Papa John’s International Inc. is shifting its messaging to focus more on the quality of its ingredients and pizzas, even as sales at the Louisville-based chain continue to flourish.
Speaking on the company’s second quarter earnings call on Wednesday, Papa John’s executives noted that the company has started communicating more with customers on the quality of its offerings.
“We are finding ways to more effectively communicate our commitment to using the best quality ingredients,” CEO and company founder John Schnatter said. “That has always been part of what distinguishes Papa John’s from the rest.”
The company is using a mix of ads and press releases in what Schnatter said “is more than a campaign.”
In recent months, the company has added garlic knots and cinnamon knots to its menu, as well as limited time offers like a Greek pizza and Philly cheesesteak. It also added lighter pizzas with fewer calories.
The efforts come as restaurant chains in multiple sectors search for ways to communicate more about quality and freshness with consumers, both through advertising and through store designs with open kitchens. Consumers are demanding higher quality ingredients from their restaurant chains and are shifting spending toward those concepts they believe have fresher ingredients.
This is an important consideration for a concept like Papa John’s, whose tagline has long been “Better Ingredients, Better Pizza.”
“Years ago, we made it our mission, and I made it my commitment, that we would make the best pizza with the best ingredients — even though it cost us more,” Schnatter said.
He says consumers have responded. Papa John’s same-store sales in the second quarter ended increased 5.5 percent in North America. That was the 19th straight quarter of domestic same-store sales growth.
The top-line growth is coming amid a continued shift in customers using digital ordering. More than half of the orders at Papa John’s now come through digital orders, and half of those digital orders are now coming through mobile technology.
The company is also analyzing improvements to its loyalty program, Papa John’s Rewards, launched in 2010. The chain was the first in the pizza category to launch a loyalty program, and few have copied that effort, though now Domino’s Pizza is testing a loyalty program.
“If you don’t evolve every aspect of your business, it’s not long before you’re in trouble,” Schnatter said.
“We’re aware they’re taking a look at that,” said Steve Ritchie, president and chief operating officer, about the Domino's program. “I’m not surprised. I’m a little surprised they didn’t launch a loyalty program sooner.”
Net income at the chain fell 36 percent in the quarter, to $10.8 million from $16.7 million, due largely to costs related to a $12.3 million settlement in a class action lawsuit brought by drivers claiming they were not correctly reimbursed. The company denied wrongdoing in the case.
Net income adjusted to factor out the settlement costs rose 12 percent to $18.8 million from $16.7 million.
Revenues in the period increased 4.8 percent to $399 million from $380.9 million.
The results didn’t meet investors’ expectations, and the company’s stock price fell 5 percent Wednesday.
Labor costs at company restaurants rose 12.4 percent to $51.5 million from $45.8 million. Company executives on the call said that much of that is due to higher bonuses because company restaurants are more profitable.
“Bonuses and incentives and merit increases are $60 million a year,” Schnatter said. “That’s a big number on $185 million profit. But our corporate restaurants doubled in profits the last four or five years. If you take care of your people, and let them work their way through the system, it comes back in spades.”
The company has added 71 locations worldwide so far this year, most of them in international markets where the chain sees considerable potential. At the moment, 1,388 of the chain’s 4,734 locations are outside of North America. But same-store sales rose 6.8 percent internationally in the second quarter, and are up 16 percent on a two-year basis.
In the United Kingdome, where Papa John’s now has more than 300 locations, the chain’s same-store sales are up in the “double digits,” the company said.
Papa John's increased its sales guidance for international markets for the year. The company now expects international same-store sales to grow in the 6 percent to 8 percent range up, up from 5 percent to 7 percent previously.
“We’re going to grow our international side of our business through our tried and true principles,” Schnatter said. “The best people, the best ingredients, the best pizza, period.”
Contact Jonathan Maze at [email protected].
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