Financing

Papa Johns finds that its customers have a spending limit

The pizza chain’s same-store sales were unexpectedly weak last quarter. The company blamed the problem on aggressive pricing by franchisees.
Papa Johns earnings
Papa Johns said its sales were weaker than expected in the second quarter, but improved through July. | Photo: Shutterstock.

Customers have a limit on how much they’re willing to spend on a pizza. Just ask Papa Johns.

The Atlanta-based pizza chain on Thursday said its same-store sales rose 1% in the second quarter. But those sales were not evenly spread. Company locations’ same-store sales rose 2.2%. At franchisee units they fell 2.3%.

“April was the worst month that we’ve had since I’ve been here in terms of comp performance,” CEO Rob Lynch told investors on Thursday.

While the company said that franchisee sales improved through the quarter, turning positive by June and then improving further in July, the unexpectedly weak performance led executives to lower overall sales expectations for the year to between flat and up 2%. And they sent Papa Johns’ stock down 3% by late morning.

The difference in performance between company and franchisee stores may also provide another lesson in consumer resistance to pricing. Papa Johns largely blamed the gap in performance on overly aggressive price increases by franchisees. Executives blamed “franchisees prioritizing margin over transactions” for the weak performance.

Consumers have proven resilient to price increases over the past year and a half as inflation has taken off and operators increased menu prices more aggressively than they have in decades. But pizza is proving to be an exception to this rule.

Domino’s, Papa Johns’ competitor, has struggled for two years with weakening demand for third-party delivery. In recent quarters, the chain has placed the blame squarely on the economy, arguing that delivery prices are turning off the chain’s consumers.

Frozen pizza sales rose 10% last year and Walmart reported strong pizza sales itself earlier this year. Meanwhile, convenience store chains continue to push into the pizza market, giving customers more options than ever. Carryout sales, meanwhile, have taken off. But not at a level strong enough to match the loss in delivery business.

Papa Johns is finding all this out itself. “This is a complex segment when it comes to revenue management,” Lynch said.

At most restaurants, he said, customers visit restaurants, see menu prices and pay them. At pizza chains, where most of the transactions are taken over an app or a website, customers price shop. Discounting is rampant throughout the sector, which typically depends on volume for profitability.

When customers see prices that are too high at one concept, they opt for another. “It’s not as simple as taking menu prices up or down,” Lynch said. “How you interact with prices being offered on a national and local level, that’s all part of the algorithm. How you show up in pricing with the aggregators, how you execute on deals, all that is in play.”

In an interview, Lynch said Papa Johns had some problems with difficult comparisons. He noted that the Omicron variant of COVID hit in the first half of last year, which kept people home and helped drive pizza delivery traffic. “Dine-in had a good run,” he said.

But he also suggested the company is losing customers to budget brands like Little Caesars. “We don’t talk about them a lot because they’re not public, but the credit card data we have suggest they’re doing really well,” Lynch said.

Lynch said that company stores kept pricing to a minimum. But he also said those stores focused on improving service and operations, which cut the “out-the-door” time for its pizzas by 25%. That led to better sales, in addition to better margins.

The company has been working with franchisees to adopt some of the operational improvements taking place at company locations. He also said that promotions, notably the Doritos Papadia and the Garlic Epic Stuffed Crust pizza drove sales. “It was traffic driven, not check driven,” Lynch said. The results led to an improvement in sales in the quarter.

And he said the company worked to drive home the importance of value in this environment, something Papa Johns expects will grow in importance this year, with expectations that consumer spending will moderate amid inflation and student loan repayments starting back up again.

“We had to really address some of the value orientation right now to make sure they can succeed in this environment,” Lynch said. “We just had to help franchisees recognize that this is the dynamic and implement strategies consistent with the change in consumer behavior.”

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