Papa John's

Papa John's recent sales have suffered dramatically because of very bad publicity which sparked the brand's ongoing turnaround. A restoration of consumer sentiment is expected to take 12-18 months and corporate reported in 1Q19 that the brand is not even 12 months past its 2nd big event. The resultant brand overhaul included: the removal of company's founder, CEO & marketing spokesman; a $250MM investment from a turn-around investment fund (Starboard Value LLP); the appointment of new board members including NBA star Shaq O'Neal who will also act as brand ambassador for at least 3 years; and an audit on brand culture & new appointments to enhance diversity. PJ's new positioning around a relentless pursuit of "better" and bringing people together addresses the expectations of Millennials & Gen Z consumers for companies to have an active role in making the world a better place. Long-term growth priorities include: making people a priority; improving brand differentiation; creating accessible value; implementing tech advancements; and improving unit economics. The goal is to create a customer-centric organization which will leverage customer data to integrate and innovate across every consumer touchpoint. Previously, the brand largely followed the founder's singular vision of keeping focused on better pizzas. Essentially, PJ seeks to evolve into a brand management organization with marketing based upon: customer segmentation; customer needs assessment; and customer journey mapping. Its new CMO's mandate is to better connect with customers around the brand's product quality differentiator (fresh original dough, fresh packed sauce, meats without fillers & pizzas with no artificial flavors or colors) and accessible value (making it easier for customers to purchase PJ’s pizza whenever, wherever & however they want) without sacrificing one for the other. These new consumer insight & analytical capabilities will be applied to its Papa Rewards loyalty program via its 4Q18 re-launch and the brand plans to leverage customer data into 1-to-1 marketing designed to drive traffic without relying on blanket discounts across all channels. Trials around a broader menu to better compete with the delivery aggregators and Domino's and tests of how to execute value on the national and local level should help to improve the brand's relevancy. In any case, it is a challenge to translate a pizza+ positioning into a higher check given the commodity nature of this segment which is so reliant on a lower income demo. In conclusion, while Papa John's brand has suffered a tremendous hit, its ongoing repositioning is well designed for the patient so long as the chain can figure out how to do value as a pizza+ player. 

1Q:19 Same Store Sales

Domino's

Domino's success as the largest US pizza chain (#1 delivery & top 3 carryout with a 36% domestic share among the top 4 players) reflects its tech innovation positioning which is based upon the idea that consumers primarily choose pizza brands by their ordering & delivery options. In essence, Domino’s emphasizes its leading-edge, digital ordering convenience and seamless payments (frictionless & fast delivery) as opposed to "flavor-of-the-month" LTOs. The chain's positioning is also based upon compelling everyday value with deals at the $5.99 & $7.99 price points that have run so long that Domino’s believes they currently contribute to brand equity. Domino's believes that scale enables value and that profit power is better than pricing power and it is notable that Domino's delivery costs are much lower than 3rd party delivery aggregator options with the hope of even lower delivery costs driven by its "fortressing" market fill-in strategy. The brand's impressive 65% digital sale mix benefits from 18 ordering options on its AnyWare platform and its average check is +36% higher than the pizza segment average, reflecting a greater number of add-ons (salads, chicken, stuffed cheesy bread & desserts) and less discounting associated with digital sales. Sales also benefit from the use of effective marketing stunts that reinforce its brand focus and include: “points for pies” which allows customers to receive loyalty reward credits for eating a competitor’s pizza; carryout insurance (replacing pies that are inadvertently dropped, etc.); pot hole paving free for municipalities (smooth ride to protect pizzas in transit); and free “hot spot” delivery to places like public parks, etc. Domino's 20MM member Piece of the Pie Rewards loyalty program effectively drives traffic and its IT and marketing scale represents a key advantage relative to smaller industry players who represent the bulk of Domino's competition and source of market share gains. Notably, Domino's traffic grew +7.4% from 4Q17 to 3Q18. In conclusion, Domino's story remains a real 21st century tale of how an iconic brand is leveraging digital and big data to create an edge in providing convenient access and low prices to American consumers who never grow tired of their pizzas.

Menu & Promotions

Report Highlights

• RR’s Menu & Promotions analysis provides data for 56 chains (33 QSR and 23 FSR) including: (1) a 5-year history of total menu items (2014 – 2018); (2) promotional mix by quarter; (3) new product intros; (4) average check; (5) sales composition; (6) menu category mix; and (7) monthly new product calendar.
• After years of menu optimization in order to simplify operations, speed-up service and improve food quality, average menu size was relatively unchanged from last year (-1.4% for QSR and +0.2% for FSR) which suggests the industry has finally found a point of equilibrium as the brands balance providing ample menu variety with keeping menu complexity in check. Innovation is currently focused on customization options, new digital ordering platforms and delivery access.
• New product introductions declined (-4.6% for QSR and -4.1% for FSR) due to a continued focus on value and efforts to reduce operational complexity. Notably, increases in the QSR value promotional mix was negatively correlated (-55%) to quarterly comps over the last couple of years. This means that a QSR value focus has been detrimental to sales, suggesting deal fatigue. Not surprisingly, increases in the FSR value promotional mix helped drive comp growth (positive correlation of almost +21%). Rather, QSR sales have benefit from premium promotions and new product news. This is the inverse for FSR where value is all that matters after years of steady price increases.
• Average check growth accelerated for QSR (+3.2%) but moderated for FSR (+1.9%). The Food at Home CPI turned slightly positive (+0.4%) for the first time in 2 years, narrowing the price gap between restaurants and grocery stores.
• Although delivery still represents a very small sales mix, it is growing rapidly as a result of 3rd party aggregators.

Wendy's

Wendy's “Quality is our Recipe” brand positioning stresses a commitment to fresh, never frozen, North American beef in the form of distinctively square cooked-to-order patties that are juicier, hotter and made with more melted cheese. The brand's “freshness” positioning is reinforced by: daily produce prep; bakery style buns; mayo on its burgers; and use of smaller birds which make its chicken fillets more tender & juicy. Wendy's menu strategy is to: reinforce its hamburger quality leadership; raise consumer expectations with its chicken products; drive unique visits through salads & beverages; innovate with on-trend flavors; and offer a multi-faceted approach to price/value. Menu renovations extend beyond upgrades to more tender and juicy burgers/chicken to improvements across all menu items including salads & fries. While the chain's successful 4 for $4 value platform is driving traffic, the challenge is to move beyond traffic-drivers to mix drivers with its $5+ price point offers that should represent the reward for Wendy's high quality QSR+ halo. Marketing is well balanced between mainstream media (TV) and social media marketing which is anchored by a 5 person team well known for aggressive comebacks (particularly as it relates to securing credit for its use of costly fresh beef) and progress with consumer-facing digital initiatives include the initiation of mobile ordering, mobile offers as well as the roll-out of delivery. Facilities benefit from lower cost fast casual-like remodel options which work better for lower AUV stores and 50% of the system is currently updated. However, despite executing around all these elements for improvement, comps have generally underperformed the segment average even though they have been positive since 2011. Resultantly, store-level EBITDAR margin pressure reflects that AUV growth has not kept pace with higher food and labor costs. In conclusion, while Wendy's is doing a good job of accentuating all the accompanying elements around its fresh beef/premium positioning, the 5th largest player in the QSR sandwich segment is still working on the mechanics of translating this core competency into a higher check sufficient to drive comp outperformance.