
Early last year, Papa Johns introduced a strategy that it called “Back to Better 2.0” that was designed to lift sales out of the same post-pandemic doldrums hurting many of its rivals. At its center was a shift in ad spending from local to national.
Operators would contribute more to the national marketing fund in exchange for the ability to devote no funds to local marketing. The new national funds were the foundation for an April ad campaign.
It didn’t work. Sales worsened after the ads hit. The CEO who drove the change, Rob Lynch, left for Shake Shack.
This week, Lynch’s replacement offered his bluntest assessment yet of that decision, calling it “a big miss” at the ICR investors conference.
“We made local optional,” Papa Johns CEO Todd Penegor said. “All the co-ops went away. And not having the co-ops to be able to put the franchise community together in the communities that we serve, have the company sitting around the table is a big mess in a business that is a very regional business, especially pizza being so localized.”
The comment goes to the heart of a debate in franchise marketing. Many brands traditionally require operators spend some funds on local marketing, to go along with their national marketing requirements. Papa Johns before last year required 3% of franchisee revenue be spent toward local marketing, plus 5% for national.
The theory behind the switch was that national marketing is more efficient. Ads can reach more people at one time. And the regional co-ops that the local marketing dollars funded have to hire their own marketing firms that provide the actual advertising. Lynch at the time called that “non-working dollars.”
But rather than generate more sales, they slowed. Same-store sales declined 2% in the first quarter last year, but slowed to a decline of 4% the quarter after the new campaign started running and then 6% in the third quarter before improving to a 4% decline in the fourth period, according to preliminary results.
Most franchisees stopped spending on local marketing, which ultimately ended the local co-ops.
The problem now is getting back to local marketing. After Lynch’s departure, the company hired Penegor, and he almost immediately targeted that national shift for a change. That means Papa Johns now must approach franchisees again to develop the correct strategy to do so, which Penegor called a “re-trade” of of marketing spending to franchisees.
Papa Johns may have to make some investments in company markets to rebuild the local co-ops and prove the business case. Or it has to convince franchisees to shift spending back to local.
“Where we really want to put the incremental dollars to work is to go prove out the business case that having a right mix of local and national really drives this business,” Penegor said. “And whether we can re-trade all of that and get the entire franchise community moving in one direction, or we go front-run it across a lot of the company markets and go prove the business case. We’ll go figure that out in the coming months.”
“Incremental spending in the company markets is probably our best investment and return,” he added.
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