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Case 4 Teaching Note Papa John’s International, Inc.
299
On the whole, we like Papa John’s position on the map because its product offerings and distribution channel
strategy are relatively distinct from those of its key rivals. It is the only flexible distributor of pizza (dine
Although rival chains have brand-name reputations and brand-name recognition, their menu selections are
either much broader or narrower than Papa John’s.
n Pizza Hut has a vastly broader menu selection and 600 of its newer outlets (opened since 2011) do not
n Domino’s, which also has a vastly broader menu, has experienced past problems with its pizza recipe
n Little Caesars’ focuses on cutting costs, offers pizza primarily via takeout, and its menu breadth and
Despite some recent moves to broaden its product line to appeal to customers wanting more than pizza,
Papa John’s, by contrast, remains almost exclusively focused on pizza. All of its franchisees are required to
3. What do you see as the key success factors in the pizza segment of the quick serve
restaurant industry?
These may vary depending upon whether the operator competes as a global chain or as a local independent—
TABLE 2. Key Success Factors in the Pizza Industry
Key Success Factor Global chains Local independents
Location X X
Distribution channel X
Menu breadth X X
Customization X
Price X
Relative cost (scale) X
International expansion X
Quality X X
Healthy options X
Social media/mobile app technology X X
Community service X
Listing industry Key Success Factors (KSFs) should be an enjoyable part of the class discussion—we like
Narrowing down the list of priority factors is often subject to debate, but students should agree that location
and quality are vital for all players in the market.
Case 4 Teaching Note Papa John’s International, Inc.
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For the global chain operators:
n The chains are in the business of selling franchises, not necessarily pizza.
n Consequently, global expansion is paramount as the U.S. market becomes saturated
For the independent operators:
n The independents are in the business of selling service.
n Consequently, to lure customers away from the chains, independents need to:
• Outperform rivals on quality,
4. What does a SWOT analysis reveal about the overall attractiveness of Papa John’s
situation?
Papa John’s Resource Strengths and Competitive Assets
n The company’s track record
n Strong franchising model system
n Quality Control Centers
n Commitment to community service and social responsibility
Case 4 Teaching Note Papa John’s International, Inc.
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Papa John’s Resource Weaknesses and Competitive Liabilities
n Still # 3 in the market
n Continued reliance on 723 company owned stores plus an additional 50 in next five years (5% of 1,000
new outlets) limits profit potential
Papa John’s Market Opportunities
n Opening Papa John’s stores in more geographic areas and in more countries
n Developing new formats for pizza delivery and distribution, i.e. “hole in the wall” outlets in metropolitan
areas where customers do not necessarily want either a dine-in or take-out experience
The External Threats to Papa John’s Future Well-Being
n Continued economic uncertainty in domestic markets and slowdowns in international markets
n Customers shun pizza for healthier choices
n Systematic risks associated with the global restaurant industry
n Merger between Little Caesar’s and of the top two market leaders
5. What are the primary components of Papa John’s value chain?
Four primary value chain components stand out:
1. Quality Control Centers
2. Supply chain management
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3. Restaurant, take-out, and delivery operations
4. Marketing and brand-building (including promotions, website management, mobile app development,
6. What are the key elements of Papa John’s strategy?
Papa John’s long-term growth plan is to grow global retail sales by expanding its franchise program. During
2013, franchisees opened 386 Papa John’s restaurants, of which 171 were located in North America and
215 internationally. However, we believe that international markets will provide better growth opportunities
n Build and maintain strong brand loyalty
n Operate Quality Control Centers across four regions
n Staff and managerial training and development
n Incentivize new franchisees
n Promote service to the community
7. Which one of the five generic competitive strategies discussed in Chapter 5 most
closely approximates the competitive approach that Papa John’s is employing?
We think Papa John’s generic strategy is a broad differentiation strategy. The company’s strategy to move
to a broader product line and distribution choices than, say Little Caesar’s, indicates this. Still, as the
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8. Based on careful examination of the data in case Exhibit 1, how would you assess Papa
John’s financial and operating performance?
You should expect class members to use the financial ratios in Table 4.1 of Chapter 4 in performing
calculations to determine what aspects of Papa John’s financial performance might qualify as impressive. In
addition to the ratios in Table 4.1, they will also need to calculate compound average growth rates (CAGR)
TABLE 3. Financial Ratios for Papa John’s International, Inc., 2009–2013
FYE— 2013 2012 2011 2010 2009
Return on sales, % 4.8% 4.6% 4.5% 4.7% 5.0%
Return on assets, % 15.0% 14.1% 14.0% 12.6% 13.6%
Operating return on assets, % 22.9% 22.5% 22.3% 20.8% 24.3%
4Y CAGR %
Total Revenues 7.5%
Domestic sales 6.0%
Domestic Royalties & Franchise Fees 7.1%
Domestic Commissary 8.5%
Year-on-Year Growth, %
Domestic sales 7.3% 12.6% 4.7% -0.3%
Domestic Royalties & Franchise Fees 3.1% 8.0% 5.9% 11.5%
Domestic Commissary 6.0% 7.4% 11.8% 8.8%
Int’l Royalties & Franchise Fees 10.6% 21.8% 23.1% 12.6%
Int’l Rest. & Commissary 25.7% 25.6% 27.3% 17.5%
Notes: (1) Calculated from Case Exhibit 1.
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The following aspects of Papa John’s financial and operating performance ought to be identified and
highlighted by class members:
■ Growth in total revenues has matched or exceeded industry growth, fueled by International Royalty and
■ Net income and EPS are both growing at double-digit rates, providing evidence that Papa John’s is
■ The profitability picture is encouraging due to stable returns on sales (about 4.5%–5.0%), returns on
■ Total Asset Turnover has been slightly improving over the five fiscal years, from about 2.70x to 3.10x,
■ Debt leverage has increased considerably over the five fiscal years, but it appears that borrowings are
■ On balance, Papa John’s appears to be in stable if not superior financial health and is well-positioned for
Advanced or superior students should also conduct an analysis of Papa John’s operating results by source
TABLE 4. Segment Analysis for Papa John’s International, Inc., 2011–2013
% of
Total Revenues
Year-on-year Growth
Rate, %
FYE 2013 2012 2011 2013 2012
Revenues from external customers:
Domestic company-owned rest. sales 44.1% 44.1% 43.2% 7.3% 12.6%
Domestic commissary 40.2% 40.7% 41.7% 6.0% 7.4%
North America franchising 5.8% 6.0% 6.1% 3.1% 8.0%
International 6.2% 5.4% 4.8% 21.5% 24.5%
All others 3.7% 3.8% 4.2% 4.1% 0.6%
% of Total rev. from Internal Customers
Income (loss) before income taxes
Domestic company-owned restaurants 5.4% 6.4% 5.5% -9.2% 31.5%
Domestic commissary 6.5% 6.3% 6.0% 10.2% 12.4%
Notes:
(1) Calculated from Case Exhibit 2.
(2) nmf = not meaningful figure.
Case 4 Teaching Note Papa John’s International, Inc.
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The following conclusions can be drawn from careful inspection of the relationships.
■ North America franchising is stable, low growth but carries high profit margins, so is a “cash generator”
■ International revenues remain a relatively small but highly important growth sector in Papa John’s
■ Domestic commissary and domestic restaurant sales dominate Papa John’s revenue streams but throw
9. What 3–4 top priority issues does Papa John’s management need to address?
Although Papa John’s is financially healthy, it nevertheless faces considerable challenges.
■ Whether or not to remain dependent on growth via franchising
• How to build out that model in international markets
■ Rivals command a 94 percent share of the $43 billion worldwide pizza market.
• Papa John’s is a distant third behind the top two chains, Pizza Hut (12 percent share) and Domino’s
(10 percent).
■ Other external trends might impact Papa John’s future growth trajectory and competitive position,
including:
• Increasing consumer health and diet awareness,
• Growing use of technology in the industry (e.g. social media, on-line ordering via mobile apps),
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10. What recommendations would you make to Papa John’s management team? At
a minimum, your recommendations should cover what to do about each of the top
priority issues identified in Assignment Q.
Students should be pressed to offer practical action recommendations to address the issues identified in the
prior question. In our view, there should be little debate that Papa John’s current strategy is working well and
at most may need minor refinements as suggested earlier. That is, we do not recommend any bold departures
from Papa John’s current strategic initiatives—the company does not appear to be in a position to launch
Epilogue
On May 16, 2014, the company announced:
Papa John’s International Inc. announced the promotion of Steve Ritchie to the position of Chief Operating
Officer. In addition, the Company’s Founder, Chairman and Chief Executive Officer, John Schnatter, will
assume the additional role of President of the Company, continuing to focus on all aspects of the Company’s
business, while also acting as brand spokesperson.
Analysts in September 2014 generally held a positive view of the pizza delivery market: rivals will benefit from
the challenging economy because of the relative value of pizzas versus other food categories. Analysts believe
that Papa John’s will gain market share due to the quality of its ingredients, as consumers become more health
conscious. Further, we think the company has significant growth opportunities in international markets, given
that it has about 1,000 restaurants outside the U.S. and Canada. We expect that number to grow at a mid-single-
digit pace per year for the next several years. Finally, rising food costs should have a lower-than-peers impact on
the company, given its franchise structure. Financial results for Papa John’s International for the quarters ending
March 31, 2014 and June 29, 2014 shown in Table 5. Further updates are available from the company’s website.
Case 4 Teaching Note Papa John’s International, Inc.
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TABLE 5. Quarterly Financial Results for Papa John’s International,
March 31, 2014 and June 29, 2014
As Reported Quarterly Income Statement
Report Date 06/29/14 03/30/14
2Q 1Q
Scale $000 $000
Domestic revenues—Company-owned restaurant sales 170000 178193
Domestic revenues—franchise royalties 20983 22614
Domestic revenues—franchise & development fees 132 144
Domestic revenues—domestic commissary sales 150581 164047
Domestic revenues—other sales 13595 12750
International revenues—royalties & franchise & development fees 6317 5779
International revenues—restaurant & commissary sales 19256 17850
Total revenues 380864 401377
Domestic Company-owned restaurant expenses—cost of sales 42030 45156
Domestic Company-owned restaurant expenses—salaries & benefits 45805 47583
Domestic Company-owned restaurant expenses—advertising & related costs 15354 16256
Domestic Company-owned restaurant expenses—occupancy costs 9446 9311
Domestic Company-owned restaurant expenses—other operating expenses 25220 25287
Total domestic Company-owned restaurant expenses 137855 143593
Domestic commissary & other expenses—cost of sales 118470 128924
Domestic commissary & other expenses—salaries & benefits 6847 7024
Other domestic commissary & other operating expenses 16215 15855
Total domestic commissary & other expenses 141532 151803
International operating expenses — —
Other operating expenses 13221 11431
International restaurant & commissary expenses 15876 14885
General & administrative expenses 33562 36966
Other general expenses (income) 1964 1533
Depreciation & amortization 9855 9164
Total costs & expenses 353865 369375
Operating income (loss) 26999 32002
Source: Papa John’s International 10-Q, March 31, 2014 and June 29, 2014.
