Who will benefit from Papa John’s challenges?

Pizza Hut stands to gain the most, but the problems will roil the market, says RB’s The Bottom Line.
Pizza Hut

The Bottom Line

Papa John’s faces a long uphill struggle to win back favor with its customers.

The company was already seeing a steep decline in same-store sales before word that company founder and Chairman John Schnatter used a racial slur during a conference call, and before news of Papa John’s toxic “bro culture.”

It’s difficult to overestimate the damage this incident is causing the company and its image. Papa John’s has already lost its sponsorship with the NFL. It has now lost its deal with MLB and several of its clubs, as well as some NFL teams. Papa John’s is being banned from certain stadiums and campuses, and its name is being taken off of the University of Louisville’s stadium.

All of which should be an opportunity for the chain’s rivals, who could take some of Papa John’s sales.

“We see an opportunity to take share broadly across the industry,” Domino’s CEO Ritch Allison said Thursday. He wasn’t commenting specifically on Papa John’s, and later refused to talk about the chain, but the implication that the country’s largest pizza chain will take share from weaker rivals was clear.

Pizza Hut can expect a boost in sales, largely because it has done the most to take advantage of the situation. It has taken over as the NFL’s sponsor and has deals with individual teams, including the Seattle Seahawks and the Pittsburgh Steelers.

Outside of the impact of the NFL marketing, however, the potential impact of a weakened Papa John’s is not clear. And the pizza sector is so saturated and loaded with concepts that it could be difficult to tell whether any sales decline at Papa John’s is helping any of these other chains at all.

There are four big pizza chains: Papa John’s, Domino’s, Pizza Hut and Little Caesars, and Papa John’s is the fourth-largest in that group, according to Technomic's Top 500 Chain Restaurant Report. Those four represent 72% of total sales generated by pizza chains in the Top 500. Papa John’s share of the total is just 12%.

Last year, Papa John’s generated $3 billion in U.S. system sales. By comparison, Domino’s led the sector with $5.9 billion in system sales, while Pizza Hut generated $5.5 billion and Little Caesars $3.7 billion.

It’s not clear what kind of impact the current controversy will have on Papa John’s. The current situation is unprecedented, actually. While there have been situations involving spokesmen and others involving CEOs and others involving founders, Schnatter was all three, and his name is on the signs.

The pizza market is ultracompetitive, and there is only so much loyalty. Consumers have an enormous number of choices. Papa John’s has already seen a slowdown in its normally consistent same-store sales. Those sales went from a 1% increase in the third quarter of last year to a 5.3% decrease in the first quarter of this year.

We can expect a continued deterioration of sales, especially as football season rolls around and Papa John’s no longer has that sponsorship deal while it works its way through its current challenges.

A 7.5% decline from its 2017 system sales would be equal to $225 million. The other three pizza chains would theoretically take about 60% of that, or $135 million.

Pizza Hut’s share of that would be less than $49 million, or less than 1% of the company’s 2017 system sales. If the chain were to get half of that $135 million, that’s still just 1.2%, though of course Pizza Hut would take it. This is a penny business, and 120 basis points can make a major difference.

All of that is assuming that chains take whatever share Papa John’s does lose. Not calculated is the large share currently owned by independents and smaller concepts not in the Top 500.

Plus, there is this growing third-party delivery business to consider. And maybe some nonpizza restaurants such as Wingstop take some of this business.

Papa John’s is in uncharted territory. We won’t really know the impact until Papa John’s reports its second quarter earnings at the earliest, probably next month. And a full picture probably won’t be evident until early next year.

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