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A Taste of Papa John’s: Better Ingredients, Better Business?

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A brief history of Papa John’s

Papa John’s International (PZZA) is an American pizza delivery restaurant chain that operates 4,660 restaurants across 36 countries. In 1984, John Schnatter bought used restaurant equipment for $1,600 and started making pizza in his father’s tavern, which led to the birth of the company he would name “Papa John’s.” Later, realizing the potential in the pizza business, Schnatter, the company’s current chairman, started expanding through a franchising model.

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Papa John’s stock performance

The company went public in 1993, with an initial offering of 1.55 million shares at $13 per share. If you invested $100 at the time of the IPO (initial public offering), by the end of 2014, you would have earned $2,448 at a compounded annual growth rate of 11.4%. Over the past five years, from 2010 to 2014, the company’s share price has grown by ~378% or a compounded annual growth rate of 36.7%.

Papa John’s products

Until 1996, Papa John’s menu only offered the following four core items:

  • pizza
  • breadsticks
  • cheese sticks
  • canned soft drinks

However, in 1996, the company tweaked its menu and introduced thin crust pizza alongside its traditional crust pizza. In September 2002, to maintain its edge in an increasingly competitive market, Papa John’s introduced “Papa’s Chickenstrips,” prepared from all-white-meat. In 2004, the company introduced “Papa’s Wings” chicken wings, and later in 2012, the company introduced its “Chicken Poppers.”

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The restaurant industry

The restaurant industry is broadly classified into two categories, full-service restaurants and limited-service restaurants. Pizza restaurants fall under the “limited-service” concept. Items on menus at limited-service restaurants are usually low-cost items when compared with “full-service” restaurants’ menus. Items on limited-service restaurants’ menus are often limited, and customers have to pay upfront. On the other hand, customers at these restaurants often have the freedom to customize their food, but within limited choices.

The pizza industry

According to CHD Experts, a Chicago-based food service database and analytics firm, the pizza market in the US alone is worth more than $38 billion, of which more than 54% is accounted for by independent pizza operators. Among national pizza chains, Papa John’s has been competing with Pizza Hut, a subsidiary of YUM! Brands (YUM), as well as with Domino’s Pizza (DPZ), Little Caesars, and Papa Murphy’s Holdings (FRSH).

Apart from pizza companies, Papa John’s has to compete with other QSRs (quick-service restaurants like McDonald’s Corporation (MCD) and Burger King Worldwide, a subsidiary of Restaurant Brands International (QSR).

You can gain exposure to the restaurant industry through the Consumer Discretionary Select Sector SPDR Fund (XLY), which invests about 10% of its portfolio in restaurant stocks, including some of those mentioned above. Alternately, you can gain exposure to Papa John’s International (PZZA) by investing in the PowerShares Dynamic Leisure and Entertainment ETF (PEJ), which has 2.2% of its total portfolio invested in PZZA, whereas the PowerShares Dynamic Food & Beverage ETF (PBJ) has approximately 2.3% of its portfolio invested in Papa John’s.

Continue to the next part of this series for a look at Papa John’s around the world.

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