of this year will be about $110 million.
For the time being, corporate profits are taking a backseat to building unit economics “to make franchisees successful both long- and short-term,” Lynch says. Additionally, the company’s new chief operating officer for North American business, Jim Norberg, has led multiple initiatives to improve efficiencies and quality in restaurants.
“We want to drive sales but make that go hand-in-hand with improving profitability, and one way to do that is to make operations simpler,” Norberg says. This is being accomplished through improved productivity and efficiencies being implemented system-wide.
One piece of equipment being rolled out helps with the hardest task in the restaurants: pounding out fresh dough and preparing it for the make line. And the new PapaCall centralized order-taking system and customer-service center will free up workers in the stores. The company also is working with aggregators and is embracing third-party delivery services, especially at busy times.
Investing in culture
One of the most important initiatives affecting change within the company so far, Lynch says, has been to repair the culture of Papa John’s. Some of that began before Lynch arrived, and the intent is to create “a company we can all be proud of and that celebrates inclusiveness and diversity.”
Papa John’s received a financial boost last year when it gained an investment of up to $250 million from hedge fund Starboard Value, whose chief executive, Jeffrey Smith, was appointed the pizza company’s chairman. And over the past 18 months, Papa John’s has built a mostly new leadership team at headquarters, starting with Lynch.
The culture change also extended to employees up and down its system. In the wake of Schnatter’s departure, the brand image internally had soured. Chief people and diversity officer Marvin Boakye says company surveys of employees found that many workers were uncomfortable sporting the Papa John’s logo away from their jobs. “Over the past few years, not all of our people were proud to wear it,” he says. “Now, more do. We want our 120,000 [worldwide] team members to be advocates for the brand.”
Workers have established Employee Resource Groups (ergs) for certain interests. One, for the LGBTQ community, “challenged us to look at policies” in that area and work to make sure corporate practices and policies support all team members, Boakye says. That led the company to participate in the Human Rights Campaign’s Corporate Equality Index, which rates workplaces on LGBTQ equality; Papa John’s scored higher than its pizza competitors. “You start on the inside and use that to excite people on the outside,” Boakye says.
Papa John’s also added Dough & Degrees, a partnership with Purdue University offering full tuition for team members’ online degree programs. Plus it added a low-cost fitness network and additional health benefits. (Papa John’s also vastly expanded its workforce in March, committing to 20,000 new hires to support delivery after the coronavirus outbreak.)
Emphasizing the product
Another key to the turnaround is returning the Papa John’s brand to its “rightful place in the market,” Lynch says. The company is working on more efficient brand positioning around the “better ingredients, better pizza” slogan, “which has not been brought to life in a long time,” he says. That means emphasizing the higher-quality, clean ingredients the company uses. It also means focusing on creating new products and platforms, a tactic largely eschewed previously. “We kind of pulled off the guardrails,” Lynch says.
At the end of 2019, Papa John’s slayed one sacred cow with its first-ever innovation to its fresh, original dough; the garlic Parmesan pizza crust had been in the pipeline for years but was never approved. Lynch says the team pulled the trigger on this product rather than a new value platform that had been planned earlier. “I fundamentally believe you can’t win at that game,” he says of value menus.
The new crust proved to be a success, and the company earlier this year introduced two additional items: jalapeño poppers and Papadias. The latter is based on an Italian piadina and uses the chain’s existing ingredients to create a $6 sandwich-like product, allowing the company to build its lunchtime business. That daypart previously amounted to only about 20 percent of sales.
“We have a pipeline full of new ideas that are going to be brought forward throughout the year,” Lynch says. Pre-COVID-19, plans called for a new product every two months.
Contributions from menu innovations will be among the most meaningful sales drivers this year, analyst Silberman says.
Papa John’s also plans to be creative and productive in its effort to expand and leverage technology, including using data analytics and engaging better with its 14 million loyalty members. Marketing is focused on products, and advertising is being bolstered by an $8.5 million deal with its new spokesman, retired basketball star Shaquille O’Neal, who also joined the Papa John’s board of directors and invested in several Papa John’s stores.
Replacing one spokesman with another does carry some risk, but marketing professor Calkins says Papa John’s didn’t make the affable O’Neal its sole promotional focal point. Much of the advertising focuses on new products.
Functions like product innovation, menu, marketing, ordering, and digital technology have historically had separate senior leaders, but Lynch’s streamlined management brought those together under Max Wetzel, chief commercial and marketing officer. “The market is changing so quickly, and the way that consumers engage—the way consumers make decisions, the tools they use—is changing so rapidly,” Wetzel says. “We don’t want to put constraints on our thinking about where the consumer wants us to be.”
The company is moving beyond legacy thinking, whether with products, efficiencies, or partnering with others. Wetzel says that means turning over every rock to find new products or a better way to do something. “There may not be an answer under every rock, but we’re looking,” he says.
Social media and advertising at Papa John’s are working together like never before, he adds. And O’Neal is not being used as a traditional pitchman, but instead is seen in the company’s “Better Day” TV spots visiting his restaurants, engaging customers, and showing off the food.
Making it work
Thus far, Papa John’s is getting more efficiencies out of its marketing spending and an increase in media impressions, says analyst Saleh, adding that the combination of increased media productivity and menu innovation will drive healthier unit economics for franchisees.
“There is a lot of low-hanging fruit for management to pick,” he adds.
Papa John’s brand positioning is the company’s most powerful step so far, Silberman says. “They are being food-forward with technology as an enabler,” she says. “By really leading with food, you allow customers to have a different view of the company.” Measures like new product innovation, enhancing the marketing strategy, leveraging the loyalty program, and enhancing digital platforms and social media are actions Lynch also took at Arby’s, Silberman says, and were a big part of the success he achieved there.
All the initiatives so far are leading up to one final step: unit growth, especially in North America. “That is the true acid test,” Lynch says.
In February he hired a top executive at Taco Bell, Amanda Clark, as chief development officer. Clark is now leading Papa John’s North American and international franchise development and sales activity, building design and new concepts, and the programs supporting existing restaurants.
She calls the ongoing efforts at Papa John’s “one of the great brand turnaround stories,” noting that opening new units is a key metric defining the health of a restaurant brand.
For Lynch, all the actions being taken now are meant to not only provide short-term positive results, but also to build sustainable, long-term value for Papa John’s and its many stakeholders. “The world deserves better pizza,” he says, “and we deliver it.”