While Papa Murphy's International prepared to take its Papa Murphy's Take 'N' Bake Pizza chain public with its March IPO filing, the company had more than paperwork to deal with. The chain was also working behind the scenes to quell broad-based opposition by angry store owners to many of its policies, an internal company survey of store owners obtained by this blogger reveals. In an exclusive interview, Papa Murphy's senior vice president Jayson Tipp discusses the survey's findings, and what the company's been doing in recent months to improve franchisee relations.
What had store owners feeling glum? Their gripes are detailed in a 23-question survey conducted by the Papa Murphy's Franchisee Association, the longstanding organization for the chain's franchise owners. Conducted last fall and released in December 2013, the survey was taken by over 300 franchisees who control more than 1,000 of Papa Murphy's 1,400 stores.
The survey paints a picture of owners unhappy with how the chain deploys advertising dollars, designs ad campaigns, determines product pricing, helps floundering stores, and receives franchisee feedback. Many franchisees are not thrilled with the company's direction since management changed in the wake of PMI's 2010 sale to private-equity firm Lee Equity Partners.
We already knew that, of course, because two groups of franchisees are suing Papa Murphy's over what they charge is unfair dealings by the franchisor. The first filed suit in April, and a second group filed in late June. Those two suits involve just 36 franchisees in total, though.
The survey offers the opinions of a much wider base of owners, and offers many new details on how deep dissent runs in Papa Murphy's franchisee community. It's to be taken with a grain of salt, as it wasn't administered by an outside polling group but by the association itself, which clearly had an axe to grind. But even taking that into account, the survey is eye-opening.
Below are some of the hot-button issues franchisees noted in the survey, along with excerpts of actual owner comments that accompanied the survey answers.
- Rising costs, shrinking sales: More than 87% of owners said sales and profit growth aren't keeping up with the rising costs of operating Papa Murphy's stores. These include a hike in required ad spending in the past year, and a store-remodeling program the company has introduced that costs $30,000 to $70,000. "My profits have gone down, down, down," one franchisee wrote. "My sales are at an all-time low!" another vented.
- Promotional pricing: Franchise owners disliked the company's low-priced, $5 Fave promotion, with 86% saying the company's discounting strategy is hurting profits. "Faves will kill this brand!" one owner commented. "The Faves were a bust," wrote another.
- Pressured to participate: More than three-quarters of the survey respondents reported they feel pressured or intimidated by Papa Murphy's to comply with corporate programs, or lose their national advertising support. "There are veiled threats and intimidation," wrote one. "That's all they do, is apply pressure," wrote another. Nearly three-quarters also said they wanted more input in the timing and content of the chain's commercials.
- Starving new markets: Three-quarters of the owners disagreed with the company's decision to allocate most ad resources to bigger, more mature markets rather than struggling newer territories. "[They] need to help more with struggling markets," one owner wrote.
- Too-expensive remodels: Over 90% of the respondents objected to the idea of spending more than $200,000 to remodel their stores to Papa Murphy's favored new format, saying the outlay would bankrupt their businesses. Would they do a remodel? "Only if PMI pays for it," one owner vowed.
- Deaf ear: More than 84% of the owners felt PMI doesn't value their opinions or want their input. Even more said responses from corporate lacked clarity and a sense of urgency. "They really don't give a rat's ass what we think," wrote one. "That's as nice as I can put it."
- Wouldn't do it again: In perhaps the most troubling finding in the survey, over 86% of the surveyed franchisees said they wouldn't open a Papa Murphy's in a new market, with what they know today about the chain's operation. "NEVER!!!" wrote one. "I wouldn't invest a dime," said another.
- "No confidence" vote: Over 85% of the owners said they disagree with the company's direction. "I am considering closing or selling all stores," wrote one. "I am scared to death," another wrote.
Among the demands that came out of the survey were a request for six months' grace from paying franchise royalties for struggling stores, and more ad support for newer markets.
Papa Murphy's response
After the survey came out, Papa Murphy's and leaders of the Franchise Association met in March, relates company senior VP Tipp. The company also continues to meet quarterly with two different advisory councils, one made up entirely of franchise owners. Management has hit the road to visit more than a dozen markets and talk to local owner groups.
Tipp says the unrest was in part due to lack of communication about their programs and strategies. For instance, the company's preferred remodel program was reputed to cost over $300,000, but in fact it's more like $250,000. He says a franchisee committee gives input on their promotions and pricing decisions.
Tipp says the update is needed. "Our current design is dated," he says. "We want to look like a current brand and be a place consumers want to visit."
The loathed Faves program, designed to counter Little Caesar's $5 pizzas, he says has been re-engineered to ensure profits for franchisees, despite the low price point.
All the activity at corporate has smoothed a lot of feathers, helped many franchisees better understand the company's direction -- and given them time to adjust to the changes.
"We're in a better place today, as evidenced by all the interactions with franchisees we've had this year," Tipp says.
Positive financial trends have also helped soothe some wounded feelings. Papa Murphy's average weekly sales continue to rise chainwide over the past year, and now top $11,700. That's a more than 3% increase over the same period a year ago -- in a model where around $6,000 a week is considered break even.
Thirty-year franchisee Chris Copp, who's been a Franchisee Association officer, attended two of the in-person meetings with Papa Murphy's leadership. He says those growing sales have helped franchisees feel more positive about the company's future.
He calls the request for royalty relief "a pipe dream" that was never realistic, but says he feels progress in other areas has been made and the mood is generally more upbeat.
"It'd be interesting to see another survey now," he says.
Despite the sales growth at the store level, as a corporation, Papa Murphy's continues to struggle for profitability -- it's declared a small loss in each of the past three years.
Lawsuits proceed
Meanwhile, the franchisee lawsuits against Papa Murphy's roll on, brought primarily by stores whose owners report they also aren't making a profit.
This week, Papa Murphy's won a point when one of five legal claims against it was tossed out in court. Papa Murphy's was pleased because that count, which alleged fraud, carried the potential of treble damages.
The court also ordered the franchisees to be more specific and detailed in their complaints. Between the two changes, it may now be less attractive for additional franchisees to jump on the lawsuit bandwagon. The suits are still in an early phase -- we'll see what else come to light as they proceed in court.
One happy franchisee's POV
Not all franchisees think Papa Murphy's is headed in the wrong direction. Longtime franchise owner Tom Lovelace has built his Papa Murphy's empire to 61 stores in seven markets, including some in the newer, warm-weather markets the suing franchisees allege aren't doing well for the chain. He's in Tucson, Ariz., as well as four Texas markets. Count Lovelace among the owners who's expanding -- chainwide Papa Murphy's added nearly 100 stores last year, and expect to add just over 100 this year.
Personnel were shifted around from established to newer markets to help struggling franchisees, Lovelace notes -- a change many franchisees didn't like, as some lost seasoned support staff in the switch. But it needed to happen to support new-market development, he says. "I lost people I worked with for years," he says. "But it's part of the process."
Lovelace thinks some newer franchisees don't understand how much work and time it takes to build up a franchise to profitability, especially in a newer market. He says he's happy with the grand-opening support Papa Murphy's offers and how responsive the company is to franchisee concerns.
"I love the direction of the company," he says. "Every time I see [company CEO and president] Ken Calwell, he's urging franchisees to contact him. He's very open, for a public company CEO."
