Papa John's resists following rivals into pasta

LOUISVILLE, Ky. -- Papa John's is betting the store on keeping its eye on the pie -- even as two larger competitors load their plates with pasta or sandwiches to boost sales in the slumping economy.

John Schnatter, founder and chief executive of Papa John's International Inc., is taking a pass on the type of menu expansions rolled out by rivals Pizza Hut and Domino's Pizza Inc. in the past year.

The No. 1 and 2 chains have rolled out pastas and sandwiches as they fight for sales in a pizza business that isn't doing as well as fast-food rivals in the recession.

The third-largest chain, Louisville-based Papa John's, tested its own pasta and calzones, but decided against offering them nationwide.

"We didn't see any reason to do it. And we saw several reasons not to do it," Schnatter said in a recent interview in his office at Papa John's headquarters. "It complicates operations. It makes Friday rush hour that much tougher to do." Schnatter worries that can affect the quality of the pizza.

Pizza is the centerpiece of the menu, but the chain offers an array of side items -- from chicken strips and wings to breadsticks, which "enhance the core product" but don't take away from making the pizzas, he said.

Meanwhile, its rivals are seeking sales in pasta, sandwiches and other items in hopes of snaring customers looking for more choices.

For Domino's, the decision came down to trying to add sales in the sluggish pizza business. The Ann Arbor, Mich.-based company decided not to be a "one-ball juggler," chief executive officer David Brandon said, rolling out oven-baked sandwiches nearly a year ago, followed by its recent introduction of pasta-stuffed bread bowls.

Domino's now sells 1 million sandwiches weekly, bolstering its lunch business, he said.

"We've got all of our operators now open for lunch," Brandon said. "When we were a pizza-only company, we struggled to get a lot of our stores open for lunch because there just wasn't enough business to support it."

So far, the pasta lineup is "doing everything we hoped it would do" based on internal sales projections, Brandon said.

Profit margins on the new items are "very acceptable to our operators," he said, but declined to elaborate. Pizza can reap especially high margins, but when the category struggles "it's very difficult to price your way to success," he said.

Domino's move into pasta follows Pizza Hut's addition of pastas to its delivery menu a year ago. Putting its marketing clout behind the rollout, pasta sales totaled nearly $500 million in the first year for the world's largest pizza chain.

The subsidiary of Louisville-based Yum Brands Inc. expects pasta to become a $1 billion-a-year business in coming years.

Pizza Hut also has rapidly expanded its WingStreet chicken wings and expects to start promoting the concept in national advertising later in the year.

Yum Brands Chief Executive David C. Novak, in an April conference call with industry analysts, said "an arsenal of pizza, pasta and chicken will allow us to leverage our restaurants more fully throughout the week, which we believe is critical to Pizza Hut's success."

The pizza restaurant industry accounts for nearly 9 percent of total restaurant customer visits, according to market research firm NPD Group Inc. For the year ending March 2009, the pizza category was down 2 percent in customer visits from the year earlier, compared with sales increases of 1 percent for hamburger fast-food chains and 5 percent for sandwich shops.

At Papa John's, Schnatter thinks his rivals' focus on pasta and other non-pizza items will strengthen his company's position in the pizza business. But he also worries the new rollouts will weaken the pizza category.

When pizza struggles, Schnatter says, his competitors are tempted into "silly things -- like $4 pizzas, pasta bowls and subs, which is not pizza-related, which is negative on the category" by distracting the restaurants from their main product, with failures reflecting poorly on pizzerias in general.

The emphasis by others on non-pizza products also dilutes the effect of their marketing dollars because they're spread around too many products, he said.

Feltl & Co. analyst Mark Smith said there are advantages for Papa John's to keep the focus on pizza. It helps the company's quality pitch and makes it less complicated for employees.

"There are obviously some incremental sales that are out there to be picked up," Smith said of the alternative menu lineups. "But I don't know if it's worth it. I don't know if you're passing through enough to the bottom line and you're driving enough traffic to really make it worth branching out."

Edward Jones analyst Jack Russo said the Papa John's strategy gives it the advantage of a tight focus. Still, that strategy could "come back to bite" Papa John's if its larger rivals succeed with pasta, he said.

"If it does work out, I'm sure John will jump on board at a later point," Russo said.