Papa John's Strategic Analysis: SWOT, Porter's Five Forces

Industry Overview and Competitive Landscape

Papa John's is the fourth-largest pizza chain in the United States and the 20th-largest quick service restaurant (QSR) 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 at $968,000 — higher than Little Caesar's and Pizza Hut, but lower than Domino's. The company has over 3,300 domestic units and more than 5,000 locations in 45 countries. Founded in 1985 in Jeffersonville, Indiana, the company began franchising the following year and grew steadily since, although the number of stores declined in 2017 (QSR, 2018).

According to IBIS World, the pizza industry in the United States is worth $47 billion, which gives Papa John's a 3.3% market share. The largest competitor, Domino's, holds a 12.5% share, indicating only moderate industry concentration. IBIS World (2019) reports slow growth of just 1.6%, signaling a mature market in which the number of new entrants is growing faster than the industry as a whole — meaning competition in pizza is intensifying.

Using Porter's Five Forces analysis (Kenton, 2019), the pizza industry does not present strong profit potential. Competition is intense and barriers to entry are low, which in turn elevates the bargaining power of buyers. Supplier bargaining power is moderate — and likely lower for a major chain like Papa John's that enjoys some purchasing leverage. Nonetheless, rivalry intensity is high, and as a result most companies earn only marginal profits. Papa John's itself carries a net margin of less than 1%.

Critical Success Factors and PESTEL Analysis

Several critical success factors define competition in pizza. First, a strong brand helps a company stand out in a crowded field. Quick service is another key factor — consumers expect pizza to arrive promptly and will switch providers if it does not. Convenient, highly visible locations generate drive-by and walk-in traffic while enabling delivery drivers to fulfill orders quickly. For any major chain, the ability to replicate a consistent experience across franchises is essential to brand support. Thousands of pizza restaurants open and close each year as a result of failing to deliver on these factors. Additional success factors include affordability, food quality, and the overall customer experience (McCormick, 2018).

Political and legal forces bear relatively minimal influence on the pizza business, since most ingredients are sourced domestically. Tax policy, however, can affect businesses operating on such thin margins. Economic forces carry more weight: because dining out is a discretionary expenditure, consumers require some level of disposable income. Papa John's actually saw same-store sales increase during the 2009 recession, owing to the strength of its brand and the affordability of its product (Navellier, 2009).

Pizza exists within a structure of monopolistic competition, meaning brand can be one of the more reliable differentiators against hard economic times. Food quality, service, and overall brand value are the principal means of separating one competitor from another. Firms that survive tend to excel in at least one of these dimensions; firms that fail tend to struggle across all of them. This industry structure, especially in a mature market, is unforgiving of weakness.

Social forces also shape the industry — including trends toward healthier eating, gluten-free options, online ordering, and consumer preference for locally sourced goods. Founder and then-CEO John Schnatter was forced to resign after using a racial slur during a company meeting, an event that would have had far greater consequences in 2018 than it might have decades earlier (Halzack, 2018). Technological shifts — most notably the widespread adoption of mobile apps for ordering — have reshaped consumer behavior, and it is imperative that competitors keep pace with these changes.

Corporate Strategy and Financial Position

The company's current corporate-level strategy is unclear. While Papa John's originally built its identity around quality, that positioning no longer appears to hold. There has been a drift toward cost leadership, but the shift is incomplete. The company seems stuck in the middle — not differentiated enough to command a quality premium, yet not cheap enough to compete on cost. Its business strategy has been largely to stay the course, but that approach is no longer delivering results; 2018 revenues were lower than any of the prior four years (Papa John's 2018 Form 10-K).

Major competitors typically compete on delivery speed, food quality, established brand equity, promotional gimmicks, and other tactics to capture consumer attention. In terms of marketing, Papa John's has recently been preoccupied with damage control. The racial slur incident diverted the company's marketing resources, and because Schnatter had been the face of the brand, the company was forced to remove him from all marketing materials and identify a new brand direction (Halzack, 2018). The initial response was a pivot toward diversity and inclusion — an act of damage control and a means of buying time to develop new marketing strategies (Richards, 2018).

The company generates revenue through several channels. Company-owned restaurants are the largest revenue earner, followed by commissary sales to franchisees. Franchise fees and international operations represent the remaining major business lines. Years of declining sales have caused net income and earnings per share to fall sharply. Debt has grown substantially on the balance sheet, and Papa John's has carried negative equity for the past two consecutive years — a sign of a deteriorating financial position. The company does not appear to have restructured in response to declining sales, and this inaction is materially damaging its overall financial performance.

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. 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

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. Adweek. Retrieved April 7, 2019, from https://www.adweek.com/brand-marketing/inside-papa-johns-transformation-how-diversity-and-marketing-leaders-are-changing-the-brand/