Last week, Canadian-based brand collector MTY Group agreed to acquire take-and-bake pizza chain Papa Murphy’s in a $190 million deal.
Assuming it gets approved—and given the sizable premium MTY is paying, it probably will—the deal will end Papa Murphy’s rather difficult tenure as a stand-alone public company, one that featured 13 straight quarterly same-store sales declines as the chain shed nearly 10% of its units.
Like many chains, Papa Murphy’s troubles were both environmental and self-inflicted. It is a victim of consumers’ shift toward convenience, and the company’s own heavily indebted structure and a franchisee base loaded with small-scale operators.
Private-equity firm Lee Equity bought the chain, reportedly for about $180 million, in 2010. At the time, it was considered a growth concept with well-loved pizza. Papa Murphy’s traditionally gets high marks on consumer ratings.
Four years later, Lee took Papa Murphy’s public, hoping to ride growing investor desire for restaurant companies. But that offering looked a lot less desirable than perhaps the company thought it would be.
Shortly before the IPO, franchisees sued the chain, claiming the company’s financial projections weren’t relevant in the Southern states where the company was expanding. Yet it soured investors on the concept, and the stock price barely rose on its first day of trading—unbelievably weak performance in an era in which IPOs are set up to ensure the stock “pops” on the first day of trading.
But Papa Murphy’s also had a lot of debt, considering the size of its all-franchised system. It had $170 million in debt at the time of the IPO.
Debt isn’t necessarily bad, but too much debt definitely is, and Papa Murphy’s had to grow aggressively for it to justify its newly public position and to pay off that debt. In 2017, the company gave new operators three years of royalty breaks if they opened restaurants in new markets. Growth concepts typically don’t need to do that.
And Papa Murphy’s had a lot of small franchisees and low unit volumes of around $500,000. That’s a tough combination.
It is a unique concept that requires some patience and some marketing so consumers understand the brand. It has always been far more popular closer to the Northwest, its home market.
But the company’s need to grow pushed it further away from those markets, and those small-scale operators and low volumes ultimately led to closures—not to mention that lawsuit.
The debt also left the brand less able to handle mounting competition and consumers’ growing demand for convenience.
That demand has upended many restaurant chains in recent years. Pizza market leader Domino’s has exploded by finding new ways to make its ordering process easier. Many of its rivals have worked hard to keep pace.
Papa Murphy’s is fundamentally inconvenient. Consumers have to make the food themselves. And while consumers eat the product at its freshest, they still have to take the time to make it.
In addition, Murphy’s has been slow to adapt to online ordering and mobile apps at a time when consumers are increasingly ordering their pizzas that way.
Current management has worked hard to refranchise stores and right the ship, focusing on delivery and improved unit economics in a bid to stabilize the brand. It started to show some lift late last year, which probably paved the way to its sale to MTY.
But those struggles have taken their toll. Papa Murphy’s is no longer the exciting growth concept it was a decade ago.
A good product can only take you so far. That product needs the support of a good business model for it to work.