‘Responsible growth and high Quality are our current focus’
By Ed Lane
Ed Lane: You were selected as Papa John’s president and COO about 17 months ago. This spring you added the title of Co-CEO in an arrangement where you and founder John Schnatter share CEO duties. Just as you were starting with Papa John’s, the current recession became a major concern to businesses. How is Papa John’s dealing with the downturn and the enhanced competition for the consumers’ food dollars from direct and indirect food service competitors?
Jude Thompson: First and foremost, Papa John’s has always had quality in its DNA. Better ingredients, better pizza, is not just a slogan; it’s a way of life. We were honored this year to win the ACSI (American Customer Satisfaction Index) for the 10th out of 11 years in the pizza category.
This year Papa John’s was also honored as the overall winner with the highest point total in ACSI’s history, which was 80 points. ACSI tested somewhere around February, March and April. Since then Papa John’s has taken some price reductions. We understand anytime that unemployment reaches that double digit number, 10 percent, that’s a key indicator for the restaurant industry. We have fared pretty well and feel fortunate to be in the position that we now are. Some other restaurant chains, particularly dine-ins, have had a rougher road than we have had. But Papa John’s works at it every day for high quality and good prices. We think that is a winning combination.
EL: John Schnatter is not only the chairman and founder of Papa John’s but also the firm’s largest shareholder. How would you describe your working relationship with Schnatter and how the CEO job responsibilities and authorities are shared?
JT: We always like to say, John is the constant. He is Papa John, and he’s the image of the company. We think people relate to people, not big organizations. I’ve known John forever, and it seems like at least 15 years socially and as friends. When people ask me, “How long did you interview?” I say “about 15 years I guess.”
One of the things about getting to know John is, he already knew me. We are only three months apart in age. I actually started my pizza restaurant when I was 18 years old in Mount Washington, Ky. I had three of them at one point, and then I went off to the healthcare industry.
Serving on this board of directors is how I got involved with Papa John’s in a more intimate way, not just as a fan. I like to say there are things that only John can do, and there are things that some of us can do for John. Being the founder and also the image of Papa John’s is very taxing. When we go to a NASCAR event, people don’t want to see me – and I’m OK with that – they want to see Papa John. They want to see the car; they want to hear the story, because it is a heck of a success story. When you consider what John’s had to endure making this company be where it is today, it involves a lot of passion. This is a company that has a real entrepreneurial streak through it. Even though Papa John’s is publicly traded, we try to work it every day to earn our business and John is very involved.
EL: What are Papa John’s two major areas of business focus at this point in the business recession?
JT: John and I agree this is a chance for Papa John’s to grow during the recession. Management has been disciplined, and the company has very low debt. That’s the way we like it. We had very few stores in the pipeline when John came back in and I came in for the first time. I’m happy to report we’ll open twice as many stores this year. Papa John’s has close to 300 new stores domestically and over 1,200 new international stores in the pipeline. Papa John’s has over 3,500 stores now and a current short-term goal to get to 4,000. we will set our sights for 5,000 – but in a responsible way. By store count, Papa John’s has two competitors that are larger, and there’s one right below us but they have all been in business 50-plus years. We consider ourselves 26 years young, with a lot of runway for growth. We’re always going to make a high-quality pizza. Responsible growth and high quality are our current focus.
EL: Many market researchers feel the U.S. pizza market segment is near saturation. What is your perception?
JT: We don’t see that. Papa John’s actually has had five consecutive quarters of transaction growth, meaning we have more customers coming to Papa John’s than we did during the prior quarter of the previous year. Pizza is a highly competitive market segment. We’ve been fortunate with the price of commodities until recently. Cheeses are a huge part of the cost of a pizza, and that’s gone up in recent months. I think you may see market conditions become more difficult for chains that are highly leveraged. Papa John’s has taken care of its financial side and will be OK.
EL: Do you see Papa John’s share of market increasing because of its quality product or because of increased promotional efforts to drive more traffic?
JT: Out of sight, out of mind. We do know that pizza is a direct response business. You have to have a certain amount of advertising even if your product isn’t the best in its class. We think Papa John’s is the best in the class, and that’s not through arrogance. There’s a lot of work that goes into a Papa John’s pizza. We have fresh-packed tomato sauce – from the vine to the can in six hours.There are only 70 days a year that we pick these tomatoes. We think our sauce is better tasting than what our competitors offer.
Our dough is fresh, never frozen; we deliver it twice a week to our stores. The dough is where all the flavor is transferred. Papa John’s works hard to make sure it has the best-tasting crust in the business.
We like to call our commissaries “quality control centers.” It’s always fascinating to watch John visiting one of our 10 quality control centers in the United States. The first thing he does is go right to the raw dough and make sure that all the flavor qualities are there. There are many things that make Papa John’s different, but our fresh dough, the sauce and the ingredients we put on top are the best we can find.
EL: What is the plan for expanding Papa John’s international locations?
JT: Papa John’s recently hired Tom Sterrett as its senior VP of international development. Tom, John and I made an around-the-world trip visiting many of our markets. We went to Hawaii, Seoul, Beijing, Shanghai, Bahrain, Cypress, London. We also met our franchisee from Moscow in London. We did that in 11 days. We traveled 22,000 miles and visited many stores. It was a fascinating trip, and we got to review our international markets.
Papa John’s largest foreign markets currently are in the United Kingdom and China; those each have approximately 150 stores. One of the things we did when we were in London was to open our first international commissary. We had a big grand opening and it’s a beautiful facility. It could support up to 500 stores based on its size and scale. We have a good expansion plan in the United Kingdom.
Papa John’s has 166 stores in China, primarily in Beijing and Shanghai. They offer a Papa John’s pizza with the same sauce, dough and ingredients made at the commissary the same way. We buy all our cheese from the same supplier. Papa John’s also offers toppings for the local taste, so there may be shrimp or squid that we wouldn’t serve domestically. So the core toppings, box, the sauce and the dough are the same wherever you go. We were really pleased with the quality of pizza we saw in each of those markets.
EL: Are the international operations franchised or do you have joint-venture partners?
JT: Most of our foreign markets are franchised with the exception of Beijing, which is a corporate market. Domestically, Papa John’s operates 600 out of its 2,800 U.S. stores.
EL: In-line or freestanding?
JT: Our real estate division is lead by Tim O’Hern, senior vice president, development. Most of our franchisees want to get into a location that is affordable. Free-standing stores are going to cost more to develop, so most of our new stores are in-line. We’re also considering a lot of non-traditional opportunities. We’ve recently gotten into a lot of college campus locations. Young people tend to eat a lot more pizza, and that’s a new venture for Papa John’s. We like what we see.
We have a development committee that meets every week. That’s one of my standing meetings I never miss. The great thing about Papa John’s is that we still have lots of territories yet to be sold.
EL: Is there a minimum size market in which Papa John’s profitably operates?
JT: There is, but I’ll tell you we are challenging that right now. We just opened a Papa John’s in Taylorsville (Ky.) that would not have met our site criteria a few years ago. It’s been a wonderful store for us since it opened. So you really have to evaluate the number of eating establishments in a trade area as well as its size.
EL: How will the legislated – but not yet implemented – Obama healthcare plan affect Papa John’s profitability and long-term expansion plans?
JT: As you know, I spent 19 years with Blue Cross Blue Shield or Anthem. I think you will see most companies will take the penalty and try to figure out what the cost will be. I’ve seen nothing from the insurance companies that would give us concrete evidence about what the new healthcare legislation is going to do to our company’s health insurance premiums. Again, we are not operating in a vacuum, and whatever applies to Papa John’s will apply to all industries. I know it’s a big concern, and my background tells me that costs are going to go up significantly with this healthcare plan.
EL: The total annual sales for all Papa John’s locations was $2.1 billion in 2009 and average store sales were about $600,000.
JT: That is correct. Average sales are a little higher than that per domestic store. Some new domestic and international stores don’t initially achieve at that level, so it’s hard to put a blanket number on it. We like to say it’s not the number of stores you have; it’s the numbers in the stores you have. Of all our major competitors from just pizza sales, none average more per store than Papa John’s. We feel Papa John’s has a healthy business model.
EL: Papa John’s is primarily a pick-up and delivery service pizza chain. Do you operate stores with dine-in services?
JT: We do internationally, and you’re going to see more dine-in locations. It’s an interesting dynamic. Over the years, as mobile phone penetration has increased we see our carry-out percentage in the U.S. increase a little bit as the delivery percentage decreases. Internationally, customers are beginning to accept more of the delivery model and dine-in percentages are going down. In the majority of our stores, we don’t have dine-in services.
EL: Pizza Hut’s campaign is “Lower prices every day.” I noticed Papa John’s has a “Buy a $10 large cheese pizza and get three free toppings” campaign going. Has price-value marketing kept your customers motivated during the recession?
JT: The food service industry has had to sharpen its pen during the recession. Pizza Hut’s doing it with its pricing; Domino’s is doing with its new product and pricing. Papa John’s doesn’t live in a vacuum. People will shop for price, and if we can get them to try Papa John’s we think they will taste the difference. We don’t ever feel like we have to be at the same price as our competition, but in these times you can’t disregard the pricing of your products.
EL: Domino’s campaign is “The pizza turnaround.” Do you think Papa John’s is doing such a good job that Domino’s has slipped in the ratings or do you think something else has impacted their product?
JT: I think that Domino’s had reasons to make changes whether you agree with the way they are marketing it or not. I’ll leave that up to the public. Papa John’s was somewhat flattered at the beginning of this year when Domino’s compared their pizza to ours. We don’t try to talk about our competitors. They keep us sharp and when they change directions or improve, Papa John’s knows we have to step up and be competitive.
EL: Is Louisville a good location for Papa John’s corporate headquarters?
JT: We love being a Kentucky company, and Louisville has been very good to us. I think Papa John’s, in return, has been good to the Commonwealth of Kentucky as well as Louisville. This is really where it started. Southern Indiana and Louisville is our home; we can’t see being anywhere else.
EL: Has Papa John’s worked with Greater Louisville Inc. or the Kentucky Cabinet for Economic Development in expanding its operations in Kentucky?
JT: The state helped Papa John’s with this building 11 years ago. What you see is not just a headquarters; most of it is our quality control center. The facility has served us well and I think John, the state and everyone had ideas of growth, and we’ve still got room to expand.
EL: How is it to work with John Schnatter?
JT: It’s fascinating to get to work with John, knowing him as a friend and as a colleague but also getting to learn from him. His insights in business are really the driving force for Papa John’s, and we partner and bounce ideas off each other. We like to say the second shift starts about 6 p.m. We get back in here, and on many nights we will chat and download about the day and start preparing for the next day.
Papa John’s can grow, and we feel fortunate for the company to be in the position it is in. Papa John’s has been a blast the 17 months I’ve been here.
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