How Papa John’s buried Papa John

Pizza runs on less floor space than almost any other fast-food format, and Papa John’s has the smallest store in the set at 1,250 square feet against 2,500 at Chipotle, 3,250 at Shake Shack and 4,000 at McDonald’s — a third of the footprint, a fraction of the staff, and almost all of it takeout or delivery.

The supply chain is the business, not the pizza. Papa John’s sold $869 million of dough, cheese and packaging to its own franchisees in 2022 against $137 million in franchise royalties — the ingredients earn more than six times what the brand name does.

That markup is specific to pizza. McDonald’s, Denny’s and Popeyes buy through not-for-profit member co-ops so franchisees pay suppliers at cost, while Domino’s and Papa John’s own every step, add a 5–10% markup and book it as revenue. Domino’s cleared $245 million on $2,755 million of supply sales in 2022; Papa John’s cleared $58 million on $869 million.

Papa John’s has always been third and never close. At the end of the founder’s first run in 2004 it had 2,829 stores worldwide against 7,757 for Domino’s and 12,274 for Pizza Hut, and it was outspent on advertising four to one, $38 million against Pizza Hut’s $153 million.

John’s answer to being outgunned was to be the only person in the category with a face. Fresh dough never frozen, real mozzarella, vine-ripened sauce, a garlic cup and pepperoncini in every box, and $8 million spent to become the first pizza chain to take orders online. System sales at all locations grew from $619 million in 1996 to $1.823 billion by 2004.

The growth was bought with other people’s money. Franchised stores tripled from 857 to 2,260 while company-owned stores went from 303 to 569, and any operator committing to ten or more locations could borrow the build cost directly from Papa John’s on 20% down. Franchise royalties tripled to $50 million — and both company restaurant sales and supply sales ran about eight times that.

Then the home market stalled. Average annual sales at a domestic franchise fell from $674,000 in 2000 to $649,000 in 2003, company operating margin more than halved from 9% in 2002 to 4% in 2004, and franchisee relations turned hostile enough that the board took the company off its founder.

The overseas bet was the tell. Papa John’s paid $32 million for the UK chain Perfect Pizza intending to convert its stores, and by 2004 the entire international division earned $33 million against $895 million at home — under 4% of revenue after eight years of trying.

Nigel Travis arrived from Blockbuster in 2005 forbidden to touch the price. John was still chairman and would not let anyone discount the pizza, so Travis discounted everything around it: DVD coupon tie-ins with Netflix, Sony and Blockbuster, a run of dessert lines, and venue deals with Six Flags and LiveNation.

His three years produced the first billion-dollar year. Revenue rose from $942 million in 2004 to $1.132 billion in 2008, and the average domestic franchise went from $656,000 to a record $724,000. Operating margin swung from 4% to 10% and back to 6% — Travis traded margin for cash flow, exactly the reverse of what he was later accused of.

Overseas expansion was his real achievement. International locations more than doubled from 267 at John’s exit to 565 at his own, with first stores in Poland, Turkey and Russia and China doubled — and he cut John’s Perfect Pizza experiment loose after a year at an eight-figure loss.

Back in charge, John did not break what he inherited. Papa John’s posted positive comparable sales every year from 2005 to 2015 — 4.3% at the start, 0.1% through the worst of the recession, 6.2% in 2014 — and by 2015 the run stood at twelve consecutive years, the only chain in the category to manage it. The market had sorted into a price ladder with Little Caesars at $5 and Papa John’s on top, which is exactly where he wanted it.

The peak was built by turning the dial back toward franchising, including to the athletes — the NFL and MLB endorsers John signed took restaurants of their own. Franchised locations grew from 2,765 in 2008 to 4,456 in 2017, the chain passed 5,000 stores in 2016, and by 2017 supply sales of $734 million plus royalties of $107 million outweighed the $817 million taken by every company-owned restaurant combined.

Then one answer about the NFL. John blamed the league’s leadership for falling ratings and the press reported it as an attack on protesting players. Operating income fell from $151 million in 2017 to $31 million in 2018 — a 79% collapse in twelve months on revenue that only dropped 7%.

Ritchie’s fix was to delete the only thing that made the brand distinct. He matched Domino’s and Pizza Hut on value deals and sold pizza at the lowest prices in company history — something John forbade outright and Travis would not attempt during the Great Recession. Revenue still fell from $1.783 billion in 2017 to $1.619 billion in 2019.

The ally Ritchie recruited to protect himself removed him instead. Starboard Value, which had taken Olive Garden holding under 10% of the stock, fired him, enacted a poison pill against John and installed Arby’s Rob Lynch — who reversed the discounting, put flavour into the crust for the first time, and drove revenue to a record $2.102 billion in 2022 while still outspent five to one on media.