Article

How Papa Murphy's controlled record-high cheese prices in Q3

The company's CEO believes the company has the potential to triple its domestic footprint.

November 14, 2014 by Alicia Kelso — Editor, QSRWeb.com

The pizza segment has had it rough with commodities this year, especially with record-high cheese prices. Papa Murphy's, however, still managed to turn in a 4.6-percent comp-store sales increase during its third quarter, which included an 8.4-percent increase at company-owned stores.

During the company's earnings call Thursday afternoon, CEO Ken Calwell attributed the company’s positive performance to having a differentiated business model and an "exciting" new product pipeline.

That pipeline includes the recent national launches of Gourmet Delites, Thick 'N' Cheesy Home Baked Bread and a new gluten-free offering. This mix allowed Papa Murphy's to avoid taking pricing to offset the impact of cheese costs, which are 19 percent higher than this point last year.

"We’ve been very focused on not taking price through the third quarter, but rather growing primarily as a result of transaction growth and putting the focus primarily on the overall base business versus putting a focus on price," Calwell said.

The Gourmet Delites line, which is now a core product for the brand, has "significantly" less cheese than Papa Murphy's base pizza line.

"To a degree that we are able to drive the mix on those, that helps and its part of our strategy of trying to be able to mitigate against the higher prices of cheese long term," Calwell added.

He doesn't completely rule out taking pricing in the future, but adds that testing needs to be done first to survey the impact.

"Basically what we saw was when you test a product like Gourmet Delites with the higher quality ingredients like Angus steak and spicy fennel sausage, it gives you some opportunity to take a little of their price along with that," he said. "So you kind of have two things working there for you – a little bit of price you're able to take as part of that new product news, and with the product that has less cheese on it than our base product line. It's a nice combination."

Calwell added that the company is careful to take gradual pricing and, if necessary, to take it around a product where the consumer is getting more. 

Growth and operations

Product innovation and mix wasn't the only driver working in Papa Murphy's favor for Q3. The company also continues to execute its "five star operations program," which drove company store comps.

"We know (operations improvements) tie to sales," Calwell said. 

The chain also continues its POS rollout and is planning more digital initiatives.

"We expect, over the next few quarters, a full POS rollout and online ordering across the system," Calwell said. "We are continuing to work to drive more digital marketing initiatives and initiatives throughout the week that continue to be helpful from a sales perspective."

Growth runway

Calwell said Papa Murphy's has the potential to reach "at least" 4,500 US stores, which would more than triple its current footprint.

"In addition, we are still very much in the early stages of our international expansion," he said, adding that there are especially opportunities in Canada and the Middle East.  

In Q3, the company opened 16 new units, including 13 in the US. Year-to-date, Papa Murphy's has opened 57 new stores, including 50 domestically.

Calwell said the company is testing some franchise incentives, particularly tied to marketing, to create brand awareness in newer markets.

"We are very interested in figuring out ways to drive our overall brand awareness, particularly in our focus development markets and we’ve done a very comprehensive analysis to figure out how we can funnel and help support in advertising dollars and operations help, as well in coaching and training those markets to help drive faster overall brand awareness," Calwell said. 

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