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Papa John’s removes the guardrails and takes off

The chain took some big risks with delivery and its menu, and as consumers stayed home, its sales flourished.
Photograph courtesy of Papa John's

It was easy to dismiss some of the moves Papa John’s made over the past several months as acts of a desperate chain with falling sales and declining units.

Using third-party delivery when you already had a fleet of drivers you control? Definitely a risk. Adding a sandwich that few people had heard of to the menu? Sure, go ahead.

Here’s the thing: They worked. In the first quarter, same-store sales rose 5.3% and were trending toward 7% before the pandemic cut back on sports-themed gatherings. And then when customers got sick of whatever was left in their fridge, they started ordering pizzas, and sandwiches, by the boatload.

The results were extraordinary: same-store sales growth of 27% in North America in April. More than 1 million new customers that month alone. Record average unit volumes and system sales that month. Not bad for a chain that was in horrific shape for much of the past couple of years.

“The whole pandemic has accelerated all of the things we were working on,” CEO Rob Lynch said in an interview with Restaurant Business. “It’s a testament to this team to be able to move quickly and to adjust to all of this change.”

To understand how far Papa John’s has come, just look at where it was. Same-store sales, which had been growing steadily for years, suddenly turned south in the last three months of 2017 amid controversial comments by CEO and founder John Schnatter.

Things were made worse when he allegedly used a racial slur during a conference call and stepped down as a result. Same-store sales declined for seven straight quarters, averaging a decline of 6.5%.

More worrisome: Operators started closing units. The company has declined by more than 150 locations in North America since the end of 2017, a decline of nearly 5%. The unit-count declines led the company to provide financial assistance to its operators long before anyone had heard of the coronavirus.

Papa John’s, of course, has overhauled just about everything at its Louisville, Ky., headquarters, selling an equity stake to private-equity firm Starboard Value, bringing in Shaquille O’Neal as a director and spokesman and hiring Lynch from Arby’s to be the CEO.

Schnatter, meanwhile, has exited every role he once played with the company, including selling most of his stock.

That exit might have helped the company take the steps it’s taking now.

To wit: The company in February introduced Papadias, its take on the Italian piadina sandwich, an Italian folded flatbread. “Papadias are just killing it,” Lynch said. “They’re being added to pizza orders. They’re not replacing our pizza orders.”

He noted that about 20% of the chain’s tickets are getting at least one Papadia add-on. At $6, “that’s huge growth.” It also gave the company more business at lunchtime, an important consideration for a chain that traditionally does most of its business in the evening.

“I love these,” he said, before admitting that “I am surprised by how well they’re doing. But it hit a sweet spot. It’s a great price point for our category.”

It’s a type of product that, Lynch suggested, would not have happened in the past.

“Papa John’s had some guardrails on the innovation pipeline in the past, put on by the leadership in place,” Lynch said. “We removed those guardrails, focused on customers and on what they want.”

The sandwich was one thing, but last year Papa John’s also took an even bolder step: using third-party delivery to help deliver pizzas. It was an idea that was put in place by former CEO Steve Ritchie and wholeheartedly endorsed by Lynch.

Longtime rival Domino’s Pizza has resisted the strategy, arguing that it can better control the delivery and do it at a much lower cost with its own drivers.  

Papa John’s now has deals with three of the top four delivery aggregators. They now account for 4% of the chain’s business and, Lynch said, are highly incremental and profitable for franchisee.

The deals expose the company to new types of customers that might not otherwise consider the chain, Lynch said.

“We look at our job as taking the best care of our customers and employees that we can,” Lynch said. “If the aggregators are able to service customers that we’re not, that gives us access to those customers. It allows us to deliver food to those customers.”

And, he added, the services expand the chain’s reach, especially at peak times. “The service platform allows us to better serve our customers by leveraging that labor pool at the busiest peak times,” Lynch said. “That was the strategy.”

The company’s same-store sales in the first quarter, even with the late-period slowdown, were its best in four years.

The pandemic has certainly helped the chain’s sales in April, and as strong as they were, they weren’t even the best in the industry: Wingstop, which similarly relies on takeout and delivery, posted an extraordinary 34% same-store sales figure during the month.

Still, Lynch said on the earnings call, “the thing we haven’t talked about as much is 27% comps when we have no sports, and we have no birthday parties, and we have no social gatherings.”

The recovery in the chain’s sales has helped stem closures: The company lost only three units in the first quarter. Papa John’s now plans to end its financial assistance to operators once existing commitments expire this fall. And it is pondering unit growth for the first time since its own personal crisis began three years ago.

“We win together when we get franchisees stabilized and get them to the point where they are ready to start investing back into the business,” Lynch said. “The infrastructure we put in is all intended to help with unit-level economics. And nothing helps unit-level economics more than 27% sales growth.”

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