As any consumer can tell you, inflation has led to rising food costs, across the board. But consumers are not the only ones affected; service providers also face higher costs for the raw materials they use to produce their offerings. For quick service pizza chains for example, tomato sauce, pepperoni, and mushrooms cost more, which means their profits will suffer, unless they raise prices.

For chains maintained by a single, corporate owner, such pricing choices likely reflect a careful strategic analysis of the market, weighing the risks of increasing the prices they charge consumers. But if chains are dominated by small franchise owners, like Papa John’s is, pricing decisions are less centralized and consistent. The franchise owners generally have less margin for experiencing reduced profits. If costs cut into their profits, they simply might not have the financial resources to remain open.

Because Papa John’s allows its franchisees to set their own prices (though with a few exceptions, such as national promotions that are mandated across the board), the cost to order a Papa John’s pizza have risen notably on average. In particular, the prices at franchise-owned restaurants are much higher than those charged by company-owned stores. And because around 2,900 of Papa John’s 3,400 U.S. locations are owned by franchisors, prices rose on average—and sales dropped by more than 2 percent.

Clearly, pizza places are not the only actors to suffer from massive inflation. The prices for popular Kraft Heinz products like Lunchables, Mac and Cheese, Capri Sun, and Velveeta rose precipitously, which led grocery store shoppers to display their readiness to switch to less expensive alternatives. The company CEO thus openly acknowledged, “We priced above the market.”

But for Papa John’s, the challenge is particularly intense, because of the sales channels that it uses. In grocery stores, consumers can see the price immediately and make their choice at the moment. If they visit the drive-thru of a conventional fast-food restaurant, they encounter the prices at the moment they order. But for diners seeking a delivered pizza, the choice process often does not include an explicit, clear indication of the price, especially if it represents a habitual repurchase.

For example, if ordering a pizza for delivery is a regular Friday night habit, consumers might not notice the prices until after they get the pizza and the bill, which makes for an unpleasant surprise—unpleasant enough to cause consumers to rethink their habits and switch to another chain, offering more competitive prices. Such shifts are a serious problem for any contender hoping to emerge victorious from the ongoing, intense pizza wars.

Discussion Questions:

1. How should Papa John’s corporate owners address these price-related concerns with their franchisees? Should they mandate price limits, and if they did, what would the implications be for franchise owners?
2. When you order pizza, how closely do you track the price? What about when you visit a drive-thru for fast food?

Sources: Danielle Wiener-Bronner, “Papa Johns’ Prices Are Driving Some Customers Away,” CNN, August 3, 2023