The rise and fall of Papa John's

In 2017, John Schnatter was worth over $1 billion. He transformed Papa John's from a closet to having over 5,000 locations worldwide. It was the third largest pizza chain in America. He was the number one sponsor on many telecasts for the NFL. Suddenly he'd made it. He famously put his face on every single box they delivered to customers. Then one day, on an earnings call with investors, He opened his mouth and he said a couple of sentences that would cost him half a billion dollars and put the company in a tailspin. By the time it was over, the company started to pretend like he never existed. They scrubbed his name and face from every advertisement and every pizza box, and they developed a poison pill, a thing that would keep him from ever coming back into the company again. Look, today Papa John's isn't dead. It has over 6,000 locations in 50 countries, but the stock is down 77% from its peak. And it turns out that the problems that hit Papa John's weren't because of what Papa John himself said in the public media. The problems started way before then. Oh, and by the way, thanks to Plaud for sponsoring this video. More on them later. And if you're interested, I turn every single one of these videos into a deeper dive that you can download for free on my website, girdley.com/youtube. This video is the rise and fall of Papa John's. In 1984, Schnatter had started his business by selling his used Camaro. For $2,800. He took about $1,700 of that, turned around and bought used pizza equipment and started selling pizzas out of a broom closet in his dad's failing bar in Indiana. While Domino's and guys like that focused on cheapness and getting the pizza to you fast, John decided to do something different. He was going to compete on quality, better ingredients with better pizza. Within a year, he was selling more pizza than his dad was selling beer out of the rest of the bar, out of a tiny broom closet. and by his mid-20s, he was doing $9,000 a week in sales. He was beating the chains in his local market. He started franchising in 1986. They IPO'd in 1991, just 9 years after they started, when they had 254 stores. By 1997, the rapid growth continued, and part of the reason was Schnatter's face was on every single box, every commercial. He was the face and the entire linchpin of the Papa John's brand. And it propelled them to having 1,500 stores that year. The early 2000s were peak pizza in the United States. From my perspective, people kept buying the stuff and kept getting it delivered. We had tons of young families that needed food fast, and Papa John's rode that wave. By the 2010s, they had gotten so big that they invested in becoming the official pizza sponsor of the NFL. Papa John's is proud to be the official pizza of the world champion Seattle Seahawks. In 2010, they had deals with 23 of 32 teams. They were more recognizable than a lot of common brands that are well-known, like Gatorade. They were so in with football that a lot of famous football stars were buying Papa John franchises. Peyton Manning famously bought 31 of them in Denver. Jerry Jones, the owner of the Cowboys, he was a partner as well, and both appeared in commercials for the brand. Papa John's Pizza for Jerry Jones. Mm. Papa John's for pizza pie. Fresh tastes so good, you can't deny it. Even make Jerry Jones. Right in this way, waves. They had a sustained record 14 years of same-store growth. They brought in an amazing amount of revenue, $3.7 billion. And by 2014, the stock market valued the shares at $84 a share. Shatner's 30% stake in Papa John's was worth over $800 million. Forbes called him a billionaire. Mitt Romney famously came and visited his 20,000-square-foot mansion in Louisville, Kentucky, and remarked, "Who would imagine pizza could create a house like this?" Papa John's continued to be all in on John being the face of the entire brand. He was on everything, and that created, well, some weakness. Before we get to that, I want to talk about today's video sponsor, Plaud. If you run a business, you already know this. Most decisions don't happen in spreadsheets. They happen in conversations, meetings, calls, and quick hallway updates. And the problem isn't that you're having those conversations. It's losing the signal afterward. Plaud Note Pro is interesting because it turns conversations into usable output. Think about how much time gets wasted asking, wait, what did we agree on? Who owns this? Did we decide what last week? The hardware is simple. It's actually this thin magnetic device that sticks on the back of your phone in this little pouch. It recharges. 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In 2012, Shatner told shareholders that Obamacare would cost 11 to 13 cents per pizza and that they would pass these healthcare costs on to customers. Reality, when this was studied by reporters, the figure was more like 3 to 5 cents. Papa is putting a price tag on that extra pepperoni. Our best estimate, he says, is that Obamacare will cost 11 to 14 cents per pizza. That's the quote. How did Papa come up with that number? Here was a guy who was living in a billionaire's mansion in Louisville with cars and all the trappings of wealth complaining about 14 cents on a pizza to give his employees healthcare. Boycotts followed. We founded Papa John's with two simple premises: take care of your people and make the best pizza you can. Under the new healthcare law, Papa John's will have to take care of its people by offering healthcare coverage to employees by 2014. Good morning, guys. So much like Shatner and these dogs who can't shut up, Shatner was starting to discover he was exactly the same thing. Despite being the face of his brand of Papa John's, he couldn't keep his mouth shut. And look, the common narrative is that Shatner ran his mouth, the brand got canceled, and that's what killed Papa John's. The reality is by 2016 and 2017, Before Shatner even said anything controversial, the stores were already struggling. Between 2009 and 2019, while Papa John's was barely growing at all, the pizza wars were being won by folks like Little Caesars, Domino's, and others who were basically growing at much faster rates. Little Caesars, I was surprised to learn, grew 4.7% per year during this time. Domino's, close to 3% per year. In October 2017, John went on an earnings call and blamed the NFL for the chain's problems. He said these NFL players who had been kneeling during national anthems at the time were the reason that the chain was struggling. Wasn't the pizza. Blamed his company's declining sales on the NFL's national anthem protest, saying the controversy is polarizing the customer, polarizing the country. The NFL has hurt Papa John's shareholders. An embarrassing moment for the chain, white supremacist groups suddenly started to promote Papa John's as the official brand for their, their groups. If the alt-right wanted to order pizza, well, they should call Papa John's. One growth demographic for Papa John's pizza sales: alt-right white supremacists who have claimed Papa John's as their official pizza. John and the brand had to disavow this publicly. That's embarrassing. Here's the deal about being a CEO. You can't say everything that's on your mind. And sometimes you just, even if you're in the right, you just keep your mouth shut. I've seen over and over again companies wade into politics, many of them on this channel, and it never ends up well. In December 2017, John stepped down as CEO. In February of 2018, the NFL officially fired Papa John's as their pizza sponsor and brought in Pizza Hut as well. And remember Peyton Manning, who'd owned some franchises? 2 days later, he sold them. Peyton Manning is saying goodbye to his Papa John's franchises. The Colorado Springs Gazette reports he sold his 31 stores along the Front Range. Manning bought the locations in 2012. In May of 2018, Papa John's hired a PR coach to train Shatner to not say stupid stuff. In one of the training calls, he supposedly used the N-word when referring to Colonel Sanders. The supposed solution to the John problem had suddenly become an even bigger problem for the company when word leaked and a story was written about it in Forbes in July. Oh, and, uh, my editor said I should start asking people to subscribe so we can hit a million subscribers. So that would make me happy and I could buy new hats. So please. The day the story broke, that's when Papa John's company decided they had enough with Papa John himself and they stripped him of any titles and relationship with the company and removed him from every pizza box and every advertisement. It even went so far that the $15 million gift he had given to Louisville for their naming rights of their new football stadium They took his name off. He still owned a bunch of shares of the company, and the board even went so far as to deploy a thing called a poison pill, which basically prevented him from ever coming back and trying to regain control of the company. They were done with him forever. This controversy cost the chain $104 million. And even worse, 54 stores that were owned by franchisees mostly, they closed. Same-store sales in Q3 were down 10%. In Q4, they were down 20%. Between 2018 and 2019, John did something else. He went and sold all of his shares that he had remaining for about $500 million. This would prove to be kind of an interesting choice if you stick around for later in the story. But look, most CEOs are people that do kind of crazy stuff. They learn their lesson eventually. John didn't. He kept going on and doing crazy stuff in interviews. At one point, he told an interviewer that he had eaten 40 pizzas in 30 days. I've had over 40 pizzas in the last 30 days. Later on, he said that was a lie. He just kept making stuff up and, well, basically wouldn't keep his mouth shut. In February 2019, an activist investor called Starboard Value came in and they installed the same guy who had turned around Olive Garden's parent company. He hung around for a bit, and then August 2019, a guy named Rob Lynch came in. He was the same guy who would run Arby's for a while and turn that chain around for a good amount. The problem was he was walking into almost every CEO's nightmare. He would later say that I was coming into something that no CEO wants to see: a chain that's losing and declining sales, and an activist investor wanting to make changes. But don't worry, these CEOs get paid well enough, he was willing to do the duty. You know, a couple dozen million a year, that'll encourage people to take on some hard tasks, I guess. CEOs. The board did some pretty smart stuff to try to resuscitate the brand. They brought in basically the anti-Schnatter, Shaquille O'Neal. He became a franchisee in Atlanta. He became the spokesperson for the brand and he basically became a board member too. Let me hear you say Epic Stuff Crust. Epic Stuff Crust. They rolled out $80 million in support for the franchisees. They integrated with DoorDash. They started to bring out a bunch of new concepts, the Chacaroni and stuff like that. Chacaroni pizza. But it's bigger than pizza because $1 from each sale is donated to support communities. Then in 2020, the brand would get a lifeline and something that would be lucky for them and many other restaurants. And that thing was COVID. Sales went through the roof in Q2 2020. They grew 21.2%, the biggest growth in the company's history. Starbird's investment as an activist investor grew from $250 million to over $364 million. Just a couple of years. But it turned out the whole COVID thing, like you saw with many businesses, was just a one-time sugar high. Wasn't going to last. By 2024, the brand was back in decline again. CEO Todd Penegar inherited a mess. That quarter that he joined, sales were down 5.4%. They were losing money. Just bad news again. Just a few days ago, the company announced that they were closing 300 North American stores by 2027. The stock is down 77% from its peak. And the whole pizza war thing, it's not even close. Domino's has 22,000 stores doing $20 billion, and Papa John's has 6,000 doing $2 billion. The reason was, while Papa John's had spent decades arguing about the quality of their sauce, Domino's Pizza had reinvented itself, become basically a technology company, making it really easy to order online and get delivery really fast and track your orders, and also gone out to the market around the 2010 era and advertised to their customers that their pizza sucked, they were sorry, and they were gonna make it better. Crust is a little too rubbery. We're bringing in the new and improved pizza. Carlos, but if it's not great, tell me. I'm eating my words. So what was the key differentiator for Papa John's for so long, that the ingredients were better and therefore the pizza was better, suddenly wasn't a differentiator at all. Papa John's was left without any kind of advantage in the market. So if you look at the major pizza chains out there, suddenly you have Little Caesars that owns the $5 dirt cheap price point. You have Domino's that owns efficiency and now is relatively decent quality that tastes pretty good. And then you have two brands that are left over, Papa John's and Pizza Hut. In my video on Pizza Hut, I talked about how the death of kind of sit-down nostalgia and sitting down in restaurants is what's killing Pizza Hut. Well, Papa John's is in the same place. They're just a brand without a home. Competitively, there's no real reason to go to Papa John's. Like, I don't even know why I would care. Not that we order much pizza at my house anyway, because I'm lactose intolerant. So yay me. Uh, welcome to the 50s, kids. That's just the way it works as you get older. But in the end, like, why would somebody shop at Papa John's? Like, I have no idea. I still associate the brand with John himself and all that crazy stuff. And I love Shaq. Everybody does. It's hard not to. Such a genuinely cool guy. Uh, but in the end, like, the brand's associated there. I don't know why I would care about what matters above all that stuff. Just why is the pizza any good? In the end, this is the thing to think about when you're building a business. Like, is your moat really something that can stick around? For the long term and keep you competitive and keep you safe from competition coming in and eating your lunch. And in this case, the moat that Papa John's had, which was their brand and their differentiator of like better quality ingredients, both those things got eroded away. And here they are, a brand without a home. Oh, and I promised to tell you why John selling all of his shares for $500 million would prove to be so crazy. Well, if he'd have held on just another year and a half or so and done it at the peak of COVID he would have been able to sell that stuff for close to $1.5 billion. In other words, he wasn't only being crazy with how he was running his mouth in the media, he was also being crazy with his stock trades. Let me know what you think in the comments below. I try to read them all. See you next time.