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What’s Wrong With Papa John’s?

Motley Fool Staff, The Motley Fool

While Papa John's (NASDAQ: PZZA) makes pizza, that's not the key to its success. The chain's chief rival, Domino's (NYSE: DPZ), has made it incredibly easy to order a pizza and track its path toward being delivered. Papa John's has fallen behind in technology and its stores are dated. New CEO Rob Lynch has to modernize the chain and change its branding to give it an identity beyond its "Better ingredients, better pizza" slogan, which is not very credible.

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This video was recorded on Sept. 3, 2019.

Nick Sciple: We talked a little bit about the controversy coming out of the original Papa John and those sorts of things. When you look at actual operating metrics of the business, what problems is Rob Lynch encountering as he takes the corner office at Papa John's?

Dan Kline: Comparable store sales have been declining. You can pinpoint the beginning of that to some of this controversy, but the reality is, Papa John's has failed in other ways. You might think of them as a pizza company, but the reality is, they're a convenience play and a technology company. Why do you order from Domino's? Domino's is the direct competitor here, and they've had a staggering amount -- I think it's 33 straight quarters of U.S. comp store growth, and over 100 internationally. Well, why is Domino's winning? Domino's is winning because they have made ordering a pizza insanely easy. You can text them an emoji. You can log into their app and repeat a past order. You can have deliveries sent to locations that aren't where you live. You're outside of the park, and Domino's shows up, and it knows how to get to you. That's where Papa John's stores have failed. Its technology is not as good. It stores look dated. Its advertising is generally based around whatever its limited-time offer is, and nothing ever feel special or good about it. The limited time offer will be like, "Hey, it's $7.99 for a pepperoni and sausage pizza." That's not that special, it's not that interesting.

So, what he inherits is a company that really needs to focus on rebranding itself in one area, but also rebuilding its infrastructure in another, and making it so if you either don't care between Papa John's or Domino's, or you like Papa John's more than Domino's -- we can throw Pizza Hut into the mix here, too -- you have to make it easier or as easy to get the pizza as the chain's rivals make it. Little Caesars has built its business around the idea that you walk in and the pizza is ready. What's the hook at Papa John's, other than, "better ingredients, better pizza?" Which, I think, if you've had their pizza, it's better pizza than maybe, I don't know, Ellio's, but not much else.

Sciple: Yeah. This "better ingredients, better pizza" idea really worked for Papa John's as they grew up as a business, but I think it's become much tougher for these large national pizza chains to compete as almost every town you're at, there's a new independent pizza store popping up every day, which has made it difficult to compete on quality. Really, when you're in pizza, there's three things you can compete on. It's either, you're going to have higher quality and better taste; you're going to have a cheaper price; or you're going to have convenience. As you mentioned, they've really struggled on the convenience side vs. Domino's. Pricing, I mean, it's difficult to see how much lower these prices can get with a $6 medium pizza coming from these companies. But, really, Papa John's has to reposition themselves to both drive higher quality, repositioning their stores, as well as do something on convenience with those tech investments.

Kline: Yeah, and that's the big problem. You can't go that much lower on price. I think it's harder to be cheaper than Little Caesars. It's very hard to be as technologically savvy as Domino's. So, the first thing that Rob Lynch has to do is take away the stigma. He has to at least make it so they're on an even playing field and you feel good about the brand so you would consider ordering it. Because it isn't better. Any town has better pizza. All of these five-minute, you walk in and they run the pizza through an oven, you get to pick exactly what you want, and they have weird toppings -- all of those places, many of which don't deliver because the nature of their pizza does not hold up to delivery, and Papa John's has had to build a pizza that's going to be durable, which doesn't necessarily translate to taste. But the first thing you have to do is reset the brand. They're going to spend about $40 million in the second half of the year with ads starring Shaq. Shaq has a lot of saturation. He advertises an awful lot of products. On the other hand, he's unbelievably likable. So, if Shaq's on TV telling you, "Hey, I'm on the board of Papa John's. I like their pizza. It's convenient. Here's a big fat guy who everybody likes telling you about pizza," that is not a bad thing, and that should help the brand.

The company is also spending another $40 million or so on its franchises, helping them by in some cases taking lower fees, in some cases not taking fees, and making an effort to help them modernize their stores and feel part of the family, to rebuild that trust that was lost.

Sciple: Yeah. You mentioned that $40 million, ramping up Shaq as their brand ambassador, you look at pizza, marketing really is a huge differentiator. When Domino's really started their big upswing, it was that Domino's Pizza, "Our pizza isn't very good, but we're working on it." And that really started the upswing. Seeing these significant investments in marketing, seeing them reposition themselves -- another thing, as well, as you've seen them scale up, when you talk about tech, their GPS delivery tracking. They're well behind Domino's there. But, there is a presence there.

Now, how optimistic are you, Dan, about the ability for these marketing tactics to succeed and make up some lost ground against Domino's and others?

Kline: I would say I'm cautiously optimistic. Only because -- and we've talked about this with the Starbucks, Dunkin Donuts comparison -- you don't have to be the leader, you just have to be better at following. Let Domino's pioneer drone delivery, all sorts of new technology. What you want Papa John's to do is to quickly be able to follow that. With a CEO who's more dynamic, who's trending -- they can do some stunts. Arby's did really well with limited-time offers. "We're going to have venison for one day," and it sells out. I think they're going to do some things like that at Papa John's to jump-start the brand, to even get you to download the app. "Oh, my God, they're going to have," I don't know what kind of pizza it is, "Shaq's favorite recipe that his mom makes," or whatever it is, whatever excites the public. They can do it. A lot of technology that was once proprietary is now off-the-shelf. But, there's a lot of work to be done.

Daniel B. Kline has no position in any of the stocks mentioned. Nick Sciple has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com