Papa Johns strategic analysis

Papa John’s is the fourth-largest pizza chain in the US, and 20th-largest quick service restaurant overall (QSR, 2018). Its total revenues for 2018 were $1.573 billion, with net income of $1.64 million, according to the company’s latest 10-K. In terms of sales per unit, QSR Magazine (2018) lists Papa John’s with $968,000, higher than Little Caesar’s and Pizza Hut, but lower than Domino’s. The company has over 3300 units in total. According to the company’s website, it has over 5000 locations total, in 45 countries. Founded in 1985 in Jeffersonville, IN, the company began franchising the next year, and has grown steadily since then, although there was a decline in the number of stores in 2017 (QSR, 2018).
According to IBIS World, the pizza industry in the US is worth $47 billion, which gives Papa John’s a 3.3% share. The largest competitor, Domino’s, has a 12.5% share, so there is only moderate concentration in the industry. IBIS (2019) shows slow growth of just 1.6%, indicating a mature business, and the number of new businesses is growing faster than the industry as a whole, meaning that pizza is getting more competitive.
Using Porter’s Five Forces analysis (Kenton, 2019), the pizza industry does not have good profit potential. Competition is intense and there are low barriers to entry, the bargaining power of buyers is high because of this. The bargaining powers of suppliers is moderate, and will be lower for a major chain like Papa John’s that has some buying power. However, intensity of rivalry is high, and as a result most companies make only marginal profits. Papa John’s has a net margin of less than 1%.
There are several critical success factors in pizza. First, a good brand helps a company to stand out among the crowded field of competitors. Quick service is another factor – consumers expect pizza to arrive quickly and will switch if this is not the case. Convenient locations in highly-visible places help get drive-by and walk-by traffic, and allow delivery drivers to arrive quickly. For any major chain, the ability to replicate a consistent experience across franchises is an essential component of supporting the brand. Thousands of pizza restaurants come and go each year as a result of failing to deliver on these critical success factors. Others include affordability, the quality of the pizza, and the overall customer experience (McCormick, 2018).
Political and legal forces are relatively minimal on the pizza business, as most ingredients are sourced domestically. Tax policy can affect businesses where profit margins are this tight. Economic forces certainly can impact the pizza business, as eating out is something done with disposable income, so people need to have some of that. Papa John’s saw same store sales increase during the 2009 recession, owing to the strength of its brand and affordability of its pies (Navellier, 2009).
Pizza exists in a state of monopolistic competition, so brand can be one of the more reliable differentiators to combat hard economic times. This market structure means that the quality of the food, the service, and the overall brand value are the key means of differentiating from competitors. Firms that survive tend to excel in at least one of these dimensions, if not more, and firms that fail seem to struggle with each. This industry structure, especially in a mature market, is not conducive to weakness.
The industry is also impacted by social forces such as trends towards healthier eating, gluten-free eating, online ordering and turns towards more local goods. Founder and then-CEO John Schnatter was forced to resign after using a racial slur during a meeting, something that maybe wouldn’t have happened in 1985 but definitely would happen in 2018 (Halzack, 2018). Technological shifts, such as the use of apps for ordering, have affected the industry and it is imperative that competitors in the business keep up with such changes in consumer behavior.
The current corporate level strategy is a bit muddy. While the chain originally focused on quality, that does not seem to be the case anymore. There has been a shift towards cost leadership, but not all the way. Papa John’s seems stuck in the middle – not good enough to trade on quality, not cheap enough to trade on cost. Its business strategy has been to stay the course, but that is not working as well now as it has in the past, and the company’s sales are declining as a result – 2018 saw revenues lower than any of the prior four years (Papa John’s 2018 Form 10-K). Major competitors typically focus on delivery times, quality, established brand names, gimmicks, and other tactics to gain consumer attention.
In terms of marketing, the major theme for Papa John’s lately has been damage control. The racial slur incident distracted the company’s marketing arm, Schnatter was the face of the brand and they had to scrub him from all marketing material and try to find a new marketing pathway (Halzack, 2018). The first shift was a focus on diversity and inclusion, an act of damage control and a means of buying time to determine new marketing strategies (Richards, 2018). The company makes its money in a couple of ways. Its company-owned restaurants are the biggest revenue-earner, followed by “commissary”, which is not really defined but appears to be what the company sells to franchisees. Franchise fees and international are the other major business lines. Years of declining sales have seen net income and earnings per share plummet. Debt has increased substantially on the balance sheet, and the past two years Papa John’s has had negative equity on the balance sheet, indicating a declining financial position. The company does not appear to have restructured in response to sales declines, and this is hurting the overall financial performance substantially.
Former strengths such as the brand have become weaknesses in recent years, though the company is trying to build its diversity into a strength. The quality of the food is a bit of a weakness these days, distractions like the former CEO certainly are, and now the financial position is becoming a weakness as well. There are few remaining strengths on which to draw at this point. Historically the company could at least draw on its brand, the reputation of its food, and the strength of its franchise model. Today, all but the latter are weaker than they were before, though arguably as the fourth-largest pizza chain there is still some value in the brand and franchise model.
Papa John’s does not appear to have many great opportunities. It can still expand internationally, but domestically the brand is damaged goods. It has never been able to move outside the pizza business. It still faces threats from competitors, any potential economic downturn, and changing in consumer sentiment. This is a difficult time to be Papa John’s. The threats outweigh the opportunities substantially. In a mature industry, focus on cost-cutting can yield some short-term results, but there is little opportunity for anything other than marginal growth. Papa John’s will need to be creative in order to start growing at a faster rate, given the maturity of the industry and the intensifying competition.
Given this, the first major strategic alternative is to tighten the belt and cut costs. This might help restore profitability. The company certainly needs to stop adding debt. It has to rebuild its brand, which was suffering before the CEO’s comments. So in a sense, the first major alternative is just to keep working to undo some of the damage that the company has faced in the past few years. The pros are obvious – regaining some of its sources of strength will help the company, but there are cons to this approach as well. The first con is that some of the work that needs to be done is defensive in nature, more to stop the bleeding, and therefore less likely to actually spur growth.
The second approach is the status quo. This seems a bad option just for the fact that the company is likely going to be unprofitable if the current trends continue. But arguably, 2018 was as low as the company could go, and it should rebound at this point. That is speculative, so there is considerable risk associated with that strategy, but it is one approach that Papa John’s can take, should it not have any better ideas.
A third approach is to focus on international. While incremental gains in the US hold more promise because of the size of the market, the brand is less damaged overseas, and some competitors like Domino’s and Pizza Hut have built strong international businesses. Papa John’s has started down that path, and therefore has a lot of upside growth internationally. It does need to get better at running a global franchise operation, but at least this is a positive, growth-oriented alternative. And it is an option that is not mutually exclusive to some of the other alternatives on the table.
A fourth alternative is to refocus its energy on a clear strategy. The company lost its way in terms of quality – it built up a reputation for good quality pizza but let that slide. It either needs to be a differentiated, quality player in the market or a low cost producer, not the current status of being somewhere in between. First, it must choose between these two, and second it must focus its energy on communicating that to the market. Differentiation is usually better because franchises come with certain overheads that small independent pizza shops don’t have, so those will almost always be cheaper if they want to be. By having a clear strategic focus, Papa John’s can move on from the brand disaster of last year and regain some of the energy it once had. This option is certainly risky, but it is the sort of bold move that the company needs to make.
As such, it is recommended that Papa John’s restores its focus on quality, with a differentiated offering in the market. Pizza is a highly competitive business, and margins are certainly slim, so there is a risk that the company cannot do this profitably, but Papa John’s needs to define its brand in a new way, and this is the best approach to the post-Schnatter brand definition. The company can also focus on international growth, as there appears to be more promise there than the domestic market. All told, by giving the company a sense of strategic focus, it can shift the conversation away from its problems of the past several years, and start to build a little bit of optimism. The strategy must be executed well, but there are still a lot of people who believe in the brand, and 5000 stores with which to bring this new product messaging to the market.
The company has already experienced a major crisis event, but should still anticipate some sort of economic downturn. While Papa John’s fared well during the last downturn, it should not expect that to happen again. The company must plan for another downturn, given its weak financial condition. By investing in its success now, Papa John’s can help to put itself on the right track. Improving profitability will be essential to riding out the next recession, whether it happens next year or ten years from now.
The future prospects for Papa John’s, as of right now, are not that great. Companies in highly competitive, mature industries can easily fail, should they lose their way strategically. The company’s brand has taken a beating and its finances are a mess. Without clear and focused action, Papa John’s will be hard-pressed to thrive going forward. However, if the company has learned anything the past year, it is that there is a commitment right from the Board to move swiftly in the event of crisis, and take dramatic action to strongly counter any problems that the company has. If it can apply that approach to its corporate strategy, it will be in a much better position going forward than it appears to be in today.
References
Halzack, S. (2018) Papa John’s just went from bad to worse. BNN Bloomberg. Retrieved April 7, 2019 from https://www.bnnbloomberg.com/papa-john-s-just-went-from-bad-to-worse-1.1120265
IBIS World (2019) Pizza restaurants industry in the US. IBIS World. Retrieved April 7, 2019 from https://www.ibisworld.com/industry-trends/specialized-market-research-reports/consumer-goods-services/food-service-drinking-places/pizza-restaurants.html
Kenton, W. (2019) Porter’s 5 forces. Investopedia. Retrieved April 7, 2019 from https://www.investopedia.com/terms/p/porter.asp
McCormick, M. (2018) Key success factors in a pizza business. Houston Chronicle. Retrieved April 7, 2019 from https://smallbusiness.chron.com/key-success-factors-pizza-business-2788.html
Navellier, L. (2009) Papa John’s – how to beat the recession with pizza. NASDAQ. Retrieved April 7, 2019 from https://www.nasdaq.com/personal-finance/papa-johns-PZZA.stm
Papa John’s Form 10-K 2018. Retrieved April 7, 2019 from https://ir.papajohns.com/static-files/2977c391-0218-4bac-8eb2-dcabd4561cfe
Papa John’s website, various pages. (2019) Retrieved April 7, 2019 from https://www.papajohns.com/company/about-papa-johns.html
QSR (2018) The QSR Top 50. QSR Magazine. Retrieved April 7, 2019 from https://www.qsrmagazine.com/content/qsr50-2018-top-50-chart
Richards, K. (2018) Inside Papa John’s transformation: How diversity and marketing leaders are changing the brand. Ad Week Retrieved April 7, 2019 from https://www.adweek.com/brand-marketing/inside-papa-johns-transformation-how-diversity-and-marketing-leaders-are-changing-the-brand/