Papa Johns revealed Thursday that it plans to shutter 50 corporate restaurants in the U.K. as the brand looks to right the ship in its second-biggest market.

All closures will occur in the second quarter. The U.K. currently holds 524 restaurants.

The pizza giant established a corporate presence in 2023, acquiring 118 stores across June and July. That portfolio will soon be whittled down to 68 restaurants. CEO Rob Lynch describes this group as underperforming stores that would not benefit from better operations, are located in obsolete trade zones, and face other challenges that aren’t easily mitigated to get them to profitability. Not all of the problems are specific to Papa Johns. Lynch notes that the U.K. has dealt with significantly higher rates of inflation compared to the U.S. and that the labor market has been just as problematic.

These units accounted for two-thirds of the brand’s operating loss in the U.K. during the fourth quarter. Lynch says the company will continue to evaluate its portfolio—as well as franchise locations—including a focus on sales trends, overall profitability, and lease and loan obligations. Through this process, more closures could occur.

Lynch suggests that some company units could be refranchised as part of the process. He also indicates that franchise closures will likely come too.

“We’re working with franchisees to help them optimize their portfolio of restaurants,” the CEO says. “If franchisees are spending resources running restaurants that are never going to be profitable, that’s taking away the resources from the restaurants they should be focused on growing.”

READ MORE:

Papa Johns Will Get ‘Back to Better’ in 2024 and Beyond

Papa Johns Zeroes in on Revenue Management 

Papa Johns Navigates the Complex World of Pizza Pricing

Papa Johns anticipates sales transfers when these stores close. Remaining restaurants will receive more volume and profit.

“I just want to make it clear, the closure of these 50 restaurants will be immediately accretive to our income,” Lynch says. “Usually when you close restaurants, it’s a bad thing. The royalty revenues go away or the EBITDA from the restaurants go away. These are all negative-profit restaurants. We don’t see them turning profitable in the foreseeable future. These restaurants need to close. Obviously if they’re unprofitable, they’re low-volume restaurants.”

The chief executive believes there’s more than enough of a base to build a lasting system.

Operators agree with the sentiment. In 2023, the chain transitioned 61 unprofitable shops from not-so-great restaurateurs to better-equipped franchisees and saw significant improvements. Fourth-quarter comps finished well ahead of corporate restaurants. It was the second straight quarter of positive same-store sales for U.K. franchisees. Also, despite the announcement of closures, the brand has seen better sales from its company-owned footprint. The momentum is ongoing as franchise and company-owned restaurants started 2024 with comp growth.

“We believe long term that our footprint over there, even if it’s less than 500 units—I know we’re going to close 50, so it’ll land somewhere between 400-450 units—we believe that can be a strong foundation to build off of and that the growth in that market can be profitable for both franchisees as well as Papa Johns corporate,” Lynch says. “So that’s really the reason why we want to make sure that this market is set up for long-term success and that we’ve got the right franchisees in there running the right restaurants that give them the best foundation for future growth.”

Papa Johns estimated between 100 and 140 gross international openings this year. Typically the chain guides with net unit growth, but it decided against that due to the high number of closures scheduled to happen.

International same-store sales dipped 5.5 percent in Q4 and 3.1 percent in 2023 due in part to the U.K. struggles. Papa Johns also felt the impact of the conflict between Israel and Palestine. The brand has 450 locations in the Middle East region, which is about 20 percent of the international footprint.

Papa Johns has debuted approximately 50 stores annually in the U.K. market in recent years, but the issue is that those openings haven’t always been efficient, Lynch says. He adds that the company has moved away from “opening at all costs” to ensuring restaurants are looked at with the same scrutiny as U.S. shops. To enforce better oversight, the company established hubs in the Asia Pacific, EMEA (Europe, Middle East, and Africa), and Latin America regions. These hubs will be led by GMs and teams who will partner with franchisees to create a holistic strategy to boost performance.

The CEO notes that international AUVs are half the size of U.S. outlets and that one domestic opening is equivalent to four international openings. In fact, the domestic per store average has increased from $850,000 to $1.2 million in the past five years. If Papa Johns is able to push international AUVs to 75 to 80 percent of the U.S., the resulting income and royalty growth would equal two to three years’ worth of store development. But first, the right procedures need to be put in place.

“Someone submits a site domestically, we go out and check the site to make sure it’s a good site,” Lynch says. “We do all the analytics to make sure this restaurant has the greatest chance and probability of success. We haven’t been as disciplined internationally. So we’re implementing those capabilities and that oversight.”

Meanwhile, Papa Johns is hyper-focused on U.S. development. Last year, the chain opened 57 net new restaurants in North America. In 2024, the brand expects 20 percent higher growth, which would be close to 70 net new units. North America same-store sales rose 1.8 percent in Q4 and 0.8 percent in 2023, but Lynch says those sales figures will accelerate once the chain fully dives into its Back to Better 2.0 plan in the second quarter. The comprehensive strategy involves a bigger contribution to the national marketing fund, the largest development incentive in company history, and profitable growth in the commissary business.

In North America, support from franchisees is tangible. Operators overwhelmingly voted in favor of increasing contributions to the company’s national marketing fund, showcasing full belief in the plan. Lynch sees the same enthusiasm in global partners, if not more so, because of the available whitespace across the world. Papa Johns believes it’s under-penetrated in almost all of its international markets. With that said, Lynch understands there are several dynamics facing these master franchisees. Many are wondering how they will get through geopolitical and macroeconomic challenges.

Whatever solution is chosen, Papa Johns has their backs.

“Our teams have been really supportive and worked really closely with our international franchisees to manage through some of this volatility that is going on out there right now,” Lynch says.

Papa Johns finished 2023 with 5,906 locations systemwide, including 3,433 in North America and 2,473 internationally.