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Landlords Could Seize Opportunity If Papa John’s Shuts Stores

The Pizza Chain’s Woes Might Lead to More Non-Retail Uses in Shopping Centers and Strip Malls
September 13, 2018

An analysis says Papa John's could be forced to close up to 250 stores as sales slump because of criticism of its founder's behavior..

It’s not often that commercial real estate landlords want to lose tenants, but that may be the case with the criticized pizza chain Papa John’s as it faces the prospect of closing 250 restaurants across the country.

Landlords are concerned the chain’s highly publicized missteps by its former chief executive, who received swift criticism after using a racial slur on a recent conference call, could dissuade shoppers and they may hope the chain shuts stores, said Joseph Valenti, a broker with Centennial Retail Services and chairman of the national restaurant committee of the Retail Brokers Network.

"There’s a need for that size of space in the market and there’s not that much of it," Valenti said. "They (landlords) may be able to get higher rents from other tenants."

Papa John’s, the country’s third-largest pizza chain, has suffered public blows the past year. Founder and former Chairman and Chief Executive John Schnatter -- who still owns about 30 percent of the company -- this summer used a racial slur to describe African Americans on a conference call. Last fall, he blamed NFL leadership for allowing players to kneel during the National Anthem and complained the controversy was hurting the chain’s sales. At the time, Papa John's was an NFL sponsor. It has since been replaced by Pizza Hut.

In a recent earnings call, Papa John’s Chief Executive Steve Ritchie said the chain was struggling and may be forced to close some locations.

"We’re going to evaluate all the options as they’re presented to us, if there is some sort of increase in closures that exist here because of the declines in the sales," he said.

A Papa John's spokeswoman declined to comment.

An analysis by brokerage and investment banking firm Stifel, Nicolaus & Co. this month suggested the chain may have to close up to 250 stores in non-core markets such as the West Coast and in the Northeast as a result of sagging sales. Stifel Managing Director Chris O’Cull estimated that sales are down 10 to 11 percent this fiscal quarter.

"We concede new branding, marketing and value efforts could help stabilize fundamentals, thus limiting the need for some franchisees to close. However, at this stage, improved visibility into any of those factors is still likely several months away, in our opinion," the report said.

If the chain does close stores, a new report by commercial brokerage Jones Lang LaSalle offers clues as to which businesses might replace them. Citing statistics from the International Council of Shopping Centers, the report said non-retail and non-restaurant space in shopping centers increased to 23.1 percent this year from 19.2 percent in 2012. Forty-four percent of shoppers say they prefer to visit shopping centers that have a wide variety of non-retail tenants.

"The growing focus on experience has led to a rising share in non-retail tenants, including food and beverage, salons, movie theaters, fitness centers and medical clinics," the report said.

Most Papa John’s stores are in shopping and strip centers, and Valenti said two popular concepts -- Mediterranean or taco restaurants -- could backfill the space and drive traffic.

Rival pizza chain Domino's, the country’s second-largest pizza chain, in particular is taking advantage of Papa John’s woes, said Henry Renaud, president of retail brokerage Renaud Consulting. In contrast to Papa John’s, Domino's Chief Executive Richard Allison said this summer that the chain was preparing to build about 2,500 restaurants in the next decade or so and two supply chain centers in the next two years to keep pace with growth.

Unlike Papa John's, Domino's is preparing to open thousands of stores.

Citing the redesign of many Domino's stores and the chain’s pizza theater concept, where customers can watch their pizza being prepared, Renaud said the company is on a "positive trajectory," whereas Papa John’s is “heading in the wrong direction" after Schnatter’s actions.

"This is an opportunity for all competitors of Papa John’s to take advantage," Renaud said. "You’ve got to him ‘em when they’re down, and Domino's is pouring gas on the fire."

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