UPDATE, June 21, 2019: BTIG met with Papa John's management on Thursday and learned that the new investment will be evenly split between franchisee assistance and marketing/branding, with a significant amount of the marketing budget going to support the O'Neal marketing campaigns. BTIG expects the additional marketing will start to hit late summer with the biggest media presence likely in the fourth quarter and first quarter when the industry is heavy on promotions.
- Papa John’s committed an additional $80 million toward marketing, brand initiatives and scheduled financial assistance for domestic franchises ending in 2020. The investment will begin during the third quarter of fiscal year 2019, according to a press release.
- The company plans to make significant contributions to its National Marketing Fund to boost its brand positioning and amplify its new brand ambassador, Shaquille O'Neal.
- The company will also extend financial assistance to its traditional domestic franchisees via lower royalties, royalty-based service incentives and targeted relief to help franchisees plan and manage their businesses in the future.
While a majority of the investment will go toward its marketing initiatives, the additional financial relief for its franchisees might have a more significant impact on overall performance.
When franchisees do well, so too does the brand. Domino's franchise business comps increased by 4.1% during the first quarter of the year, compared to a 2.1% increase among it company-owned stores, EVP and CFO Jeffrey Lawrence said during the Q1 earnings investor call. Overall the company posted its 32nd consecutive quarter of positive comp growth, CEO Richard Allison said during the call. It plans to further assist and advise its master franchisee partners with customer insights, research and data to help owners make better strategic business decisions, Allison said.
Papa John’s franchisees haven't been doing nearly as well and have faced dozens of closures. One analyst estimates that franchisees earn about $40,000 per location. Comparatively, Domino's franchisees earn three times as much, according to Restaurant Business. Given the significant discounts offered by competitors, Papa John's will have to keep pricing low in order to compete, which could only hurt struggling franchisees more.
The company told BTIG that financial pressure on franchisees has worsened, with 25% to 27% of units under constraints that put them at risk of closure. Comparatively, only 20% were in dire straights at the end of 2017.
The heavy marketing investments could help franchisees that were hurt by slower traffic in 2018 following the downfall of John Schnatter, especially since the founder's ownership in the company is decreasing. Papa John's has been doing a lot to try and up its marketing game, already paying more than $8 million for its deal with O'Neal, who will act as a brand ambassador, joined the board and has invested in nine franchised restaurants in Atlanta. Executive said during the Q1 earnings call with investors that they believed adding O'Neal to his various roles would also attract new franchisees into the system.
The entire $80 million is a big expense for the chain, especially since the Schnatter controversy cost Papa John's $50.7 million, and given these expenses BTIG expects that Papa John's turnaround will likely take longer than expected. Even with the additional financial relief, this might not be as welcomed news to these struggling franchisees.