Many brands are raising prices to combat inflation, but Papa Johns is finding other ways to drive restaurant profitability. 

“We continue to hold on pricing as a system relative to a lot of the other segments of quick service,” CEO Rob Lynch says in an interview with QSR. “I think our value equation just continues to improve and drive folks to us during these inflationary times.”

To put the current pricing gap into perspective, he says Papa Johns can feed a family of four with two large pizzas and a 2-liter of soda for approximately $22, well below what it could cost to feed the same number of people at a typical drive-thru. 

With the majority of orders coming through digital channels and the average transaction boasting significant discounts, maintaining that value proposition while growing sales and maximizing margin isn’t as simple as telling operators to decrease menu prices. 

“Revenue management in this category is very challenging given that a lot of our volume is sold on pricing promotions or deals,” Lynch says. “When you go through a drive-thru, the price is on the menu, and that’s what you’re paying. When you go into our digital channels, there’s a regular menu price, but there are also specials and discounts. How all of that lives together and how you optimize that to drive the best representation of value while also driving margin-accretive transactions is a bit tricky.”

There’s also aggregator pricing and the fact that promotions and deals can vary from market to market, and even by different locations within a market. With so many factors involved in enhancing profitability, Papa Johns is gearing up to enter a revenue management partnership with external partners to digest all of the data and create optimized models on a local and even store-by-store basis, Lynch told investors during the Q3 earnings call on Thursday.

Recent enhancements to the chain’s e-commerce platforms that highlight value are boosting website and app conversion rates, especially for carryout, which is mixing higher year-over-year as consumers become more price-sensitive. Approximately 85 percent of sales take place through organic delivery and carryout channels. The other 15 percent comes from third-party aggregators, a channel that’s growing both in total and as a percentage of the business.

Lynch says Papa Johns has been competing with thousands of hometown pizza shops since it first ventured into third-party delivery four years ago. And while more national pizza chains have entered the channel over the past three years, the company’s DoorDash sales have grown more than 150 percent over that same period. He believes there’s plenty of room for category expansion and “competitive entries do not necessarily lead to significant volume loss for brands that have been thriving in this space for years.” 


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

Papa Johns Finds the Value Sweet Spot

Papa Johns’s partnership with aggregators takes two forms. One is leveraging their marketplace to bring in incremental customers. The other is leveraging delivery-as-a-service. That’s helping it increase volume in the lunch and late-night dayparts, which are smaller segments of the business today but represent significant opportunities for future gains. 

“It’s hard to staff late-night appropriately,” Lynch says. “It’s not quite as predictable as our dinner daypart. It becomes cost prohibitive when you overstaff it, so we find that our restaurants are understaffed during that daypart a lot of the time. It’s really hard to service those orders with organic delivery labor. With DoorDash Drive, you can schedule a minimal amount of labor, and if you see demand come through, you can deliver that by leveraging their drivers. It just allows us to stay open later without having to worry about being either overstaffed and understaffed. Our operators are really leaning into that, and they’re seeing positive transaction growth as a result.”

The tradeoff is that the composition of lunch and late-night tickets looks different. On one hand, the aggregator marketplace makes it more difficult to win on low prices alone with incremental fees limiting the ability to offer steep discounts, which enhances the value of premium products. On the other hand, people just don’t order as much food during lunch and late-night as they do during dinner.

“The orders are incremental but the ticket is lower,” Lynch says. “That’s why you’re seeing a little bit lower ticket growth than you’d see if all of this transaction growth was coming at dinner, but all in all, it’s a net positive for us.”

New product launches, like the recent introduction of Spicy Garlic Epic Stuffed Crust Pizza and boneless chicken wings, is the other growth driver for Papa Johns. Menu innovation, revenue management enhancements, and continued growth in the third-party aggregator channels contributed to year-over-year sales growth in Q3. Global systemwide restaurant sales were $1.23 billion, up 5 percent from the same period a year ago. North America same-store sales were up 3 percent, with transaction growth delivering a 6 percent increase in comps at domestic company-owned restaurants and a 2 percent increase in comps at franchised restaurants. 

Going forward, Papa Johns will evolve the structure of its North America Commissary business to increase the level of investment in its vertically integrated supply chain. Starting in 2024, the fixed operating margin domestic commissaries charge will increase by 100 basis points annually over the next four years, moving from 4 percent today to 8 percent in 2027. Those changes are layered in with an incentive program that rewards franchises for growing their volume and opening new stores. 

“Volume is what makes the supply chain more productive and more efficient, so we’ve created a commissary model that now offers rebates back to franchisees based on the amount of volume growth they deliver,” Lynch says. “We’ll be able to discern who’s driving the growth, whether it’s through incremental transactions or new unit development, and make sure that we’re adjusting the rate structure that they have commensurate with the amount of growth that they’ve driven into the supply chain.”

Papa Johns opened a net of 45 restaurants globally in Q3. As of September 24, the brand had 5,825 units systemwide, including 3,397 in North America and 2,428 internationally.

Finance, Franchising, Growth, Story, Papa Johns