Financing

Papa Johns plans more marketing and more locations

The pizza delivery chain’s franchisees will increase their marketing contributions while the brand plans to add a new incentive to encourage new units. But it is also increasing its supply charges.
papa johns
Papa Johns is planning increased marketing spending and more development incentives. | Photo: Shutterstock.

Papa Johns franchisees plan to contribute more to the brand’s marketing fund in a bid to generate stronger sales as part of a broad-based strategic growth initiative the pizza chain announced on Monday.

That initiative also includes new incentives for franchisees to add new units, including a waiver on their marketing contribution for five years. That waiver is designed to speed the time it takes for an operator to generate a return on a new location.

Papa Johns also plans to increase its charges to franchisees for cheese and other supplies. But even that has a provision designed to encourage franchisees to add new locations.

Papa Johns, like many other pizza chains, operates a commissary business. It then charges franchisees for those supplies at a specified margin.

The company plans to increase its commissary charges so its profit margin on that business is 8%, rather than 4%. Those charges will increase by 100 basis points in each of the next four years to get to that 8% margin.

Papa Johns said the change in the commissary charges will ultimately increase franchisees’ restaurant-level costs by 100 basis points.

Franchisees that increase their purchases of supplies the most could get annual rebates that ultimately mitigate the entire increase in supply costs. The company said that higher sales from the increased marketing, along with the new units, could ultimately reduce the shared supply chain costs throughout the system.

“We are optimizing our investments in data science and our marketing tech stack to unlock value for both the top and the bottom line,” CEO Rob Lynch said in a statement. He said franchisees voted to increase their own marketing fund, “giving us more fuel to accelerate comparable sales growth and increase restaurant profitability.”

Franchisees agreed to increase their marketing fund contributions by 20%, or 1% of their sales. The company said that a review of its marketing strategy “identified significant opportunities” to improve audience selection, offer differentiated solutions in the pizza category, improve return on ad spending, loyalty and “create cultural buzz.”

The increased spending also gives the company the ability to use that marketing fund as an incentive to encourage development.

Papa Johns operates 3,200 locations in the U.S., but the company has long said that its sales improvement domestically deserves a higher number of restaurants. Indeed, its unit count still hasn’t recovered from closures in 2017 and 2018 when sales fell in the aftermath of controversial comments from founder John Schnatter.

The company has long used incentives to encourage domestic development but its newest incentive is the largest in its history.

Papa Johns also said that it plans to change its business structure internationally to improve its position in key markets, encourage targeted investments and improve services to customers and operators.

It plans to establish hubs to operate different regions around the world, led by general managers who work with franchisees in those markets to share best practices, marketing and technology with local preferences in mind.

The company plans to increase technology investments in international markets, and it plans to improve operations in its U.K. market, its biggest international market. Papa Johns closed low-performing franchise restaurants in the fourth quarter and expects more closures of low-volume restaurants this year. The company said that the move will increase the profitability of existing locations.

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