Papa Johns franchisees accelerating growth this year in light of incentives

Dive Brief:

Several Papa Johns franchisees are moving up domestic units initially planned for the first half of 2025 to Q4 2024 to lock in the savings related to an advertising incentive offered by the franchisor, BTIG said in a report based on discussion with several franchisees.
The incentive, which eliminates an operator’s national ad contribution for five years for new restaurants opened this year, will save $330,000 in new development costs, BTIG estimated. The payback period on a new unit will be reduced to roughly 3.2 years compared to 5.5 years, the analyst said in the report emailed to Restaurant Dive.
Earlier this year, Papa Johns laid out a Back to Better 2.0 plan that included a $20 million investment in national advertising and made local ad spending optional for franchisees. The plan also included a focus on domestic and international expansion.

Dive Insight:

With the turnaround plan in the works, franchisees told BTIG they are disappointed about CEO Rob Lynch’s departure, who largely spearheaded the chain’s Back to Better initiative. Lynch will be leaving the chain in May to become Shake Shack’s CEO.

“Franchisees highlighted all the major structural changes happening this year, including the commissary margin increase, advertising change and development incentives, all while the Board searches for a new CEO and the executive ranks are historically thin,” BTIG said.

Most, but not all, franchisees have already reduced local advertising spending either by 1% of sales or entirely following Papa Johns’ plan to increase national advertising. Franchisees said they are “anxiously awaiting the promised sales bump,” BTIG said.

Operators said they largely expected an uptick in sales during Q2 due to the increase in the chain’s national ad spending. BTIG said the brand should have a much higher average check following the current promotion of XL New York Style Pizza ($13.99) compared to its year-ago promotion of a $7.99 Cool Ranch Dorritos Papadia. The benefit of this campaign could be seen in May, BTIG said.

A Papa Johns spokesperson said the chain has seen “positive reaction from our franchisee partners regarding enhancements to our marketing spend and new development incentives.” Last week, one of its biggest franchisees, Nadeem Bajwa of The Bajco Group, announced plans to open 50 new units last week, the spokesperson said.

One of the biggest challenges still facing franchisees is rising development costs that are higher than pre-COVID-19 costs and much higher than peers “with no clear path to lower this cost being heard by franchisees,” BTIG said.

Comparing Papa Johns’ franchise disclosure documents from March 2022 to March 2024 revealed an average $55,000 increase in furniture, fixtures and equipment costs, BTIG said. On the higher end, investments are $102,000 for FFE. New unit development cost are now roughly $630,000 versus about $425,000 for a similar format at Domino’s, BTIG said.

“Historically, the development cost for both brands were similar, but over the past 18 months, development costs for Papa John's have diverged significantly, and franchisees are unsure why,” BTIG said, adding that the FFE package is not different or innovative enough to require such a steep increase.

“In our view, this spike in FF&E costs needs to be resolved to improve unit economic returns and healthier organic growth across the domestic system,” BTIG said.

Papa Johns is working alongside its operators to “optimize new unit build costs, including FF&E,” the spokesperson said.

“We expect these efforts will drive down the overall investment required for opening new restaurants to a range that is comparable to other pizza concepts,” the spokesperson said.

Papa Johns’ incentive program also applies to restaurant openings in 2025, and the company will share more details on its development plans when it shares its Q1 results on May 9, the spokesperson said.