In this FDD Talk 2017 post, you’ll learn the following:
- Section I – Background information on the Papa John’s franchise opportunity, including relevant news updates
- Section II – Estimated initial investment for a Papa John’s franchise, based on Item 7 of the company’s 2017 FDD
- Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for a Papa John’s franchise, based on Items 5 and 6 of the company’s 2017 FDD
- Section IV – Presentation and analysis of Papa John’s financial performance representations, based on Item 19 of the company’s 2017 FDD, including information on the:
- 2016 average sales for the 648 company-owned traditional Papa John’s restaurants that were open the entire year of 2016
- 2016 average sales for the 2,397 franchised traditional Papa John’s restaurants that were open the entire year of 2016
- 2016 average food costs, labor costs and taxes, manager’s labor and taxes, mileage, advertising, controllables, rent and common area maintenance, other non-controllables, training costs, store bonuses, and pre-tax cash flows for the 648 company-owned traditional Papa John’s restaurants that were open the entire year of 2016
Section I – Background Information
12 Things You Need to Know About the Papa John’s Franchise
New Addition to Burger-Pizza Lineup
1. To kick off the summer season, Papa John’s introduced in late May a new addition to its burger-pizza lineup—the Bacon Cheddarburger Pizza with Wisconsin cheddar, zesty burger sauce, and pickles. The limited-time only pizza, which remained on the menu until June 25, was priced at $10. Customers could also add Bacon Cheddarsticks to an order for $6 more.
2. To help launch the pizza, Papa John’s ran a new national television campaign featuring Indiana Pacers All-Star Paul George, and shared the same across its social media channels. The commercial shows George being distracted by the smell of the new Bacon Cheddarburger Pizza as he attempts to dunk in a game.
New Gluten-Free Crust Featuring Ancient Grains
3. In early April, Papa John’s announced that it was testing a new gluten-free crust made with ancient grains, specifically sorghum, teff, amaranth, and quinoa, in select locations across the U.S., including Los Angeles, Phoenix, St. Louis, Houston, and Nashville.
4. The Papa John’s research and development team spent more than a year developing the product with the goal of offering pizza fans a better tasting gluten-free pizza crust. According to Sean Muldoon, Chief Ingredient Officer at Papa John’s, customers have been asking for a tastier gluten-free crust for some time, but the company had never been satisfied with the flavor profile of available gluten-free crust options.
5. Papa John’s wanted to create a crust with added nutritional benefits since the ancient grains are naturally gluten-free and higher in protein and fiber than other grains.
Testing Organic Vegetable Toppings
6. Early in the year, Papa John’s announced that it would be adding freshly-sliced organic produce to its pizza topping options. The organics pilot program is currently being tested in Papa John’s locations across Lexington, Kentucky and features four freshly-sliced, organic toppings: Roma tomatoes, green peppers, yellow onions, and mushrooms.
7. The company will be working with Green BEAN Delivery to source the fresh produce from Certified Organic family farms across the country, including those in Arizona, Florida, Pennsylvania, Kentucky, Oregon, California, and Indiana.
Significant Investments in Digital Innovation
8. In early March, Papa John’s introduced “Papa Track,” a digital pizza tracker that allows customers to follow the pizza process from oven to delivery. According to the company, over the past year, Papa John’s has made significant investments in digital innovation, customer experience, and staffing. The company has also increased and enhanced its tech staff, including the appointment of its first Chief Information and Digital Officer (CIDO), Mike Nettles.
9. Around that same time, Papa John’s announced the addition of PayPal as a digital payment option. The addition of PayPal to Papa John’s payment methods makes it the national pizza chain with the most payment choices.
10. Papa John’s was founded in 1983 when “Papa” John Schnatter knocked out a broom closet in the back of his father’s tavern, Mick’s Lounge, in Jeffersonville, Indiana, and started selling pizza. Schnatter’s pizzas were so popular that he was able to open the first official Papa John’s location a year later. Papa John’s began franchising in 1986.
11. As of 2017, Papa John’s is the third largest take-out and pizza delivery restaurant chain in the United States, with over 5,000 franchised and company-owned locations in the U.S. and internationally.
Entrepreneur’s Franchise 500
12. Papa John’s has ranked on Entrepreneur’s annual Franchise 500 list every year in the last decade. The company’s highest rank was No. 10 in 2007 and 2009, while its lowest rank was No. 55 in 2017.
Section II – Estimated Costs
- Please click here for detailed estimates of Papa John’s franchise costs, based on Item 7 of the company’s 2017 FDD (updated).
Section III – Initial Franchise Fee, Royalty Fee, Marketing Fee, and Other Fees
- Please click here for detailed information on Papa John’s initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2017 FDD.
Section IV – Financial Performance Representations (Item 19, 2017 FDD) and Analysis
- Presented below are average restaurant-level sales revenues of domestic franchised and company-owned Papa John’s restaurants for the company’s fiscal year ended December 25, 2016, along with average restaurant-level cash expenses for company-owned Papa John’s restaurants only.
- The following revenue and cash flow data is drawn from Papa John’s financial books and records, which are kept on a basis consistent with Generally Accepted Accounting Principles (“GAAP”) in the United States.
- All information is based on actual historical costs and results. Thus, there are no material assumptions associated with the data, other than the principles of GAAP.
- A number of factors may affect the comparability of the expense (or cash outflow) data, which is drawn solely from company-operated restaurants, to franchised restaurants and the data’s effectiveness as a guide or template for potential operating results of a franchised restaurant. The most significant of these factors are discussed in the following notes.
Full Year Only
- At the close of Papa John’s fiscal year, there were 3,331 total domestic (United States) Papa John’s restaurants, 702 of which were company-owned, including restaurants owned by franchisees in which Papa John’s has a majority interest (a total of 222 restaurants).
- However, the following data is drawn only from standard (or “traditional”) restaurants that were open the entire year of 2016 because including results from non-traditional restaurants and restaurants that were open only part of the year would skew the annual revenue and expense data.
- Therefore, the total number of restaurants included in the following data is 3,045, comprising 2,397 franchised restaurants and 648 company-owned restaurants.
Core Business Revenues
- The revenue figures for both franchised and company-owned restaurants include only sales of food and beverages arising in the ordinary course of retail operations. Non-recurring items, such as proceeds from the sale of used furniture or equipment, are not included.
- The cash flow data does not include depreciation expense or any other non-cash items.
- Company-owned restaurants do not pay a royalty. The expenses incurred by a franchised restaurant will include Papa John’s standard royalty.
Economies of Scale
- Because Papa John’s operates more than 600 company-owned restaurants, it is able to achieve certain economies of scale and operational efficiencies that may not be available to a franchisee operating one restaurant or a limited number of restaurants, as is the case for the typical franchisee.
Restaurant and Market Maturity
- Sales of a particular restaurant may be affected by how long the restaurant has been in operation and how successfully the surrounding market has been penetrated. Typically, sales “ramp up” as the restaurant and market develop. Greater penetration (the greater the number and concentration of restaurants) in a market also may affect performance.
- The following company-owned restaurant data represents averages for all of Papa John’s company-owned domestic restaurants, some of which are long-established in their location and some of which are relatively new. Most of the company-owned restaurants are in highly developed and highly penetrated markets.
- Papa John’s company-owned restaurants are typically clustered in and around major metropolitan areas, such as Atlanta, St. Louis, and Nashville. Many franchised restaurants are operated in less densely populated areas, with more limited access to advertising media.
Table 1 – Average Restaurant Revenues
Company-Owned Restaurants (648 Restaurants)