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FDD Talk 2019: Papa Murphy’s Franchise Review (Financial Performance Analysis, Costs, Fees, and More)

America's Most Lucrative Franchises of the YearAmerica's Most Lucrative Franchises of the Year

Papa Murphy's Store Exterior Photo by PRO-TECT TINT LVPapa Murphy's Store Exterior Photo by PRO-TECT TINT LV

In this FDD Talk post, you’ll learn the following:

  • Section I – Background information on the Papa Murphy’s franchise opportunity, including relevant news updates
  • Section II – Estimated initial investment for a Papa Murphy’s franchise, based on Item 7 of the company’s 2019 FDD
  • Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for a Papa Murphy’s franchise, based on Items 5 and 6 of the company’s 2019 FDD
  • Section IV – Number of franchised and company-owned Papa Murphy’s outlets at the start of the year and the end of the year for 2016, 2017, and 2018, based on Item 20 of the company’s 2019 FDD
  • Section V – Presentation and analysis of Papa Murphy’s financial performance representations, based on Item 19 of the company’s 2019 FDD, including information on the:
  • 2018 average, high, and low net sales for the top third, middle third, and lower third of the 1,397 domestic Papa Murphy’s Take ‘N’ Bake Pizza stores, both franchise-owned and company-owned, that were open and operating for all of the trailing 52 weeks ending on October 1, 2018
  • 2018 average net sales, cost of goods sold, labor costs, advertising expenses, occupancy costs, other store expenses, royalties, and store contribution for the 633 Papa Murphy’s stores that were open and operating for all of the trailing 52 weeks ending on October 1, 2018, and submitted profit and loss statements in the appropriate format for this period
  • 2018 average weekly net sales during the first 12 full operating weeks for the 8 Papa Murphy’s stores that opened in fiscal year 2018 and had 12 or more full operating weeks as of the week ended December 31, 2018

Section I – Background Information

28 Things You Need to Know About the Papa Murphy’s Franchise

Acquired by Canadian Restaurant Group

1.  In early April 2019, Papa Murphy’s announced that it had entered into a definitive merger agreement with MTY Food Group – which owns Extreme Pita, Jugo Juice, Koya, and TacoTime – under which MTY would acquire all of the issued and outstanding shares of common stock of Papa Murphy’s for a cash consideration of $6.45 per share, representing a total transaction value of approximately $190 million.

2.  The terms and conditions of the merger agreement were unanimously approved by the boards of directors of both companies. The transaction is subject to customary closing conditions including receipt of applicable regulatory approvals.

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3.  Eric Lefebvre, chief executive officer of MTY, said, “Papa Murphy’s is a unique concept with over a 35 year history of providing a superior quality product made with fresh ingredients. We believe the pizza segment is highly attractive due to its size, fragmented nature and growth potential. The Papa Murphy’s brand is well loved by its loyal customers and is supported by a strong network of franchise partners. We expect the combination of these two companies and the expertise it brings to produce tremendous opportunities for MTY’s U.S. expansion objectives.”

4.  Jean Birch, chairperson of the board of directors of Papa Murphy’s, added, “The board of directors and our advisors have thoroughly evaluated all options available to us and are confident that this agreement provides immediate value to our stockholders at a premium over our current share price. Merging our unique, differentiated brand with a global leader in franchised restaurant concepts will accelerate on-going efforts to enhance our convenience and relevance and maintain our position as the number one Take ‘n’ Bake pizza chain in the United States.”

Closed Several Stores While Making Sweeping Changes to Improve Convenience Options

5.  In mid-March 2019, Papa Murphy’s announced its fourth quarter results for fiscal year 2018. The company ended the quarter with 106 company-run stores, which represented a net decrease of seven stores compared to Q3 and 39 less than Q4 2017. This reflects 10 closures over the last year and a net reduction of 29 stores that were franchised – a push Papa Murphy’s is making as it tracks back to at least a 95 percent franchised system with no more than 50 corporate units by 2020.

6.  On the franchised side, the brand’s Q4 count of 1,331 was down from 1,378 in the prior-year quarter. The decrease comprised of a total of 87 franchise store closures offset by 11 openings and a net refranchising of 29 company-owned units over the last 12 months.

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7.  In the same press release, Papa Murphy’s said that it was in the process of significant consumer-facing and non-consumer facing changes. While the brand saw some positive lift from internal initiatives – October marked the first period of same-store sales growth in 37 months – Papa Murphy’s retracted its unit count by 97 restaurants in 2018.

8.  Moving forward, CFO Nike Rupp said Papa Murphy’s has “significant opportunity for franchise development, both in the U.S. and abroad.” For 2019, the brand expects to open about 15 franchises, with at least 10 units in the United States. The company did not offer guidance on closures for this coming year.

9.  As Papa Murphy’s charts a return to profitable and sustainable growth, it’s not sitting back. The initiatives taking place at the pizza chain are extensive, and they’re providing some top-line improvement in the early going. In Q4, 48 of Papa Murphy’s domestic designated market areas showed growth, up from 39 in Q3. One thing the DMAs had in common: they fully adopted a new marketing message that streams a low, broad, and consistent value story across all channels.

10.  Weldon Spangler, CEO of Papa Murphy’s, said, “becoming more convenient has become table stakes in the restaurant industry.” Papa Murphy’s has a lot of room to grow on that front, especially compared to the other major pizza chains that flood the marketplace with tech-forward carryout and delivery strategies.

11.  In March 2018, Papa Murphy’s rolled out a new ecommerce platform that serves as the foundation for many of its convenience initiatives, Spangler said. It’s already led to a steady increase in the mix of online orders with Q4 ecommerce sales jumping 34 percent over Q3. Online check average was roughly 28 percent higher than in-store orders.

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12.  Also, delivery orders still represent a very minimal part of Papa Murphy’s overall business. The mix in its top 10 stores offering delivery hit 4 percent in Q4. At year’s end, delivery was live in 480 restaurants, with highly incremental orders, Spangler said. The company plans to double that count by the end of 2019, which would bridge a significant convenience gap between Papa Murphy’s and its main competitors.

13.  Another change that Papa Murphy’s made in late 2018, was the introduction of the brand’s mobile app. It focuses on seamless digital ordering, including favorites and the ability to quickly reorder with saved payment information. It is also integrated into Papa Murphy’s POS system, which has helped the chain minimize operational impact, Spangler said. He added the app has been downloaded more than 243,000 times to date and has generated almost as many orders. Papa Murphy’s plans to add more to its mobile app, including a loyalty program. According to Spangler, Papa Murphy’s is in the process of selecting a partner and is targeting a system-wide rollout by late 2019.

14.  Spangler added, “These digital tools are not only great facilitators of driving convenience, but importantly, they are driving growth of our text and e-mail databases. These databases enable powerful targeted one-to-one marketing capabilities that will allow us to further tailor our messaging to the needs of individual customers in addition to facilitating more effective and efficient marketing efforts.”

15.  Additionally, Papa Murphy’s has been working on increasing brand awareness. In August 2018, after an evaluation of the company’s brand positioning, digital marketing, and social media strategies, Papa Murphy’s unveiled a new creative design to ensure it was reaching younger customers without disenfranchising the brand’s current customers. The message focuses on Papa Murphy’s product and its do-it-yourself poisoning, “clearly demonstrating our differentiation,” Spangler said.

16.  In conjunction with the changes, Papa Murphy’s has shifted more adverting dollars toward digital marketing. It’s a more cost-effective path and broadens the company’s reach.

Improving Relationships with Franchisees

17.  As part of Papa Murphy’s recent efforts to overhaul every aspect of the brand, Papa Murphy’s spent the past year improving its relationships with its franchisees. According to CEO Weldon Spangler, “We’ve made significant progress in strengthening these relationships throughout 2018 and believe that most of our franchise owners would agree.”

18.  As an example, in January, Papa Murphy’s introduced an offer that had 96 percent participation and buy-in from the system, all arranged within a four-week time frame. “That kind of participation would have been incredibly hard, if not impossible, to accomplish just a year ago,” he said.

19.  Starting in 2019, the company said it is adding five regional franchise advisory meetings per quarter, “with the goal of getting in front of more of our regional franchise leaders and elevating our connection to the broader franchise owner base,” Spangler said. A key is the systematic improvement of processes in the company’s support center, in the field, and in the stores, he added.

20.  Papa Murphy’s has also developed an ongoing in-store career path training program it calls “One Bit at a Time.” The platform focuses on skills instead of positions. Spangler said, “The goal of the program is to empower crew and management members, adding value to the recruitment and retention process.” The training program began in Q4 of 2018 and was introduced in more than 700 stores. System-wide rollout is expected by the end of 2019.

Company History

21.  Papa Murphy’s was founded in 1995 after two different take-and-bake pizza chains, Papa Aldo’s Pizza and Murphy’s Pizza, were acquired and consolidated by Terry Collins. Papa Aldo’s was originally founded in 1981 in Hillsboro, Oregon, while Murphy’s Pizza was started in 1984 by Robert Graham in Petaluma, California.

22.  Before starting Murphy’s Pizza, Graham owned a convenience store and noticed that one of his vendors was selling uncooked pizza. Interested in the idea and noting that home ovens couldn’t reach the high temperatures required for traditional dough, Graham asked the vendor for his crust recipe. After the vendor told Graham he would sell him the recipe for $10,000, Graham set out to develop his own dough.

23.  After trying out hundreds of recipes, Graham created a dough he was satisfied with and opened several Murphy’s Pizza outlets. However, Graham did not have fast-food experience and his business nearly failed.

24.  Then in 1988, Graham met Terry Collins, a longtime fast-food executive with experience at Burger Chef and Pepsico. Graham sold Collins a controlling 51 percent interest in the seven-store Murphy’s Pizza chain for $500,000. Two years later, Collins expanded his portfolio when he acquired 65 Papa Aldo’s stores. Unlike Murphy’s Pizza, Papa Aldo’s had strong management, but also struggled with sales because of an inferior product.

25.  After taking over Papa Aldo’s, Collins replaced its product with the recipe from Murphy’s Pizza and turned both businesses around. Collins continued to run both brands separately until 1995 after successfully testing a unified brand the year before.

26.  To help grow the new Papa Murphy’s brand, Collins hired Thomas Morrell, a Wendy’s veteran with 25 years of fast-food experience, to serve as president. Collins and Morrell refined the Papa Murphy’s concept before launching a franchising program. Since then, Papa Murphy’s has grown across the United States, Canada, and the Middle East.

27.  In early April 2019, Papa Murphy’s agreed to merge with MTY Food Group of Canada.

Entrepreneur’s Franchise 500

28.  Papa Murphy’s did not rank on Entrepreneur’s 2019 Franchise 500 list.

Section II – Estimated Costs

  • Please click here for detailed estimates of Papa Murphy’s franchise costs, based on Item 7 of the company’s 2019 FDD.

Section III – Initial Franchise Fee, Royalty Fee, Marketing Fee, and Other Fees

  • Please click here for detailed information on Papa Murphy’s initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2019 FDD.

Section IV – Number of Franchised and Company-Owned Outlets

Franchised

2016

  • Outlets at the Start of the Year:  1,369
  • Outlets at the End of the Year:  1,369
  • Net Change:  0

2017

  • Outlets at the Start of the Year:  1,369
  • Outlets at the End of the Year:  1,334
  • Net Change:  -35

2018

  • Outlets at the Start of the Year:  1,334
  • Outlets at the End of the Year:  1,291
  • Net Change:  -43

Company-Owned

2016

  • Outlets at the Start of the Year:  127
  • Outlets at the End of the Year:  168
  • Net Change:  +41

2017

  • Outlets at the Start of the Year:  168
  • Outlets at the End of the Year:  145
  • Net Change:  -23

2018

  • Outlets at the Start of the Year:  145
  • Outlets at the End of the Year:  106
  • Net Change:  -39

Section V – Financial Performance Representations (Item 19, 2019 FDD) and Analysis

Part 1 – System Store Performance

  • As of October 1, 2018, there were 1,420 domestic Papa Murphy’s Take ‘N’ Bake Pizza stores open.
  • The statements in this System Store Performance section are based on information reported by the 1,397 domestic Papa Murphy’s Take ‘N’ Bake Pizza stores, both franchise-owned and company-owned, that were open and operating for all of the trailing 52 weeks ending on October 1, 2018. These stores represent 114 company-owned stores and 1,283 franchise-owned stores (collectively referred to herein as “System Stores”).
  • The System Stores were divided into three groups with the same number of stores in each group based on Net Sales results: top third (“High”), middle third (“Medium”), and lower third (“Low”).

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