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Papa John's Business Strategy Analysis...

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Papa John’s Case Analysis Introduction This case will analyze the situation of the pizza restaurant Papa John’s by examining the firm’s competitive forces, its strategic position in the quick service industry, the industry key success factors, a SWOT analysis of the company, the components of the value chain, elements of Papa John’s strategy, its financial and operating performance, and by matching Papa John’s approach to a generic competitive strategy. The case study will then identify a few issues that should be addressed in the near future and finally propose alternatives to address those issues and select the best fitting one. Analysis Five Forces Bargaining Power of Suppliers (HIGH): The bargaining power of suppliers refer to how many flexible options there are in purchasing their ingredients from. For Papa John's the bargaining power of suppliers is high because Papa John's mainly buys their ingredients from Quality Control Centers. Since they depend only on QCC they may potentially face difficulties concerning direct material costs. Bargaining Power of Buyers (HIGH): Bargaining power refers to the pressure consumers can exercise on sellers to get a higher quality product at a lower price. In Papa John’s case it is high, because the main product “Pizza” is standardized and undifferentiated to some extent. Consumers will shop where coupons and discounts are offered. Additionally, Buyers are well knowledgeable about the quality, prices, and costs of all competitors, which make the buyer costs of switching to competing product very low.

Threat of Substitution (HIGH): Threat of substitution is the competitive pressure coming from the producers of substitute products. Papa John's pizza substitution is very high because there are many other choices that customers can substitute from their pizza. Consumers have other alternatives such as buying a low cost frozen pizza from a variety of grocery stores. They can also choose to purchase a larger cooked or uncooked pizza from Costco for only $10.99. Threat of Rivalry (HIGH): The intensity of rivalry among competing sellers within the pizza industry depends on a number of recognizable features. Papa John's has a high rivalry level because of the existence of similar competition both franchises and local family owned pizza restaurants. Which they all sell similar products at a comparable price, and they have roughly similar competitive strength; such as: Pizza Hut, Domino's Pizza, Little Caesar's. Papa John's focuses on differentiating themselves with higher fresh quality ingredients for a better pizza.

Threat of New Entrants (HIGH): Threats of new entrants are high due to the exciting market saturation and similarity in products offering. The initial capital requirement to open a family pizzeria restaurant is not significant which makes it easier to open a new pizza restaurant. Moreover, local pizza restaurant doesn’t require a high fixed cost nor a higher storage costs.

Which of the five generic competitive strategies discussed in chapter 5 most closely approximates the competitive approach that papa John’s is employing? Papa John’s pizza aims for high- quality menu offering, efficient operating system, employee training and development, and an effective marketing programs. Which can be classified as a Broad differentiation strategy. Papa John’s involve offering a superior quality pizza using only ingredients that are supplied from Papa John’s Quality Control centres around the world to ensure consistency and superior quality among all location, while some of their competitive were focused more on low cost. Papa John’s has established a strong brand loyalty in the pizza industry because they carefully chose attributes that buyers find appealing and have unique value proposition, such as hiring the best employees and offer educational training programs, the company also applied marketing innovations that contributed to its success, and additionally Papa John’s is very active in the community supporting different causes

Papa John’s Position in the Quick Serve Pizza Industry Given that taste is completely opinionated when comparing different pizza restaurants, the strategic group f map will focus on the two more prominent and quantifiable amounts for the pizza segment; price and products offered.

What this Map Means for Papa John’s Unfortunately based off the strategic map, Papa John’s isn’t very well positioned. They have the highest price of the “big four” pizza chains, and are only middle of the pack for products

offered. Ideally, a company would want to be high in products offered and low in the price segment. Pizza Hut is the closest to that ideal spot right now, however that spot is still open.

Key Success Factors The essential key success factors of the pizza industry can be debated to death. With that being said, these are three of the most prominent factors that most people would agree on. Taste/Recipes: Simply put, if your pizza doesn’t taste good, your pizza restaurant is much less likely to be successful. As mentioned earlier, taste is opinionated and is going to change from person to person; but usually when the taste is bad enough that it leads to a pizza restaurant being unsuccessful, most people would agree that the taste isn’t great. The taste of your pizza should want to make customers coming back. However, a pizza industry needs to be able to respond to a volatile marketplace and keep up with industry and consumer trends. For example, if every other pizza restaurant starts offering gluten free pizza, you need to offer gluten free pizza. Price: Since pizza is generally viewed as a product that’s affordable and can feed a whole family, your price needs to be competitive with other pizza restaurants to be successful. For some people, it will be hard to justify not buying from Little Caesars or Pizza Hut since they are some of the more affordable pizza restaurants in the industry. Employees/Customer Service: No matter how good your taste is, or how affordable your pizza is, people aren’t going to continue with a pizza restaurant if they feel uncomfortable interacting with the employees there. That is why it is so essential to have good employees in restaurants. Employees are often the first interaction the customer has with the restaurant and can often influence if the customer had a good or bad experience with that restaurant.

SWOT Analysis Evaluating Papa John's SWOT analysis as presented in Exhibit F, it is apparent that their strategy is to provide the best quality pizza while ensuring that they meet the expectations of their customers. These strengths gave them the competitive advantage over their competitors and the opportunity to create brand awareness worldwide. On the other hand, they offer fewer food options, and they also have limited number of stores. Currently, Papa John's has over 5,000 locations worldwide, and one of their biggest competitors which is Pizza Hut has over 13,000 locations worldwide. Papa John's biggest threats are their competitors. Aside from having more stores than Papa John's, their competitions also provide more variety in their food menu items. Health conscious customers have also been a threat to Papa John's. To gain a more competitive advantage, they can offer new menu items to meet the needs of these consumers. Papa John's can also build more stores worldwide to create

better brand awareness. There are three types of distribution in the pizza industry, and Papa John's can add Take N' Bake in their delivery options. Value Chain Supply Chain Management Strong employee training is one of Papa John's best assets. They make sure that they provide regular training to their employees and offer monetary incentives depending on the employee's performance as well. Their franchising system is one of their focuses as a company. Experienced operators in the restaurant industry are the only ones allowed to franchise Papa John's which made them as one of the best franchise opportunities in the restaurant industry back in 2013. Operations Papa John's has a Quality Control Center where all their branches purchase the fresh ingredients they use in their day-to-day operations. According to the book, "the Quality Control Center also specified operating practices and restaurant layouts for franchisees to facilitate efficient restaurant operations in all locations." Distribution Papa John's provide delivery, traditional sit-down, and carry out for their distribution options. Customers have the option of calling or ordering online to make orders. Sales and Marketing They have ongoing promotions which provide their customers discounts and upgrades on their food items. Also, they have a website and mobile application which makes it easier for customers to see these promotions. Customers can also use the website and mobile application to make orders. Furthermore, they advertise through the use of social media and sponsoring charities. Service They provide assistance to their customers using their customer service feedback page on their website. This is where customers can file complaints or comments regarding their experience with Papa John's. There are also on-site managers working at every location to ensure that they provide the best customer service. Strategy The overarching strategy that Papa John intended to follow was to build the strongest brand loyalty in the pizza industry. The organization believed that a strong brand loyalty could give them a competitive advantage through attracting and retaining customers in the long term. Papa John identified five key objectives that, if accomplished, would help them achieve their brand loyalty strategy. The first two of these was the presence of high quality menu offerings and improvements to their operating systems. High quality in this case meant using fresh and

pure ingredients, for example using real tomatoes rather than tomato paste in their sauces and using only 100% beef and pork products. High quality also meant consistency of ingredients across franchises and this was achieved by standardized ingredients in Quality Control Centers set up by Papa John’s headquarters that franchisees were required to purchase from. Having these centralized suppliers for franchises made operations more efficient and improved standardization. The third objective was to encourage employee training and development to ensure best practices across the board. Papa John’s offered continual development opportunities to employees and implemented performance based compensation for all employees, not just management. Fourth, Papa John’s looked at making their marketing more effective. This aspect of their strategy focused on becoming leaner and cutting down marketing expenses in the international markets, whose smaller size did not justify a larger advertising budget. The final component of their strategy was to improve their franchising system. This was of importance since franchising was at the core of business expansion. To encourage growth through franchising Papa John’s waived the up front $25,000 franchising fee, reduced the royalty percentage charged, and provided two pizza ovens to the new restaurant free of charge. These efforts lowered the cost of a Papa John’s franchise by $60,000 and gained them accolades as a top choice for potential franchisees.

Financial and Operating Performance Looking at Papa John’s financial information, as presented in exhibit A, tells a story about the company’s relative performance. This story becomes even clearer when that information is converted into financial ratios. The specific financial ratios are listed in exhibit B. In general Papa John is displaying strong good performance. Their profit margin is stable and slightly below the industry average of 6%. The operating margin is better at 7% which is above the 5% standard. While this might not seem like a large difference, in a market where the margins are as thin as the food service industry it is significant. Additionally, they have an extremely strong return on equity and a high price-earnings ratio. This is most likely due them pursuing an aggressive policy of share buybacks, demonstrated in the reduction of stockholder equity from 181,514 to 138,194 from 2012 to 2013. This policy of share buybacks likely caused investor confidence in future growth to increase which explains the strong price-earnings ratio. On the other hand, their level of debt as evidenced by their growing debt to asset ratio and over 1.00 debt to equity ratio, is concerning. From 2012 to 2013 Papa John’s almost doubled their level of debt from $88,258,000 to $157,900,000 which explains these poor ratios. Their

dividend yield is also poor in 2013 and in previous years they did not issue dividends at all. Investors who desire large or consistent dividends should be wary of investing in Papa John’s. Issues Growing use of Technology in the Industry With the rapid change in technology, it is important to address the growing needs of consumers. Papa John's has allowed online food ordering, text orders, and has phone applications that their customers can use. Their competitors such as Pizza Hut have been creating high brand awareness through the use of different social media platforms. It is essential for them to create a stable platform online where customers can easily connect with the business. On top of helping advertise Papa John's, it will target the younger market that uses social media more often. Rising Ingredient Costs In recent years the price of standard pizza ingredients has risen significantly. The wheat used to create the dough has risen 3.4% from 2007 to 2012 ,and the milk used to make the cheese rose 27.3% in 2010. These cost increases have cut into the already extremely thin profit margins of Papa John’s and the strategy of raising prices to offset these costs has proven ineffective due to high price sensitivity of consumers. Papa John’s Negligence to Go Healthy It is no secret that pizza isn’t the healthiest thing to eat; whenever you put cheese, sauce, and meat onto bread, you’re going to be eating a high amount of calories. People have started to be aware of that, and are starting to make healthier choices when eating out. This of course, is a problem for the pizza industry. As consumers become more informed, pizza restaurants in the quick serve industry will have to give consumers a reason to keep ordering their pizza. Now some pizza chains have responded well to the marketplace shift, while others have not. Unfortunately, Papa John’s is one of the chains that have not.

Alternatives Papa John’s could introduce healthier menu options (low calorie, gluten-free) and charge a price premium for them. For example they could offer healthier pizzas made with whole wheat dough, low fat cheese, organic ingredients and exotic toppings like spinach, arugula, figs, feta, etc. Doing so would attract the gourmet pizza market segment to Papa John’s, one that is willing to spend more for the product. Looking at the downsides, Papa John’s competition is all already offering healthier menu options and it may be too late to make an impact. Additionally the costs of researching, developing, and marketing these new items will be high without a guaranteed return.

Papa John’s could look at expanding its franchises into the Asian market where demand for pizza is beginning to take off. One of the biggest problems current Asian pizza restaurants have is a shortage of dairy imports to the continent. Since Papa John’s franchisees are supplied by the centralized Quality Control centers they could avoid this problem and have a strong competitive advantage in the market. Furthermore, the novelty of pizza in Asia would reduce price sensitivity of consumers and allow franchises to charge a higher price to compensate for rising ingredient costs. This option also carries significant risk due to the unpredictability of the Asian market. Demand is growing but there is no guarantee it will continue. As well there are the risks of operating internationally such as exchange rates, different legal systems, and culture clash. In the long term Papa John’s could look at transitioning into technologies like drone delivery of the pizzas and automation of the pizza assembly process. This is not as distant a reality as it may seem as the technology for automated pizza assembly already exists and companies like Amazon are developing drone delivery technology(http://www.mercurynews.com/2016/09/29/zume-pizza-startup-robots/). This alternative would allow Papa John’s to become a market leader in costs as they would reduce a significant portion of their labour expenses. The problem with this proposition is that it will take a large purchase

Recommendation Looking at the alternative and issue comparison matrix in exhibit G, both introducing healthier menu options and transitioning into automated delivery and assembly solve two out of three main issues. The alternative to transition into automation however, would require a significant time and capital investment and would likely not pay off for decades. Bringing in healthier menu options would see results much sooner and have an immediate impact on Papa John’s operating margins and market share. For that reason the chosen recommendation is to develop healthier menu options and charge a price premium for them. Implementation Plan Short Term ● Begin research and development of healthier pizza recipes and alternatives ● Perform market research on consumers tastes and preferences ● Develop a marketing campaign to inform customers about the new offerings ● Begin sourcing the healthier ingredients and developing supplier relationships ● Begin training employees on the new menu items ● Perform a cost/benefit analysis of the project

Medium Term ● Pilot the new menu in select locations and monitor sales, costs, and relative popularity of new offerings ● Survey consumers on the pilot menu and collect feedback Long Term ● Analyze collected pilot data and make adjustments to the program ● Decide to launch new menu nationally if pilot is successful ● Continue support and monitoring of the national launch Conclusion This case evaluated the different issues and factors that affect Papa John’s operations. It discussed the different strategies, SWOT analysis, value chain, and financial and operating performance. The main issue that this case focused on is the lack of healthy menu options for the pizza joint. Adding healthy options for Papa John’s consumers is recommended to accommodate to a bigger market. An implementation plan is provided for Papa John’s to use by the end of this case.

Exhibits

Exhibit A

Exhibit B

Exhibit C

Financial Ratio

2013

2012

2011

Return on Assets

15.72%

15.05%

15.02%

Return on Equity

52.81%

36.36%

14.02%

EPS

1.58

1.31

1.08

Debt to Equity

1.14

0.49

0.25

Debt to Asset

0.34

0.20

0.25

0.56%

N/A

N/A

28.47

20.18

17.42

Profit Margin

5.07%

4.92%

4.82%

Operating Margin

7.40%

7.43%

7.14%

Dividend Yield Price-Earnings Ratio

Exhibit D

Exhibit E

Exhibit F

● ● ● ● ●

Strengths Strong employee program Good customer service High quality ingredients Strong franchise system Extensive marketing campaigns

W Weaknesses ● Limited menu items ● Limited number of stores

● ● ● ●

Opportunities New menu items More types of distribution More stores worldwide Create better brand awareness

Threats ● Competitors have more stores worldwide and have more variety in their menu items ● Health conscious customers

Exhibit G

Issues