Papa John's Strategy to Enhance Profitability and Increase store-level Margins

As part of the second phase of its Back to Better initiative, Papa Johns is increasing its marketing spend and accelerating development in North America to enhance comparable sales and average unit volumes. This move is aimed at improving restaurant-level margins, with CEO Rob Lynch stating that in 2023, the corporate and franchise teams achieved their fourth consecutive year of positive North America comparable sales, sustaining the pandemic-induced sales growth.

The company announced a preliminary 1% rise in North American comparable sales for 2023 and a 5% increase in global systemwide sales. Additionally, 210 net new units were opened last year, including 57 in North America.

During the initial stage of the Back to Better initiative, the company made it a priority to enhance its operations, as stated by Lynch on Tuesday at the ICR Conference. At the company-owned restaurants, the time it took to serve customers improved from 28 minutes to 19 minutes compared to a year ago.

The second phase of this initiative is a “three-legged stool” that includes changes to its marketing investment, development strategy and supply chain model, Lynch said. 

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Courtesy of Papa Johns

Creating more nationwide marketing buzz

Papa Johns is set to launch a new marketing strategy this year, supported by a $20 million investment, according to Lynch. The company recently conducted a review of its creative and media strategy in 2023, identifying opportunities to enhance audience targeting, develop unique category solutions, optimize ad spend, and foster brand loyalty while increasing brand visibility. Moreover, franchisees have agreed to raise the contribution rate to the national marketing fund by 20%. Lynch noted that many national brands have shifted away from a co-op model, as leveraging a national platform enables chains to procure marketing at a larger scale, obtain favorable rates, and access superior programming.

Franchisees of Papa Johns now have the option to choose whether or not to spend on local advertising, a move that the company believes will reduce the overall required marketing spend and enhance profitability. According to Lynch, the previous 8% mandatory marketing spend has been a significant factor in affecting restaurant margins, with 5% allocated to national marketing and 3% to local marketing over the past decade.

Lynch stated that the new strategy has reduced total marketing spend from 8% to 6%, enabling franchisees to gain an additional 200 basis points of margin at the restaurant level. "Our goal is to ensure our franchisees are profitable," Lynch emphasized. "When franchisees are successful, they are motivated to expand their restaurant business, which is a pivotal sign of a brand's success."

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Permission granted by Papa Johns

Accelerating growth with development incentives

In order to spur further growth, Papa Johns has pinpointed overlooked markets in North America and has introduced a development incentive that offers increased restaurant-level EBITDA margins for the initial five years of operation. Franchisees who construct new restaurants this year have the option to forego their contributions to the national marketing fund. Lynch described this as the "most significant development incentive in the brand's history."

When brands offer incentives, they usually come with royalties or other expenses that impact the bottom line. However, Papa Johns’ incentive is based on marketing and will not result in additional costs for the chain, as they have already allocated $20 million for marketing. New restaurants typically contribute $2 million to $4 million in additional marketing, and the marketing fund is expected to continue growing to ensure that new restaurants built this year will not have a negative impact on marketing funds.

Lynch credited the increased productivity and expanded marketing investments for making this incentive possible. According to the company's press release, this new incentive will greatly enhance cash-on-cash paybacks for franchisees, increase the company's presence in important markets, and appeal to franchisees who are focused on growth.

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Courtesy of Papa Johns

Updating its U.S. commissary business

Papa John's announced that it will be increasing the fixed operating margin charged by its commissaries in the U.S. by 100 basis points over the next four years. This will result in a shift from 4% to 8% in 2027. The company stated that this adjustment is expected to generate more profitable growth and improve overall supply chain productivity, leading to additional cost savings and incremental profits for the entire system.

Despite the 100 basis point cost increase at the restaurant level, Papa Johns has implemented various measures to minimize this cost. Franchisees are eligible to receive rebates based on their performance in increasing volume and opening new restaurants.

The chain is prioritizing increased productivity in its supply chain by enhancing operations and strengthening relationships with suppliers. Management announced during ICR that they anticipate North America comps to fall between 2% and 4% this year. Optimism within the management team has been boosted by supply chain enhancements, as well as Papa Johns' growth and marketing strategies.

Lynch, the CEO, shared that in his four years of tenure, he is the most optimistic about the chain's future.