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Papa John’s invests $80M into franchisees and marketing

The company will provide royalty relief to operators and add to the chain’s ad fund in a bid to improve the brand’s recovery.
Photograph: Shutterstock

Papa John’s is investing $80 million to increase marketing and franchisee support in a bid to speed the brand’s recovery from steep sales losses over the past year amid controversy surrounding founder John Schnatter.

The company said it would make “significant, additional contributions” to the brand’s national marketing fund in the third quarter. That would enable Papa John’s to “activate” its new brand ambassador, Shaquille O’Neal.

The former NBA great was named a company director and spokesman in March in an agreement valued at more than $8 million. He has also invested in a group of Papa John’s franchises in the Atlanta area.

In addition to the marketing investment, Papa John’s said it would provide the company’s domestic operators with assistance such as lower royalties, service incentives and “targeted relief.” The assistance runs through 2020.

Papa John’s said that it has the backing of the franchise advisory council, a group of franchisees elected to represent their interests to the brand.

“The strength of our brand and of our franchisees are both critical to Papa John’s long-term success,” CEO Steve Ritchie said in a statement. He called it “an important shared moment for Papa John’s and our committed franchisee base.”

The agreement is an indication of Papa John’s primary needs in the coming months.

The Louisville, Ky.-based pizza chain believes that a new marketing campaign, centered around the popular O’Neal, can be a game-changer for a brand that lost its primary spokesman when the company ended Schnatter’s founder’s agreement last July.

Schnatter resigned as chairman and has since left as director and started selling his stock in Papa John’s after admitting to the use of a racial slur during a conference call in May. That worsened a sales decline that had started months earlier following Schnatter’s comments about NFL player protests in November 2017.

“We’re used to getting involved in companies needing operational improvements,” said Jeff Smith, Papa John’s chairman and CEO of Starboard Value, on CNBC in March. Starboard has invested $250 million in the pizza chain. “But we also have to move past a marketing challenge and an image challenge. We can handle that well. We’re going to break through that challenge.”

But keeping its franchisees afloat is another challenge. The company operates 100 fewer locations now than it did at the beginning of January 2018, as franchisees in some markets closed locations as sales fell. Papa John’s has more than 3,300 locations in the U.S.

Papa John’s spent $5 million on royalty relief to keep operators from closing stores in the first quarter, for instance, but executives have acknowledged that they need to do more to keep operators afloat.

“This is a brand that experienced 14 consecutive years of flat to positive sales growth,” Ritchie said in May. “So we are not accustomed to sales declines. And sales declines create unit economic pressure, and we’ve attempted to bridge solutions to support our franchisees.”

But the continued royalty relief has also generated some concern among investors that the company’s recovery is proceeding more slowly than anticipated. Papa John’s stock was down about 1% in morning trading Thursday.

Papa John’s agreement indicates that “franchisees are probably expected to struggle with profitability over the next several quarters,” Stifel analyst Chris O’Cull wrote in a note Wednesday.

Peter Saleh, an analyst with BTIG, said the agreement suggests that “any meaningful sales turnaround has yet to take hold and franchisees are not yet capable of standing on their own.”

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