Papa Murphy'S International, Inc. Business Information, Profile, and History

Company Perspectives:

It is the energy and entrepreneurial spirit of our franchisees that makes Papa Murphy's the innovative and customer centered organization that it is.

History of Papa Murphy'S International, Inc.

Operating out of Vancouver, Washington, Papa Murphy's International, Inc. is a privately held pizzeria chain devoted to the "take-and-bake" concept, in which customers purchase pizzas appropriate for baking in home ovens. In addition, Papa Murphy's stores offer other uncooked products, such as calzones, lasagna, and cookie dough as well as salads, positioning the company in the home-meal-replacement business. It owns only a small number, around 5 percent, of its 750 stores located in some 22 states, relying on a franchising plan, the rollout of which has been carefully controlled by management. Thus far, Papa Murphy's management has concentrated on West Coast and midwestern states, eschewing large urban areas in favor of smaller communities, with the intention of backfilling states once the concept has taken hold in areas where marketing costs are less expensive. Nevertheless, Papa Murphy's has grown fast enough to become the largest take-and-bake chain, and has outpaced more established chains such as Godfather's Pizza and Round Table Pizza to become the sixth largest pizza chain overall.

Origins of the Major Pizza Chains: 1950s-60s

In the 1950s, pizzerias were mom-and-pop operations that took advantage of the pizza craze that had developed after World War II. Then, in 1958, Frank and Dan Carney opened the first Pizza Hut in Wichita, Kansas. A year later they incorporated and opened their first franchise unit in Topeka, Kansas. While Pizza Hut was devoted to a table and chairs concept for pizza, Detroit native Tom Monaghan founded Domino's Pizza in 1960 and pioneered the delivery chain. A short time later Michael Ilitch, also from Detroit, founded Little Caesars, which focused on the carryout segment for inexpensive pizza. Each of the three future pizza empires unknowingly carved out a unique share of the market and for many years were dominant among pizza chains, although the majority of pizza businesses would remain independently owned until the 1990s. The origins of the take-and-bake pizza concept are uncertain, despite general agreement that it dates back to around 1980. Mom's Bake at Home Pizza of Philadelphia, Pennsylvania, was one of the early chains, and lays claim to being the first. However, most of the segment's growth took place on the West Coast.

Papa Murphy's was originally two separate take-and-bake pizza operations. Papa Aldo's Pizza was established in Hillsboro, Oregon, in 1981. Murphy's Pizza began in Petaluma, California, in 1984. Its founder, Robert Graham, owned a Petaluma convenience store when he noticed that one of his vendors was selling uncooked pizzas. Aware that home ovens could not properly bake pizza dough, which required commercial 600-degree ovens, Graham asked the vendor how he made his crust. Told that the recipe would cost him $10,000, Graham decided to find out on his own. According to company lore, he tried some 250 recipes before settling on a pizza dough that could be baked at 425 degrees in a conventional home oven. With $100,000 in financing he opened several Murphy's Pizza outlets, which did not fare particularly well, due in large part to Graham's lack of fast-food experience. In 1988 he met Terry Collins, a longtime fast-food executive with experience at Burger Chef and Pepsico, where he had just departed after an unsuccessful attempt to establish the company's La Petite Boulangerie bakery chain. Collins was convinced of the potential for the take-and-bake pizza concept and purchased a controlling 51 percent interest in the seven-store Murphy's Pizza chain for $500,000. In 1990 Collins added to his holdings by paying $1 million to purchase the 65 stores of the Papa Aldo's chain. Unlike Murphy's Pizza, Papa Aldo's had strong management, but produced less sales per unit because of a poor product. It relied on frozen rather than fresh ingredients and was reportedly less than generous with its toppings. As a result, bland supermarket deli take-and-bake pizzas cut into sales. Once Collins took charge, he quickly replaced Papa Aldo's product with Murphy's superior pizza and began to regain market share. The chain also added calzones and lasagna to its offerings in order to encourage additional trips from its customers. These changes were instrumental in Papa Aldo's sales for 1991 increasing by more than 17 percent over the previous year.

Merger of Papa Aldo's and Murphy's Pizza: 1995

Collins operated both of his chains separately until 1995. After successfully testing a unified brand in 1994, he merged 86 Papa Aldo's stores with 54 Murphy's Pizza stores to create Papa Murphy's International, Inc. He then hired Thomas Morrell, a Wendy's veteran with 25 years of fast-food experience, to serve as president. Together they began to plan the expansion of the Papa Murphy's chain, relying on franchising and refining the concept before a major rollout.

In reality, much of the Papa Murphy's formula was well established by now. The product was geared towards middle class families strapped for time because both parents worked. Stores required less space than other pizza operations and were often located in modest storefront properties at suburban strip malls where they would be conveniently located for customers running errands. Because Papa Murphy's stores did not cook any of their products they saved on seating space as well as space for ovens. In addition, with ingredients arriving fresh and used immediately, stores could invest in much smaller refrigerators and required less storage space. Moreover, they required no licenses for cooking. Overall, the stores were cooler, cleaner, and safer, resulting in a much friendlier work environment and a lower than average employee turnover rate. Since the pizzas were uncooked, they were considered groceries and therefore eligible for food stamps, which accounted for as much as 15 percent of sales in some stores. In contrast to traditional pizzerias, the necessary employee hours were greatly reduced, divided into two shifts and requiring less staff. Stores generally opened at noon, and because few customers would be looking to bake pizzas late in the evening, they closed at 9 p.m. The first shift, coming in at 9:30 a.m., made dough that would be ready for use the next day, as well as cooked fresh sauce and prepared toppings that would be used that day. Pizza dough was spread on specially made disposable trays on which the pizzas would bake in customers' ovens and would be ready when a customer began the ordering process. The customer could direct the employees as the pizza was assembled behind a plastic sneeze guard. At the end of the line the final product would be wrapped in plastic and a label with baking instructions applied. The entire process required just five minutes.

The Papa Murphy's model was very attractive to franchisees--start-up costs over traditional pizza franchises were significantly less. Savings would also be realized on delivery. Management had experimented with delivery in the early 1990s but soon learned that customers equated delivery with instant gratification and were simply not interested in baking the product themselves. Eliminating delivery also freed store owners of setting up a system and the difficult task of hiring reliable drivers, as well as paying the cost of insurance. Operational savings, as a result, provided Papa Murphy's with a competitive edge, allowing it to splurge on toppings while undercutting the price. In general, a Papa Murphy's franchise could charge one-third less for its product and still generate the same profit as a traditional pizzeria. Collins was also well aware of a common source of friction between franchisees and the parent company and elected not to sell toppings or equipment to the stores, a major revenue stream for other pizza chains. Franchisees were required, however, to buy tomato sauce and dough ingredients from a common manufacturer, but that provision simply allowed the company to use its size in order to negotiate lower prices that would benefit the franchisees. Papa Murphy's also had greater flexibility in changing pizza sizes than traditional rivals, which in some cases alienated franchisees by requiring them to make significant investments in new pans. The company's baking trays were purchased on a week-to-week basis and could be quickly switched to a different size without adversely affecting franchisees. The parent company charged franchisees a 5 percent royalty on a store's weekly gross revenue, and required a contribution for local and national advertising that came to 6 percent. Papa Murphy's was also careful in screening franchise applicants, insisting on owner-operators that relied on the success of the store as their primary source of income, rather than investor groups that ran large-scale operations. Franchisees were only able to open a second store after waiting six months, at which point they could pay a deposit on three additional sites, but these stores could only open at six-month intervals and had to be within an hour's drive from where the owner lived. Locations more than an hour away would require a partner who lived within an hour of the store, and that partner would have to be given decision-making responsibility for the operation. The company also opted to stay away from large metropolitan areas until Papa Murphy's could enter a market with considerable muscle. Clearly the quality of the chain took precedence over rapid growth, which management was well aware had proven fatal to other fast-food franchises.

In 1995, the first year of Papa Murphy's combined operation, total units reached 188 and systemwide sales increased 5.5 percent to $57 million. As more stores were added to the chain and same-store sales showed marked improvement, systemwide revenues increased to $84 million in 1996 and $120 million in 1997. In all, Papa Murphy's had more than 300 locations spread across 15 states. It was the largest player in the take-and-bake category but was now beginning to face competition from a number of quarters. Figaro's Italian Pizza out of Portland, Oregon, boasted 89 stores in eight states. Boulder, Colorado's Nick-n-Willy's World Famous Take-n-Bake Pizza and its 18 stores looked to exploit gourmet toppings. In Chicago another potential rival emerged in HomeMade Pizza Co. Established traditional chains Little Caesars and Godfather's Pizza also introduced take-and-bake pizzas in select markets.

Cheese Shortage Hampering the Pizza Industry: 1999

In 1998 Papa Murphy's added 104 stores and increased systemwide sales to $178 million. It expanded beyond the West Coast, making inroads in Wisconsin, Minnesota, Missouri, North Dakota, South Dakota, and Iowa. The company also added new locations to existing territory by acquiring and converting two small take-and-bake chains: Piccolo's of Fresno, California, and Chief Cheeser's of San Leandro, California. To stay ahead of competition it debuted a new line of stuffed pizza, with a Chicago-style deep-dish pizza as its first offering. A year later it added the "Larger Than Large" product, a 161/4-inch pie that replaced its 151/2-inch large pizza at the same price point and which the company boasted was larger than any pizza offered by the competition. Again, its ability to easily replace its baking tray provided a strategic benefit. During 1999 Papa Murphy's also opened its 500th unit, and now had a presence in 17 states; systemwide sales grew to approximately $250 million. In order to control costs and maintain its pricing edge, the company contracted SYSCO Corporation to serve as a national distributor for the chain. In a further effort to lower costs for franchisees, Papa Murphy's also took steps to create its own proprietary manufactured products. Costs were an especially sensitive issue in light of a cheese shortage that was having repercussions across the pizza industry in 1999. Cheese generally accounted for as much as 40 percent of the cost of the ingredients in a pizza. A milk shortage combined with poor weather and a failure of the U.S. Department of Agriculture to properly report inventories caused the pizza industry to be caught unprepared for the sudden price spike.

Papa Murphy's continued its controlled expansion in 2000, augmenting its longtime marketing campaign that relied on print advertising and coupons with some regional television advertising. It opened its 600th store in October 2000 in the Kansas City suburb of Overland Park, Kansas, thereby becoming the nation's sixth largest pizza chain, according to Franchise Corporation of America. Papa Murphy's territory now included 21 states, stretching as far north as Alaska and as far east as Illinois. Systemwide sales were approximately $300 million. The trade magazine Pizza Today recognized the company's impressive growth by naming Papa Murphy's its Chain of the Year for 2000. Although the pace fell off somewhat in 2001, Papa Murphy's continued to grow, topping the 650 mark and extending to 22 states. The company faced stiffer competition in the take-and-bake sector, from similar chains, independent operations, and the major pizza franchises. In August 2001 the company contracted San Francisco's Grey advertising agency to help it pursue a branding campaign and to craft television spots to introduce Papa Murphy's to major markets. A sagging economy in 2001 also promised to fuel sales, as consumers became even more value conscious.

By the end of 2002, Papa Murphy's was posting systemwide sales of $332 million. In January 2003, the company appointed veteran foodservice executive Mark Laramie as its new president. Collins remained as CEO. Under their leadership, the company's goal was to open 88 additional locations that year and continue to "aggressively position Papa Murphy's as a world class retail operation." In March the company received accolades from Restaurants and Institutions Magazine, which voted Papa Murphy's the "Best Pizza Chain in America." Because of the large number of markets where take-and-bake pizza was not yet available, Papa Murphy's appeared poised to retain its position as a category leader and also give the top pizza chains a serious challenge.

Principal Competitors: Pizza Hut Inc.; Domino's Pizza, Inc.; Papa John's International, Inc.; Little Caesars International, Inc.

Chronology

• Key Dates:
• 1981: Papa Aldo's Pizza is founded.
• 1984: Murphy's Pizza is founded.
• 1988: Terry Collins acquires controlling interest in Murphy's Pizza.
• 1990: Collins acquires Papa Aldo's Pizza.
• 1995: Chains merge to operate under Papa Murphy's brand.
• 1999: Company opens its 500th store.
• 2003: Papa Murphy's is voted "Best Pizza Chain in America" by Restaurants and Institutions Magazine.