[CORRECTED: Contains updates on who qualifies for Papa Murphy's new-store owner plan, the timeline for implementation, and on its 2Q results.]
On the surface, Papa Murphy's new incentive plan for owners who sign up to open a new pizza take-out store is fairly routine: New or existing franchise owners willing to open new units in 17 key markets the chain wants to develop can operate for a year without paying royalties to corporate parent Papa Murphy's International. These owners can also get $10,000 in free, cutting-edge digital signage, among other goodies.
Many chains try to lure new franchise owners with offers of reduced royalties -- Jamba Juice and Del Taco are among the chains that have rolled out similar incentive plans this summer.
But the context of Papa Murphy's offer is unique, because many of the chain's struggling existing franchisees have been asking for royalty relief for over a year. And the company has refused to grant it. For these owners, the offer to give owners of new stores a 12-month royalty holiday has to sting.
Early this year, the owner organization Papa Murphy's Franchisee Association was calling for royalty relief on a sliding scale for stores bringing in less than $8,000 a week -- the group's calculation of their breakeven point. (The company claims breakeven is closer to $5,300, due to the take-and-bake model, which doesn't require a costly pizza oven.)
Papa Murphy's International has been unreceptive to the idea of reduced royalties for existing owners, and this summer two groups of franchisees filed lawsuits against Papa Murphy's, charging they'd been misled about the chain's performance. (The suits are currently on hold because not all of the 28 suing franchisee groups have completed a required mediation process.)
Another one bites the dust
More recently, one franchise owner of nine units in the Dallas market filed for bankruptcy a few weeks ago, the company confirmed. A Chapter 11 reorganization plan for those nine stores, filed this week, proposes severing the company's relationship with Papa Murphy's. The owner, DTP Pizza, is a participant in the lawsuits against Papa Murphy's, and has sparred with the chain over its operating rules in the past, too.
With 23 stores closed as of end of June, and now these nine Dallas stores a question mark, Papa Murphy's is motivated to keep its growth on track -- hence, the royalty-break offer.
The company insists it's not seeing an uptick in closures, and cites its historically low average annual store-closure rate of 2.3%. But if the nine Dallas stores closed, Papa Murphy's will be nearly at that figure, with four months of 2014 yet to come.
Meanwhile, Papa Murphy's store-opening plan is on course for this year, with the new incentives intended to pay off in 2015, the company says. "We are on track to hit our target of at least 105 new domestic francise openings in 2014," says Jayson Tipp, PMI's senior VP of marketing, strategy and technology.
A mixed Q2 doesn't help
The developments come on the heels of mixed second quarter results for Papa Murphy's. Domestic franchise owners saw sales growth slow to 1.2%, down from 3.6% in the same period a year ago. Interestingly, company-owned stores saw sales jump 5.7%, a similar figure to a year ago -- maybe those store managers could share some best practices with the franchisees?
On the plus side, the chain has added over 70 stores in the past year, and total revenue grew more than 14%. But losses also incrased -- the company was in the red $1.6 million for the quarter (mostly due to its IPO costs), compared to basically flat results in the year-ago period.
Why not give the struggling owners a royalty break? There's a feeling in franchising, and definitely at Papa Murphy's, that established owners need to pull their weight. They signed an agreement and got the benefit of using the Papa Murphy's brand and products, and need to pay royalties for that privilege.
Extending a carrot to bring in new owners, on the other hand, is considered a marketing tactic that's needed to compete with the many fast-food franchise offers out there.
There's a golden rule in franchising that when franchise owners are unhappy and suing, there's always one sure-fire cure -- rising same-store sales and growing store-level profits. Right now, Papa Murphy's isn't delivering that for many of its owners, so the forecast is for more franchisee unrest ahead.
