Papa John’s International, Inc.

Papa John’s International, Inc.

11492 Bluegrass Parkway
Louisville, Kentucky 40299
U.S.A.
(502) 266-5200
Fax: (502) 266-2925

Public Company
Incorporated: 1993
Employees: 4,000
Sales: $161.5 million (1994)
Stock Exchanges: NASDAQ
SICs: 5812 Eating places; 6794 Patent Owners & Lessors

Papa John’s International, Inc. is widely recognized as the fastest-growing pizza chain in the United States. The company operates and franchises pizza delivery and carry-out restaurants under the trademark “Papa John’s” in 21 states primarily in the Midwest, Mideast, South, and Southeast. Papa John’s expanded to more than 750 stores after the opening of its first store in 1985, roughly doubling its size every year well into the 1990s. Although Papa John’s competes in a market dominated by such giants as Pizza Hut, Domino’s, and Little Caesar’s, it has managed to carve out a highly profitable niche by concentrating on four menu items: pizza (which is accompanied by a container of the company’s special garlic sauce and two pepperoncinis); breadsticks; cheese sticks; and canned soft drinks. The company devotes its energy and resources to improving delivery time and product quality.

Papa John’s was born in what was once a broom closet in the back of a southern Indiana tavern. The idea for the company ranked number one on Business Week’s 1994 list of “Hot Growth Companies” originated in the mind of a 23-year-old entrepreneur who felt that he knew how to make a better pizza. In September 1983, shortly after attaining a business degree from Ball State University in just three years, John Schnatter returned to his hometown of Jeffersonville, Indiana to take over the management of Mick’s Lounge, a bar co-owned by his father. The tavern, noted for its fist fights and biker clientele, was physically and financially decrepit; beer dealers and other vendors even refused to give the establishment credit. In his first week, Schnatter, $64,000 in debt with a long list of angry creditors, cleaned and repainted the bar, determined to make the most of his opportunity. He lowered and simplified beer prices, while adding more pool tables and video games. And he began to market the bar through promotions that resulted in word-of-mouth advertising. In just three months, he had paid off half of his debt.

Although Schnatter quickly succeeded in resurrecting the bar to profitability a month later, his ambitions extended far beyond the walls of a smoke-filled beer joint. In March of 1984, he sold his business partner, Bob Ehringer, who had purchased the elder Schnatter’s stake in the business, on the idea of supplementing revenues by serving pizza out of the bar’s broom closet. With $1,600 worth of equipment and ingredients, Papa John’s was born. Schnatter tore down a wall with a sledge hammer to make room for an eight-by-ten-foot kitchen. During those early days Schnatter and his partner worked from 9 a.m. to 1:30 a.m., sleeping in the bar so they would not miss any calls. For the first six months, the pizza business generated only $1,000 to $1,500 a week and was financially dependent on the bar. But as the fledgling establishment became better known, sales increased. By March 1985, the two partners, along with a few helpers, were making 3,000 to 4,000 pizzas a week.

With Mick’s Lounge financially sound and not enough room in the “broom closet” kitchen to keep up with the growing demand for pizzas, Schnatter and Ehringer set their eyes on an empty retail space next door where they could open their first restaurant. Having gained valuable experience working in several restaurants in high school and in college preparing himself for such an opportunity, Schnatter was eager to put his ideas into practice. “One day he sat at his desk in the dorm and had a menu laid out, along with a company logo,” recalled Schnatter’s college roommate in Business First. “Papa John’s was on his mind even on campus.”

But before the 23-year-old entrepreneur could launch his new venture, his father and top supporter died. “You’re supposed to feel sorry for yourself, and I could have sat at the bar and moped,” he said in Business First. “But I’m pretty tough on myself, and I got on with it.” Having inherited his father’s unwavering determination, Schnatter acquired the site for his restaurant through sweat equity. With the help of his uncle. Bill Schnatter, who became a partner in charge of store layout and construction, and Ehringer, who took over operations and maintenance, Schnatter, the firm’s president and chief marketer, opened his first restaurant.

In January 1986 the company was incorporated and able to stand on its own. A year later Schnatter and Ehringer sold Mick’s Lounge so they could devote more time to Papa John’s. The strategy that brought them such rapid success was simple: make the best pizza and sell it at a competitive price. What Schnatter had learned while working in pizza joints as a teenager and a college student was to keep his product line focused. While other restaurants offered salad bars and chicken wings, he devoted his energy to producing the “Perfect Pizza” (a slogan that would later become a registered company trademark) and delivering it to customers in a timely fashion. Behind the focused strength of this strategy. Papa John’s generated revenues of $500,000 in its first year and opened two more restaurants in the “Kentuckiana” region.

To prepare the company for more serious expansion, the visionary Schnatter built a commissary near corporate headquarters in Louisville’s Bluegrass Industrial Park to supply his stores with fresh pizza dough and spices. In the commissary, giant mixers turn bags of flour mix and warm water into dough balls of several sizes. The dough is then chilled until it is firm enough to be shipped to individual stores twice a week and shaped into pizza crusts or breadsticks. The commissary system has frequently been cited by industry analysts and company officials as a key factor in the success of Papa John’s. The system not only reduces labor costs and reduces wastes because the dough is pre-measured; it, perhaps more importantly, maintains control over the consistency of the product. In many other restaurants, for instance, the least-experienced employees are responsible for making the dough because it is such a messy job.

Not only did this centralized production facility furnish all of the Papa John’s stores with the same high-quality ingredients for their pizzas, but it lowered start-up costs for new restaurants by saving them the cost of expensive equipment. From this early stage in the company’s history, Schnatter made sure that he expanded the production capacity of his commissary system before he added new restaurants. Accordingly, four additions were made to the company’s first commissary by the end of the decade and the opening of the 23rd Papa John’s.

In 1989 Schnatter enlisted the services of pizza industry veteran Dan Holland to help the company strengthen its financial base and fashion a strategy for further growth. A former executive with Mr. Gatti’s and Pizza Hut, Holland, who took over as company president in 1990, brought more than a decade of experience in the pizza business to Papa John’s. That same year, which brought in $15 million in revenue, Ehringer, who did not share his partner’s expansionary vision, sold his 40 percent share in the company to Schnatter.

During the early 1990s the company embarked on a phenomenal pattern of growth, expanding to 200 restaurants and $82 million in sales. At least part of the success was due to a surge in the overall pizza market, which grew at the fastest rate of any major segment of the restaurant industry during the mid-1980s and early 1990s. Pizza sales also benefited from the larger trend toward more off-premise food consumption; pizza was, to some extent, viewed as one of the leading replacements for the homecooked meal and realized a greater increase in sales than other large quick-service segments, such as hamburgers and chicken. Having established itself from the beginning as primarily a delivery and carry-out restaurant, Papa John’s was poised to take full advantage of this growing demand.

Another contributing factor to the company’s success during this period was its ability to keep start-up costs low for new franchises during the recession of the early 1990s. Whereas some restaurant franchises cost upwards of $1 million, a Papa John’s could be purchased during this period for less than $100,000. This bargain price, combined with the company’s profitable history, attracted a number of high-profile franchisees into the Papa John’s stable. Such restauranteurs as Rick Sherman, former president of Rally’s and Church’s Fried Chicken chains; Frank Carney, one of the founders of Pizza Hut; Ed Johnson, founder of Grandy’s; and Jack Laughery, former chairman and CEO of Hardee’s. all opened several stores.

After recording total revenues of close to $50 million in 1992, having roughly doubled its size every year since 1986, the company looked to raise money to pay off debts and finance continued expansion. In June 1993, Papa John’s went public with an initial offering of 1.45 million shares at $13 a share. As evidence of the strong faith of the financial community in the company, the stock closed at $20, generating proceeds of about $12 million after costs. The stock sale helped to strengthen the company’s financial base while providing capital for entrance into three new markets: Atlanta, Georgia; Orlando, Florida; and Charlotte, North Carolina.

Geographic expansion required the building of two more commissaries to supply the new stores during the early 1990s; one in Orlando and one in Raleigh, North Carolina. The commissaries, which were designed to serve a 400-mile radius, enabled the company to open its 400th store in 1993, nearly doubling the size of the company from the previous year. Total revenue, likewise, increased more than 80 percent, surpassing the $89-million mark.

Just as Papa John’s was nearing the 500-store milestone in mid-1994, it was named by Business Week as the nation’s bestrun small business, based on three-year results in sales growth, earnings growth, and return on invested capital. The attention the company received from this report, as well as from other reports by business and industry publications ranging from Forbes to Nation’s Restaurant News, helped the company to attract management talent and gain momentum in the investment community. Taking advantage of this energy, Papa John’s completed two common stock offerings during the year, raising an additional $35 million and preparing the way for further expansion.

In keeping with the company’s strategy of ensuring that the commissary system is developed to support the growth and geographical expansion of restaurants, Papa John’s constructed its fourth commissary in Jackson, Mississippi during 1994. The company also finalized plans to build a full-service commissary in Orlando to replace the existing dough-producing facility. The additional production capacity provided the infrastructure to serve up to 1,200 restaurants in 20 states. The timely expansion of this system, according to many industry experts, enabled the company to continue its ability to monitor and control product quality and consistency, while lowering food costs.

Papa John’s, having set quality standards for all products used in its restaurants, required all of its franchises to purchase dough and spices from the commissary. What is more, virtually all of the franchises, although they were not required to do so, purchased their other supplies from the commissary as well, taking advantage of the lower prices offered. While the commissaries helped to improve quality control and efficiency by providing each individual franchise with the same products, they also facilitated the growth of the company by lowering start-up costs. With the commissary system, there was no need for franchises to purchase expensive dough-making equipment and train their employees how to use it.

Throughout Papa John’s tremendous growth during its first ten years of operation, its marketing programs targeted the delivery area of each restaurant, primarily through print materials in direct mail and store-to-door couponing. In 1994, for instance, approximately 80 percent of all purchases were made using a coupon, at a savings of about 17 percent. As the company has become more affluent and attempted to serve a larger geographic area, it has increasingly supplemented local marketing efforts with radio and television advertising. To maximize the resources of its individual restaurants, the company has also created the Papa John’s Marketing Fund, Inc., a nonprofit corporation that oversees market-wide marketing programs, such as radio, television, and billboards. The Marketing Fund, which is supported by required contributions from each store, also provides company-owned and franchised restaurants with catalogs and toll-free numbers for uniforms and promotional items.

As Papa John’s entered the late 1990s, it had no plans to change the simple formula that has placed it in position to become the nation’s fourth-largest pizza chain. Schnatter has promised to keep what Bill McDowell of Restaurants and Institutions magazine has called “an almost obsessive focus on the core product.” No additions to the four core menu items— pizza, breadsticks, cheesesticks, and canned soft drinks—had been planned. As Schnatter stated in a 1995 letter to stockholders, Papa John’s does not intend to follow the lead of its competitors who “clutter their menus with chicken wings, salads, pasta and subs.” Rather, the company will direct its energy and resources towards “delivering the Perfect Pizza” to more people and in a larger geographical region.

With more than 250 restaurants projected to open by the close of 1995, the company planned to open a new distribution center in Dallas in early 1996 and a full-service commissary in Denver during the latter part of 1996 to facilitate western expansion. The ambitious Schnatter hoped to eventually control a 3,000- to 4,000-store empire that would rival the likes of Pizza Hut, Domino’s, and Little Caesar’s. This broadened vision of the future may also entail a greater emphasis on television spots and other forms of electronic media. According to Schnatter’s estimates, 50 percent of those who have not tried Papa John’s have never heard of Papa John’s. “Once they’ve tried us, though,” he says. “Nine out of ten come back.”

Principal Subsidiaries

PJFood Service, Inc.; Papa John’s USA, Inc.; Printing & Promotions, Inc.; PJFS of Mississippi, Inc.

Further Reading

Cooper, Ron, “Focus Was Key Ingredient in Schnatter’s Success,” Business First-Louisville, June 12, 1995.

_____, “Papa John’s Rolls Out the Dough,” Business First-Louisville, December 16, 1991, p. 1.

Egerton, Judith, “Papa John’s at 10: The Growth is Spectacular,” Courier-Journal (Louisville), April 17, 1995.

George, Eric, “Putting Pop in Papa John’s,” Louisville, January 1994, p. 26.

Henderson, Angelo B., “Out of the Broom Closet and Into the Oven,” Courier-Journal (Louisville), September 5, 1988, p. E1.

McDowell, Bill, “Papa John’s Slice of Success,” Restaurants and Institutions, February 15, 1995.

“Nobody’s Growing Like Papa John’s,” Pizza Today, July 1994, p. 50.

Papiernik, Richard L., “Papa John’s ‘Simple’ Policy Pays Off: Profits up 77%,” Nation’s Restaurant News, March 6, 1995.

Reichert, Walt, “Pizza on the Move,” Louisville, September 1991, p. 31.

Schiller, Zachary, “From a Broom Closet in a Bar to 485 Pizza Restaurants,” Business Week, May 23, 1994, p. 94.

—Jason Gallman