Eric Lefebvre, the CEO of the Canadian brand collector MTY Food Group, was asked on an earnings call last week about Papa Murphy's and whether its problems are rooted in competitiveness in the pizza sector. His answer was instructive.
"You look at our competitors, and they all admitted to overinvesting in marketing in the last few quarters ... not something we can afford to do," he said, according to a transcript on the financial services site AlphaSense. He noted that those competitors were spending about $20 million to $30 million on marketing above normal. "We need to compete differently."
That makes sense. But then he said this:
"We have some franchisees that are pulling out a little bit of their local marketing efforts, and as you know, pizza is very marketing driven. As soon as you close the tap, you see sales going down right away. And unfortunately, some franchisees are just not putting their money into their businesses at the moment."
But marketing isn't Papa Murphy's biggest challenge right now. The brand historically expanded too quickly with a business model that makes it less desirable at a time when price and convenience matter. As such, the brand has been in decline for several years.
When franchisees cut marketing spending like that, it is typically a sign of stress. When operators aren't making enough money, they often cut what they can. Yes, cutting marketing can lead to sales declines. Local marketing is important! But franchisees aren't cutting that spending in a vacuum.
Papa Murphy's has faced questions for years. The company was effectively formed in 1981 with the opening of Papa Aldo's Pizza in Hillsboro, Oregon. It would later merge with Murphy's Pizza out of California, and the concept was renamed Papa Murphy's. The chain at one point was named the best pizza in the country by a trade publication.
Yet the company expanded rapidly through franchising, selling locations all over the place. Many of its locations far from its home in the Pacific Northwest struggled because consumers in those markets were not as familiar with the company's take-and-bake model.
In 2014, just before the company's IPO, franchisees sued the chain, accusing it of disclosure violations.
The company has been closing locations annually since 2017, when it reached a peak of 1,577 locations. It finished last year with 1,084 locations, and executives' comments last week suggest it closed more this year. MTY does not break out location count by brand in its public filings.
Do the math and Papa Murphy's has closed a third of its locations in less than a decade. That's hardly a franchisees-aren't-spending-enough-on-marketing problem.
The pizza sector, to be fair, is difficult right now. Most pizza chains are not generating strong organic sales, the result of a consumer that has cut spending, coupled with competition from third-party aggregators.
Total sales among fast-food pizza chains last year grew less than 1%, according to data from Technomic. But the typical chain's system sales declined. That kind of stagnation has been evident for the past three years.
Papa Murphy's business model is not built to thrive in a market like this because the brand requires its customers to make their own pizzas. If consumers are going to make their own pizzas, they have to be cheaper than what you get prepared. That's not always the case.
The base price for a Papa Murphy's 14-inch pepperoni pizza is about $1.50 cheaper than Domino's. But Domino's, Papa John's and Pizza Hut all run aggressive deals on their websites—such as a $7.99 carryout offer at Domino's or a $6.99 Papa Pairings offer at Papa John's. Little Caesars has a $9.99 menu. There are no national value offers anywhere on the Papa Murphy's website or app that we could see, though you can find a few deals at the store or get hit with an occasional Instagram ad.
Papa Murphy's biggest competitors, however, are companies like Walmart or Aldi, where take-and-bake pies are typically under $10. Consumers can already get a cheaper pizza at the place they are likely already shopping.
It's not the worst thing to be a higher-priced competitor, especially if consumers believe that higher price is worth it. But Papa Murphy's has not historically done enough to convince consumers that it is worth that price. Not to mention the time associated with baking that pizza once you get home.