In this FDD Talk 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 2019 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 2019 FDD
- Section IV – Number of franchised and company-owned Papa John’s outlets at the start of the year and the end of the year for 2016, 2017, and 2018, based on Item 20 of the company’s 2019 FDD
- Section V – Presentation and analysis of Papa John’s financial performance representations, based on Item 19 of the company’s 2019 FDD, including information on the:
- 2018 average, median, high, and low sales for the 622 company-owned traditional Papa John’s restaurants that were open the entire year of 2018
- 2018 average sales for the 2,358 franchised traditional Papa John’s restaurants that were open the entire year of 2018
- 2018 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 622 company-owned traditional Papa John’s restaurants that were open the entire year of 2018
Section I – Background Information
32 Things You Need to Know About the Papa John’s Franchise
Secures $200 Million in Investment from Turnaround Specialist
1. Following major controversies caused by founder John Schnatter in late 2017, Papa John’s has been working hard to rebuild its reputation. In January 2019, after rumors of major strategic changes, including a possible sale, Papa John’s announced that Starboard Value LP was making a $200 million strategic investment in the company, with the option to add another $50 million through March 29.
2. In addition, Starboard’s chief executive officer, Jeffrey Smith, took over as chairman of Papa John’s board. The chain also expanded its board to include Anthony Sanfilippo, the former chairman and CEO of Pinnacle Entertainment Inc. Papa John’s Steve Ritchie is joining the board and will remain CEO. Seven of the chain’s directors are independent.
3. Starboard is no stranger to the restaurant industry or to the turnaround process. In a rare shareholder coup in 2014, the company took control of casual-dining company Darden’s board and pushed for operational changes, including better-tasting breadsticks at Olive Garden. Within 18 months, the company saw its stock rise 47 percent. Smith served as chairman of Darden’s board until April 2016.
4. Papa John’s “began a process to evaluate a wide range of strategic options” in September 2018. That same month, Reuters reported that Papa John’s reached out to potential buyers to ask them to submit offers.
5. In November, The Wall Street Journal noted that Trian Fund Management LP, considered a serious potential bidder, took itself out of the running. Papa John’s didn’t receive serious interest from any parties wishing to buy the whole company, people familiar with the matter told The Wall Street Journal.
6. According to Papa John’s, “The board concluded that the investment agreement with Starboard was in the best interest of shareholders.” Former chairman and CEO John Schnatter, who owns nearly 31 percent of the company’s stock, voted against the Starboard deal, per The Wall Street Journal.
7. Olivia Kirtley, a member of Papa John’s Special Committee and most recently chairman of the chain’s board, said, “Our agreement with Starboard concludes a comprehensive strategic review conducted over the past five months to better position Papa John’s for growth, improve the company’s financial performance and serve the best interests of our stakeholders. This transaction provides the company with financial resources and strong and experienced directors on the board in order to position the company for success over the long term.”
8. Kirtley added, “We believe we have found terrific partners to advance Papa John’s strategy, especially given their record of reinvigorating and growing premier restaurant and consumer brand companies. Starboard’s investment represents a strong vote of confidence in Papa John’s, our people, our franchisees and the many opportunities we have ahead.”
9. Starboard is making its investment through the purchase of new convertible preferred stock. This represents a stake of about 11-15 percent of Papa John’s outstanding common stock on an as-converted basis. Papa John’s is also giving qualifying franchisees the ability to purchase $10 million of the stock under the same terms as Starboard.
10. Papa John’s plans to use about half of the proceeds from the investment to repay debt, with the remaining proceeds providing financial flexibility “that enables Papa John’s to invest capital to further advance its five strategic priorities of people, brand, value/product, technology, and unit-level economics,” the company said.
Plans to Spend $40 Million on Marketing Blitz
11. In August 2019, Papa John’s reflected on its comeback efforts through an 18-month lens. At the time of the press release, Papa John’s was about a year into the far-reaching plan and, while the company had made some real, tangible gains, there remains work to be done.
12. In the same press release, it was reported that Papa John’s systemwide North America same-store sales declined 5.7 percent, year-over-year, in the second quarter of fiscal 2019. Stacked on Q2 2018’s negative 6.1 percent result, Papa John’s top-line performance remains challenged.
13. Additionally, Papa John’s closed 35 North America restaurants during the second quarter, while opening 18. Year to date (at the time of the press release), Papa John’s debuted 128 units globally and shuttered 86 for a net increase of 42. Papa John’s North America’s total of 3,319 restaurants (there are 5,345 with international included) was down from 3,337 as of December 30, 2018.
14. The good news, though, in addition to three straight periods of accelerating comps, is Papa John’s marketing blitz hasn’t arrived yet. When Starboard made a strategic investment in February – a move that included placing CEO Jeffrey Smith as chairman – Papa John’s said it would use up to half of the initial proceeds, or $100 million, to advance its turnaround priorities. Of that amount, $40 million is headed to marketing and half will be spent in the second half of 2019 (the other in 2020).
15. Additionally, it will be coupled with a 25 basis-point increase in Papa John’s national marketing fund contribution rate to 5 percent of restaurant sales in 2020.
16. What this amounts to is roughly $20 million over the next four months to support a campaign featuring fresh brand ambassador Shaquille O’Neal. The NBA legend is set to break through Papa John’s materials in early September.
17. According to Papa John’s CEO Steve Ritchie, “Given the excitement that Shaquille has created among the Papa John’s teams, we have no doubt that he will help drive positive sentiment among consumers as well. We are very excited to get them off the bench and into a new national advertising campaign coming up this fall.”
18. This new marketing plan is critical for Papa John’s, given the company’s setbacks following founder John Schnatter’s many exits and PR flareups. At the time of the press release, Schnatter had already unloaded 3.8 million shares since early May, and now owns about 6.1 million. His stake in Papa John’s is down to 19 percent from roughly 31 percent.
19. In addition to the $40 million being spent on advertising, Papa John’s plans to use another $40 million as royalty relief for North America franchisees across three areas: systemwide relief available to all operators to agree to some customary terms and to move on from the past events; incentive-based royalty relief around guest-service targets; and, lastly, additional needs-based royalty relief for targeted franchisees.
20. Papa John’s termed the program internally, “We Win Together.” Ritchie said nearly 100 percent of franchisees opted in, and Papa John’s estimates spending half of the $40 million between the remainder of fiscal 2019 and 2020.
21. A June filing revealed that Papa John’s is paying Shaq $4.125 million over three years to rep the brand, in three payments. The first of which will be for $1.25 million. It will then up to $1.375 million and $1.5 million in years two and three, respectively. Shaq is also receiving 87,136 shares of stock that vest between 2020-2022. At the time of the agreement, the shares were worth about $4.4 million or so, but this number can change dramatically if Shaq helps gather investor sentiment behind the brand.
22. Shaq is also an investor in nine Atlanta locations, which include design elements hand-picked by Shaq (his signature is on the front of the building and his size 22 footprints at the front door). Papa John’s owns about 70 percent of the joint venture, and Shaq poured roughly $840,000 into the restaurants’ acquisition costs of $2.8 million.
Installs GPS Live Tracking in 1,000 Restaurants
23. In mid-July 2019, Drivosity announced that it has installed its GPS live tracking and safety solution in over 1,000 Papa John’s restaurants nationwide, as a response to increased customer demand for faster delivery times and live data on food delivery drivers. Drivosity enables users to pin-point a vehicle’s location using GPS technology while presenting an updated log of vehicle and driver information, such as speed, location, and behaviors.
24. The solution adds transparency as to what, when, and how drivers are completing their delivery routes. Drivosity also empowers drivers with quantitative scoring on how safely they are driving, resulting in reduced auto-related accidents and costs. Franchisees and operators that have implemented Drivosity report reduced wait-times, increased customer satisfaction, and improved business operations.
25. With this initiative, Papa John’s once again demonstrates its commitment to quality that goes beyond food, leveraging technology to provide a better delivery experience to customers while also keeping drivers and the public safe.
26. According to Mike Nettles, chief operating and growth officer for Papa John’s International, “Papa John’s is implementing Drivosity’s technology to improve delivery times, increase driver safety and ensure a more transparent experience for our guests. We are pleased with the results we have seen and continue to integrate Drivosity into more of our restaurants. Improving our team member and guest experience through technology is a key area of focus for Papa John’s and we thank Drivosity for being a strategic partner.”
27. Brian Moroney, CEO of Drivosity, added, “We are proud to bring our technology to the Papa John’s family. Their partnership and insight into delivery operations makes Drivosity a better company. We are fully committed to providing our customers with the best and most-reliable technology and will continue to innovate and enhance our solution to ensure bigger and better results.”
28. Papa John’s was founded in 1984 by “Papa” John Schnatter in Jeffersonville, Indiana. Schnatter turned the broom closet in his father’s tavern into a space where he could make and sell pizza to the tavern’s customers. The pizzas were so popular that Schnatter was able to rent the space next door to his father’s tavern and set up a proper pizza shop. That same year, Schantter invented Papa John’s signature dipping sauce, which has become a popular item.
29. Schnatter began franchising the Papa John’s concept in 1986 and by the beginning of the 1990s, there were 100 locations opened around the United States. Papa John’s went public in 1993 and a year later, the chain had grown to 500 stores. Papa John’s continued to grow throughout the 1990s and in 2001, the brand became the first pizza chain to offer online ordering.
30. Over the next two decades, Papa John’s kept up its expansion across the United States and also internationally. From 2010 until early 2018, Papa John’s had been the official pizza sponsor of the NFL. However, Papa John’s lost the partnership after founder John Schnatter engaged in controversial behavior.
31. Beginning in late 2017, Schnatter harmed Papa John’s reputation when many alt-right and Neo-Nazi websites began “claiming” that Papa John’s supported their controversial views based on statements that Schnatter had personally made. Due to the negative backlash, Schnatter stepped down as CEO of Papa John’s in December 2017, a position he had been in since he founded the company. Today, Papa John’s continues to work toward rebuilding the brand’s reputation while distancing itself from Schnatter.
Entrepreneur’s Franchise 500
32. Papa John’s ranked No. 44 on Entrepreneur’s 2019 Franchise 500 list.
Section II – Estimated Costs
- Please click here for detailed estimates of Papa John’s franchise costs, based on Item 7 of the company’s 2019 FDD.
Section III – Initial Franchise Fee, Royalty Fee, Marketing Fee, and Other Fees
- Please click here for detailed information on Uno Pizzeria & Grill’s initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2019 FDD.
Section IV – Number of Franchised and Company-Owned Outlets
- Outlets at the Start of the Year: 2,583
- Outlets at the End of the Year: 2,629
- Net Change: +46
- Outlets at the Start of the Year: 2,629
- Outlets at the End of the Year: 2,606
- Net Change: -23
- Outlets at the Start of the Year: 2,606
- Outlets at the End of the Year: 2,554
- Net Change: -52
- Outlets at the Start of the Year: 707
- Outlets at the End of the Year: 702
- Net Change: -5
- Outlets at the Start of the Year: 702
- Outlets at the End of the Year: 708
- Net Change: +6
- Outlets at the Start of the Year: 708
- Outlets at the End of the Year: 645
- Net Change: -63
Section V – Financial Performance Representations (Item 19, 2019 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 30, 2018, 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.
- The following data refers only to standard (or “traditional”) Papa John’s restaurants. Performance data for Non-Traditional Restaurants varies widely, depending upon the nature of the non-traditional location, number of events or sales dates, and other widely varying factors. Thus, this Item 19 is applicable to traditional Papa John’s restaurants only.
Full Year Only
- At the close of Papa John’s fiscal year, there were 3,337 total domestic (United States) Papa John’s restaurants, 646 of which were company-owned, including restaurants owned by franchisees in which Papa John’s has a majority interest (a total of 183 restaurants).
- However, the following data is drawn only from standard (or “traditional”) restaurants that were open the entire year of 2018 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 2,980, comprising 2,358 franchised restaurants and 622 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.
- Over time, worn-out or obsolete restaurant equipment will have to be replaced and leasehold improvements, signage, computer systems, and restaurant furnishings may have to be refurbished, remodeled, upgraded, or replaced. The following cash flow data does not include any reserves for funding any of these types of improvements or upgrades.
- 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 (622 Restaurants)