The reality at Papa Johns these days is there’s value gap between the brand and the rest of the field. That includes pizza peers as well as other quick-service chains. And it’s going to take “several more quarters” to narrow that divide, CFO Ravi Thanawala shared Thursday with investors.
The brand’s North America same-store sales declined 6 percent in Q3, year-over-year (against a Q3 2023 lap of 3 percent). Domestic company stores dropped 7 percent, while franchises decreased 5 percent. Internationally comps slid 3 percent versus the prior-year period.
Papa Johns’ total revenues of $507 million in the quarter fell 3 percent as systemwide sales clocked in at $1.19 billion—a 3 percent downtick.
While some competitors this earnings cycle have reported sequential monthly improvement out of the summer depths, BTIG analyst Peter Saleh said, it appears Papa Johns’ remained around the negative 6 percent trend from July. Restaurant-level margin of 15.6 percent was weighed down by higher cheese and chicken prices (190 basis points) and lower average check (40 basis points). “This dynamic likely continues into Q4 as commodity inflation is expected to be mid-single digits, and check will be negatively impacted by the $1 discount on the Shaq-a-Roni pizza,” Saleh added.
Papa Johns narrowed its full-year North America same-store sales guidance to a range of negative 3.5–4.5 percent, which suggests low-single-digit to mid-single-digit declines in Q4. Through the opening four weeks of October, Papa Johns’ North America comp decreased 4 percent, although, Thanawala said, transactions trends improved on the brand’s strategic pricing call to improve value perception by prioritizing transactions over ticket near term.
MORE: Todd Penegor and Papa Johns Begin the Search for Value
The notion of “value,” speaking more broadly, playing a role in Papa Johns’ struggles of late isn’t a fresh development. New CEO Todd Penegor, who came over from Wendy’s in early August, mentioned last quarter the brand hadn’t kept up with a cautious consumer climate. Papa Johns’ same-store sales underperformed Domino’s by 100, 740, 840, and 860 basis points in the last four periods, respectively. Saleh said it’s a curve that began following Domino’s decision last September to reduce the rewards threshold of its Piece of the Pie Rewards program—a move that drove incremental transactions. Domino’s also reversed course and began working with Uber Eats on third-party outreach.
Regarding rewards, Penegor took sight of this opportunity from the outset. He said Thursday Papa Rewards was in line for a revamp in the coming weeks to, like Domino’s, lower the threshold and allow users to redeem lower-value rewards more often.
Currently, about a quarter of active members, he said, have not yet reached a reward due to the current levels. In Q4, that will change, and guests will be able to get to “Papa Dough” quicker, Penegor said, which will activate members at higher rates to drive transactions and frequency.
It won’t be complicated. “We believe that converting points to Papa Dough in smaller increments to members can unlock rewards faster for more immediate customer gratification,” he said. Penegor added the decision was merely the first step in future loyalty improvements.
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“We understand the importance of building a program that innovates ahead of the category,” he said. “Our loyalty program must be flexible and easy to understand to create strong, emotionally connected consumer engagement that seamlessly integrates with our creative, paid, earned, and owned messaging.”
Penegor expects the greatest impact will come from simply getting that customer to their second purchase faster and shrinking the number of days it takes for future visits to occur.
It’s a vital lever for Papa Johns given the balance it’s trying to strike—a topic that circles back to value. The brand originally navigated the industry’s early inflation-driven price hikes by skewing premium, as it generally has in its history. So when some chains had to take price on items that traditionally cost less, Papa Johns elevation wasn’t as noticeable. Put differently, its core products were already priced higher to begin with.
However, promotional activity and a flurry of deals through foodservice—fast casual, casual, and everything in between—has amplified the importance of “compelling value.” And Papa Johns was too heavily weighted on the other side.
Like Penegor noted last quarter, though, this doesn’t mean Papa Johns didn’t have value on the menu. It’s simply had to come back and start talking about those options. It launched an XL New York Style pizza at $10.99, which leans premium in differentiation and quality but is priced competitively. Papa Pairings at $6.99 were already available and ready to be marketed against. The Shaq-a-Roni pizza, to Saleh’s observation, is a Q4 promotion at $12.99 versus the $13.99 it used to roll at.
Penegor said, first and foremost, Papa Johns must move back into the consideration set when it comes to value. And yet, it’s also got to amplify the brand’s long-standing message around quality and why it’s different. Papa Johns’ fresh-never-frozen dough, six simple ingredients, farm-to-fork pizza sauce, high-quality cheese, and proteins. “We haven’t paid that story off,” he said, “to continue to make sure that the consumer has us at the top of the list when it comes to high-quality pizza at an affordable price.”
Papa Johns has work to do to on this front. Penegor said the brand will focus on the renovation of core pizzas and aim to take complexity out of restaurants so “we can be the best pizza makers in the business,” Penegor said.
“And then, really get into a nice cadence with some innovation, both on the high end and the low end of the barbell, to drive some more frequency into our business,” he continued. “And I think that’s where we get the balance. How do we start to get folks to start coming back into Papa Johns more often—drive a little bit of frequency, engage better with them through our loyalty program, and that’s why we’re making some of the revamps with Papa Rewards.”
Data will factor in as well. Penegor wants Papa Johns to think beyond journeys when it comes to communication and more on one-to-one engagements. He’d rather have more targeted specific deals rather than a constant national offer. This will enable Papa Johns to discount more surgically and thread the needle on bringing customers in more often and being in that consideration set of value. “And that’s going to take a little bit of time with some of the commodity headwinds in the near-term,” he said, “but we’re very focused on that to make sure it’s an and, right? When the hearts and minds of the consumers, as well as partner with the franchise community on the restaurant economics.”
“We need to ensure that we’re in the consideration set time and again when people are thinking about choices across not just the pizza category but the QSR category,” Penegor added. “The work we’ve been doing is really about how do we bring them back in, how do we bring them back again, and then how do we trade them up over time?”
Penegor has been busy in his early weeks assembling a team. Papa Johns brought on Kevin Vasconi, who worked with Penegor at Wendy’s, in September as chief digital and technology officer. Just this week, the company added Jenna Bromberg as CMO. She was working at Carter’s Inc. as VP of brand marketing and creative and previously led core brand marketing at Pizza Hut.
Thanawala, who held the interim CEO post between Rob Lynch’s (now at Shake Shack) departure and Penegor’s appointment, is adding oversight of Papa Johns’ international business to his CFO role. Joe Sieve, chief restaurant and North America development officer, will now direct all global development, as well as corporate and franchise restaurant operations, too.
The group’s high-level blueprint will center on accelerating profitable growth through five elements, Penegor shared: One, core product proposition and improved innovation across the barbell (as mentioned). “Customers know us for better ingredients, better pizza, and we need to deliver on this promise consistently, every day, to every customer, across every restaurant,” Penegor reiterated. “Additionally, we must win the hearts and stomachs of customers with craveable menu items across occasions and value offers.”
Secondly, Penegor said, Papa Johns will amplify marketing to drive customer consideration and call to action across target segments. The “Better Get You Some” campaign was launched earlier in the year around “the love for pizza” with visuals, soundtracks, and a multimedia experience inspired by hip-hop, expressionist art, and cultural touchstones. Penegor said to expect more campaigns on pizza craftmanship.
Next, Papa Johns needs to modernize its tech stack to enable commercial and operational efficiency through improvements in the end-to-end digital customer experience and its customer relationship management platform. Plainly, Papa Johns must make it easier for customers and franchisees to do business.
Fourth up, there’s a goal to differentiate Papa Johns’ customer experience to meet and exceed the convenience, value, and quality expectations of its guests’ channel of choice. So, simplify processes, optimize offerings, and employ technology to give employees the chance to execute better. The evolution of Papa Rewards falls into that bucket of evolution.
The final note, Penegor broke down, will be to partner and progress Papa Johns’ franchisee base to be growth oriented, and to focus on increasing market share through strategic new restaurant development and priority markets. He said North America remains Papa Johns’ most accreditive development opportunity and the company is committed to growing domestically.
The brand had 25 net openings in Q3 and is on track for more than 100 gross North America restaurant debuts in 2024. International will range between 170–190. As of September 29, there were 3,454 North America stores (2,917 franchised) and 2,454 international (2,441 franchised) for a total of 5,908. Trailing four quarters, Papa Johns has added 91 net units.
Within the topic, Papa Johns has faced another gap of sorts when it comes to development costs. Earlier in 2024, per Saleh, costs were averaging about $630,000 to open a Papa Johns. A similar format at Domino’s, for perspective, was roughly $425,000, marking “the widest cost differential that we can remember,” Saleh said.
Penegor on Thursday said the company has made “substantial progress” in identifying real-time cost savings and now anticipates its remaining company-owned restaurants openings to average about $500,000, excluding marketing incentives. And further efforts to bring that down are ongoing.
Papa Johns’ marketing fund board recently approved a program where franchisees who open standard U.S. restaurants in 2024 would be exempt from paying contributions to the marketing fund for five years from the date of the qualifying units opening. Additionally, any standard store opened in 2025 will not have to contribute to the fund for three years. At the end of the five-, or three-year stretch, traditional rates kick back in.
Saleh estimated this amounted to roughly $330,000 of savings, or more than half of the cost of a new location. He guessed it also reduced the payback period to 3.2 years from about 5.5 years.
More on current developments
Thanawala said, similar to the opening half of the year, Q3 witnessed lower transactions as Papa Johns’ growth in its aggregator channel was more than offset by a decline in organic delivery and, to a lesser extent, the brand’s carryout business.
He said consumers in this economic cycle have become more deliberate in managing their overall ticket. Throughout Q3, Papa Johns responded by investing toward initiatives based in value—efforts that had a positive impact on transactions as Papa Johns saw year-over-year momentum build in carryout and delivery.
In fact, carryout transactions turned positive in September and the trend continued in October, he said. Halloween was the highest sales day in Papa Johns history. But, again, it’s going to take multiple quarters to gain on competitors. “But the tests we are running within our company-owned restaurants give us confidence that we can produce incremental wins over time,” Thanawala said. “Having Papa Pairings always on promotion has also helped, and we are working to refresh this great offering to keep it exciting for our customers.”
These tests have included everything from pilots on $6.99 two medium pizzas, carryout offers at different price points, side options, and bounce-back tests. Penegor said Papa Johns is trying to figure out what’s needed to supplement what it has in its loyalty program and what would happen if those rewards users suddenly had additional Papa Dough. Would that drive transactions and reengage guests?
“Still have work to do, but we’re going to take those learnings, apply them, make sure that we’ve got a strong calendar to come out of the gate to compete early next year, and then make sure we get onto the regularly scheduled programming with a great balanced innovation calendar with news across both the premium core side of the equation, as well as on the value side,” he said.
