Financing

Increased marketing spending did not help Papa Johns' sales in April

A softer consumer environment is more than offsetting the pizza chain’s boost in marketing in recent weeks. But profitability improved last quarter.
Papa Johns
Papa Johns new marketing was more than offset by a weak consumer economy. | Image courtesy of Papa Johns

The consumer environment is apparently too difficult for Papa Johns’ new marketing.

The Atlanta-based pizza chain said Thursday that its North America same-store sales declined 2% in the first quarter and weren’t much better to begin the second, declining 1% to date despite a major marketing push funded with more franchisee dollars.

The result led the company to lower its guidance for same-store sales the full year, to flat to down, from up in the low single digits. The result sent shares of the pizza chain down more than 7% on Thursday.

Ravi Thanawala, the company’s CFO who was named interim CEO in March following the departure of Rob Lynch to Shake Shack, blamed the problem on the consumer environment.

He suggested that reduced consumer confidence is leading customers to visit less often or reduce spending when they do.

“We saw slightly softer sales in the month of March than what we expected,” Thanawala said. “Consumers are managing a little bit more, and we’re seeing slightly higher exit rates at certain points in the consumer funnel.”

Franchisees agreed overwhelmingly last year to shift their marketing spending toward national efforts. Rather than spend on local marketing, they would contribute another 1% of their revenues to the national marketing fund.

The goal, according to former CEO Lynch, was to shift spending to areas with the highest return on investment.

The company then introduced a new tagline, “Better get you some,” and increased marketing in April. Executives and franchisees had suggested this would boost sales.

But the economy has hit the consumer and in recent months they’ve been expressing their concern about prices with their feet, visiting restaurants ranging from McDonald’s to Olive Garden less often.

At Papa John’s, they ordered delivery less often through the company’s own ordering channels.

The chain’s 2% decline in same-store sales came despite increases in demand from third-party delivery users. Papa John’s blamed the issue on a decline in sales through organic delivery, and apparently that decline more than offset any increases the company received from its partnership with Uber Eats and DoorDash.

The combination means Papa John’s is more reliant on third-party delivery than most chains—it now gets 16% of its sales through aggregators.

“We’ve continued to perform well because we’ve executed well in that space,” Thanawala said.

Still, he added, “our objective long term is not to have our organic business decline, and only our growth is coming out of aggregators.”

Papa John’s results reflect broad weakness in the pizza market in the U.S., outside, apparently, of Domino’s.

The Ann Arbor, Michigan-based pizza chain’s same-store sales increased 5.6%, as the chain recovered from a weak two years coming out of the pandemic. But Papa Johns and Pizza Hut, whose same-store sales declined 6% in the first quarter, are both struggling to start out 2024.

That said, restaurant chains in several sectors have struggled with weak traffic or soft consumer spending so far this year.

“Throughout the month of April, we saw that the consumer behavior continued to soften, particularly in elements of traffic and check management,” Thanawala said. “And that’s really the differential of what we started to see in the month of April.”

Yet the results put Papa Johns in a tough spot this year. The company just unleashed its new marketing strategy, only to watch the CEO and engineer of that strategy, Lynch, leave for Shake Shack.

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