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Papa John’s works to make its franchisees ‘whole’

The company has generated excitement with the Starboard investment and addition of Shaquille O’Neal, but sales growth remains key to its comeback.
Photograph: Shutterstock

Papa John’s has added a new brand ambassador in Shaquille O’Neal, received $250 million in investment from a highly regarded hedge fund in Starboard Value, gave operators royalty breaks and added technology and third-party delivery, all to distance itself from an ugly 2018.

Yet company executives acknowledge they have more to do to get the company back to where it was in the fall of 2017, before comments from founder John Schnatter plunged the pizza chain into a year-long controversy that sent the company’s reputation and sales plummeting.

Same-store sales in the first quarter improved from where they were late in 2018, and in January, though they still declined 6.9%, Papa John’s said. While the franchisor spent $5 million on royalty relief in the first quarter to keep operators from closing stores, executives said operators are still not close to where they were 18 months ago.

“There was definitely excitement around the Shaquille O’Neal announcement,” CEO Steve Ritchie said on the company’s first quarter earnings call Tuesday, noting that the National Marketing Fund unanimously supported the move.

“This is a brand that experienced 14 consecutive years of flat to positive sales growth,” he added. “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 royalty abatements and reductions that we have provided have not made our franchisees whole.”

Noting that he, too, is a franchisee of the brand, “I’d like to get back to where I was prior to the issues in late 2017.”

Papa John’s did say it has the “foundation” in place for a turnaround. That includes the investment from Starboard Value, which is now up to $250 million. The fund made a $200 million investment in the pizza chain and in March decided to exercise an option to invest another $50 million in the company.

The decision is “a clear sign of Starboard’s confidence in the potential of Papa John’s,” Ritchie said.

Starboard CEO Jeff Smith was named chairman along with the investment. He is “actively engaged in the business, leveraging his turnaround experience in the restaurant and retail space,” Ritchie said.

So, too, is O’Neal. The NBA star was named a member of Papa John’s board of directors, as well as a franchisee of nine units in the Atlanta area and a “brand ambassador.” He was one of six new members to the Papa John’s board in recent months.

“He’s a natural marketer, a proven business person and an experienced restaurant franchisee,” Ritchie said. “He has jumped right into his new role, as a member of the board’s marketing committee, and here in the new building meeting with members of the Papa John’s team.”

Papa John’s recently named former McDonald’s and Subway executive Karlin Linhardt chief marketing officer—filling a position that had been open for 10 months.

Ritchie said Linhardt “is working on now to understand and assess the potential opportunities and the creative ideas” regarding O’Neal’s role as a brand ambassador. Ritchie said that O’Neal has been “very broad in his reach and very tactical in his efforts” and is spending time on engagement.

The company has tested a new pricing structure to find a balance between premium and value offers. That includes a $12 price point for specialty pizzas and a $6 medium one-topping price that is an “entry point” for new customers.

It relaunched its Papa Rewards loyalty program, which has hurt same-store sales in the short-term with more offers. Customers on the old program also cashed out their previous rewards.

But the chain is also working on new technology. That includes a deal with Door Dash to supplement the chain’s delivery capabilities.

But Ritchie suggested that deal was designed to get Papa John’s in front of the delivery provider’s customers. “We continue to explore the potential opportunities we believe aggregators may represent as an incremental sales channel,” he said. “We are committed to testing and learning wherever we have the opportunity to meet customers where they want to meet us.”

And the company also has a new mapping technology at “several hundred corporate and franchise restaurants” that helps customers track where their delivery drivers are on a map. That also helps the company get detailed metrics on driver time, which could help the company improve delivery times.

The company’s efforts thus far to improve unit economics do appear to be easing closures, which shrunk the chain’s size last year.

Papa John’s said that 27 units opened in North America in the first quarter, mostly offsetting 28 closures during the period—the chain now operates 3,336 locations in North America, only one fewer than it had at the end of the year, and 5,336 locations globally.

Executives said they anticipate continuing to provide royalty relief this quarter and will assess operators’ needs afterward to mitigate closures.

The number of openings so far this year was more than expected. “Despite all the challenges we’ve had over the last year, there is still a high level of interest to open the units from existing franchisees and new franchisees,” Ritchie said.

“On the other side, I think we made the right decision to support the franchisees with the high level of financial support that has mitigated some of the closures.”

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