Value to the customer is key in the eyes of Papa John's (NASDAQ:PZZA) management. There’s also the matter of competing with other pizza companies that are deeply discounting their pizzas. But Papa John's is not changing its strategy to compete with them.
The big players, as well as the small regional players, have begun targeting a segment of the market that wants value in pricing.
“Some of that pickup has been driven through extreme value. I think the good thing for the Papa John's brand is we are much less reliant upon extreme value seekers in the deep discounting part of the segment," said John Schnatter, CEO of Papa John's, in the fourth quarter conference call. "Little Caesar's sells $5 pizzas, Domino's sells $5.99 medium pizzas and Pizza Hut has been selling $6.99 medium pizzas. And you are starting to see a lot of independents and regionals trying to follow suit to stay competitive. The good thing is, we didn't make any change to our strategy in the quarter and still produced 3% comps."
- Warning! GuruFocus has detected 2 Warning Signs with PZZA. Click here to check it out.
- PZZA 15-Year Financial Data
- The intrinsic value of PZZA
- Peter Lynch Chart of PZZA
The company has not stayed still. Outdated POS systems were nixed, and Papa John's invested in a new system, FOCUS. Instead of going into international markets alone, Papa John's is seeking a high quality franchise partner in the Beijing and Tianjin markets. It's the United Kingdom market that has helped the company even more, with three straight quarters of double-digit comp growth. More important, the company also successfully opened its 40th country in Bolivia and is fast approaching 1,500 international stores.
Last year Papa John's grew revenues by 2.5%, and earned $1.2 million in the fourth quarter from North America franchising.
"Our passion and commitment to delivering on our brand promise has never been stronger," said Steve Ritchie, Papa John's COO. "We will continue to leverage our leadership position in product quality, technology and branding as we continue to build out Papa John’s restaurants around the world."
But Papa John's has made itself a digital leader, not just a follower. With digital advantages and brand strength, the company has focused on technology as the main factor for its sales as well as its market share (the company was rated on having the best mobile experience in a Search Agency Report). It now looks as if Papa John's growth will be dictated by how it executes the digital strategy. After adding Google Wallet as a payment method, the company is still exploring new and alternative payment methods and is focused on constantly improving and updating its apps and website.
One of the biggest challenges in the pizza industry is momentum — competing with both Mexican food and sandwich chaines. While Papa John's is primarily known in the U.S., it has moved into more difficult markets such as China, which has not turned out the way Schnatter and management expected. After running into roadblocks when it came to expanding into China, Papa John's finds itself under pressure to take a different approach to cracking China as a market. Competitors like Domino's have already announced plans to enter China, which is likely to unleash a even more competition as most of the company's business in China is through franchises.
In 2015 Papa John's rolled out 182 International locations in Israel, France and Spain, with the company on track to open its 5,000th store globally this summer. Schnatter has also partnered with the likes of the NFL players J.J. Watt and Peyton Manning, the Carolina Panthers and owner Jerry Richardson.
But it’s Domino's that will be the toughest company to bite into — and possibly Schnatter's greatest opportunity to pummel the competition. Ease of ordering, particularly Domino’s zero click ordering, is one of the top reasons many consumers still eat in. That kind of brand value means hungry pizza lovers are likely to remain loyal to the Papa John's. It’s expected that Papa John's will continue to iterate and improve its mobile app, as well as focus on driving even more orders from mobile. The company is now one of the only brands in the category with a fully responsive site and has been redesigning their iOS app, significantly improving their ratings among users and against the competitors. At the same time, Schnatter is well-aware that competition is increasing and was careful to give the competition credit when saying "One of our largest competitors last year during Q4 and Q1 kind of got way off the strategy. And I think they got a little bit better on strategy this year. So I think we felt the benefits of it in a year ago."
“We just continue to get better and better in technology," Schnatter said. "Being the first national chain to launch online ordering back in 2001 and today, over 50% of our orders come in from the digital side of the business and we're seeing over 25% of our stores in the U.S. with over 60% online sales mix. We know we're doing the right things to continue to grow it. Our focus is not necessarily on bells and whistles, it's on the customer experience in that transaction path."
Analysts agree. "There are a lot of opportunities here for Papa John's and Domino's," said Christopher O'Cull, a restaurant companies analyst at KeyBanc Capital Markets. "Smaller players are having difficulty providing digital support and platforms."
Certainly Schnatter, Ritchie and other executives have spent many hours trying to make Papa John's more competitive through innovation and branding. But listen to the Schnatter at any length, and it’s apparent he’s still focused on growth through operational excellence, partnerships and digital initiatives. Schnatter spouts off terms like "digital sales" and "loyalty" frequently. On his agenda, he's focused on mission, commitment, product innovation and fundamentals.
Nowhere, perhaps, is the company's customer first strategy more evident than the leverage of technology investments to enhance the customer experience. The company launched Papa Rewards in 2014. The company is studying different ways to enhance the value of the program, and pledges to only come out with improvements that are good for customers. The company is trying to foster customer loyalty by making the best possible pizza regardless of cost. Same goes for making it as easy as possible for the customer to order and pay. Almost two years ago, the company launched Pay share, a way to give consumers way that is safe and secure to split their bills when placing their order.
While many smaller pizza chains are not innovating, Papa John's is. The company launched a redesign of their digital platforms and have said there are several additional upgrades on the way. The platforms now use responsive web design technology to deliver a better customer experience regardless of which digital channel the customer uses. Papa John's says millenials, who the company sees as a key pizza demographic, are responding well to these new initiatives. Online sales are still growing as well, coming in at over 50% of all North American sales.
Unlike creating a new menu item, the company's better ingredients initiative has been in constant development and improvement. As Schnatter has said "through our commitment to better, we will grow our brand, enhance our quality, boost our sales, and earn our customers' loyalty one customer at a time."
Schnatter emphasized the company's biggest change that sets them apart is becoming the first national pizza chain to announce that they removed artificial flavors as well as synthetic colors from their entire menu, which includes all pizza ingredients, pizza toppings, dessert items and sauce selections. But Papa John's is only beginning to discover how its better ingredients way of life can do to the company's legacy — starting with investing in better ingredients to set the gold standard.
Already, Schnatter said, the new menu changes have found success with consumers. In July 2015 the company introduced a Papa's Lighter Choices menu as well as a Online Nutrition Calculator. In the meantime, the company has expanded beyond just classic pizza, introducing "grilled chicken pizza toppings and chicken poppers will consist of poultry that is raised without human and/or animal antibiotics, as well as fed with a 100% vegetarian diet, by summer 2016."
Sean Muldoon, who has been at the company for 17 years, was promoted in February to chief ingredients officer. From 2001 to 2005, Muldoon was the company's vice president of strategic supply chain management. From 2007 to 2009, Muldoon was vice president and general manager of Preferred Marketing Solutions, a subsidiary of Papa John's International. He recently served as senior vice president of R&D, quality assurance and supply chain.
Back at the headquarters in Louisville, Schnatter and Ritchie are watching Muldoon implement a Clean Label effort—"a gold standard for ingredients, as well as one of the cleanest pizza ingredient labels among top national pizza chains," Muldoon said. The initiative, which is making it so the customer gets the best pizza and the best ingredients, seems to fit right in with the company's motto, "Better Ingredients. Better Pizza." But it wouldn’t be the first time the 32-year-old company focuses on living by their commitment to provide better ingredients and better pizza.
As Schnatter noted in the company's February conference call "our success depends on a belief in better, from better ingredients to a better baking process, to even a better box, we are prepared to pay more to deliver better."