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Papa Johns welcomed its 10th birthday in China in October. However， such a glorious moment was shadowed by the facts that this pizza retailer is suffering great losses and has to close outlets massively.
According to its official website， in the past 10 years， Papa Johns only opened about 170 chain restaurants in 30 cities of China. More specifically， it only opened 10 restaurants in the past three years.
The number of newly-opened restaurants is heavily outmatched by the number of closed outlets as this company closed at least 66 franchised restaurants from 2011 to 2013. Most of its franchised stores are suffering heavy losses.
Actually， early in 2011， Papa Johns was reported to have closed 100 outlets after the 7-year loss in the Chinese market. However， the top-level management of Papa Johns denied this. In the same year， several franchisees of Papa Johns appealed to the court， accusing Papa Johns of providing no brand support they deserved after paying the franchising fees. Though Papa Johns has won in the court， it met an unprecedented credit crisis and worsened the situation of recruiting franchised stores.
A general look at the development path of Papa Johns reveals that the shortage of promotion and push is the evil behind the massive closure of stores. After being in China for ten years， Papa Johns never impressed the Chinese consumes as a global professional pizza maker. The Chinese consumers have too many complaints about the restaurants and the service， but quite a few have been solved.
The Wave of Closing Restaurants
“The Papa Johns restaurant in Tian’an Area， Shenzhen was just closed. This is the first restaurant Papa Johns opened in Shenzhen. Which is the next one？” asked Mr. Chen， a businessman engaged in the pizza making and delivery. He spoke of this in June 2011， when he forecasted the incoming wave of closing restaurants of Papa Johns.
Things were just as he expected. In the following months， Papa Johns closed several restaurants in Shenzhen. Once upon a time it had 15 restaurants in Shenzhen， but in 2011 the number dropped to 5. By September 2013， there have been only three restaurants in Shenzhen， which are all directly owned by Papa Johns.
The case in Shenzhen is just an epitome of Papa Johns’ predicament in China. In Shanghai， where Papa Johns is headquartered in China， the wave of closing restaurants did not stop there. By September 2013， Papa Johns totally has 55 restaurants in Shanghai. In 2011， two of its restaurants in Shanghai were closed. In 2012， six restaurants were closed. Though the year of 2013 has not been finished， one Papa Johns’restaurant in Shanghai has already been closed.
Actually， the wave of closing restaurants just started from the year of 2005 when Papa Johns opened up its franchise system. According to the investigation， the massive closure of restaurants was spread to Hangzhou， Changsha， Fuzhou， Guiyang and other cities in China.
By September 2013， Papa Johns has closed at least 66 restaurants in China， accounting for 27% of the total number of restaurants of Papa Johns in China. That means one of every four restaurants of Papa Johns is to be shut off.
“Such a proportion is apparently too high for a well-established enterprise like Papa Johns. Globally， 95% of the franchised restaurants of wellknown brands will succeed and KFC even saw the 100% success rate，” says Li Weihua， an expert in the franchising operation.
A careful study into Papa Johns’closing restaurants could reveal a strange pattern. First of all， most of the closed restaurants are located in South China， but none of the 50 restaurants Papa Johns opened in Beijing and Tianjin have met the same fate. In addition， the number of Papa Johns’ franchised restaurants keeps decreasing while its directly-owned restaurants are expanding in the number.
“This shows that Papa Johns’ franchising system is not matured and full of problems. Such a high proportion of closed franchised restaurants shows that the general agent of Papa Johns is extremely irresponsible towards franchisees. If the general agent is capable but not willing to take the responsibility， it should be blamed and criticized. If it has not ability to take this job， Papa Johns is the one to recruit an incapable agent，” says an expert.
The Greedy Agent
Different from the common pattern that one brand has one agent in the catering industry， Papa Johns has two different agents in China.
When Papa Johns entered the Chinese market in 2003， it appointed Shanghai Shida Catering Management Co.， Ltd as its general agent in 33 cities of the 35 cities – except Beijing and Tianjin – it included into its map of development. Later， Papa Johns founded Beijing Papa Johns Development Company Limited to take charge of its business in North China. “We （the Beijing-based company） directly report to the U.S. headquarters and are only responsible for the surrounding markets. To be more specifically， we only manage our restaurants in Beijing and Tianjin. Those franchisees in Shanghai， Guangzhou and Shenzhen are managed by the Shanghai-based company. The two companies work independently and barely have any connections in the work，” says Miss Feng from the marketing department of Beijing-based Papa Johns.
This time， the market of South China is trapped in the massive wave of closing restaurants， placing Shanghai Shida Catering Management Co.， Ltd， which is the general agent of Papa Johns in South China， under heavy scrutiny.
Early in 2010， some businessmen who jointed in Papa Johns’ team of franchisees through Shanghai Shida blamed the company for only collecting the franchising fees without any necessary support. It is even reported to ex- port the benefits to DQ， a brand closely related with it as well.
Xu Baotong， a lawyer who had worked for these franchisees， says that the case was arbitraged by the Shanghai Branch of International Arbitration Council. About ten franchisees appealed to the court， most of whom were in Zhejiang， Jiangsu and Shanghai.
At that time， franchisees wanted Papa Johns to open some of its administrative and financial documents to them， but some of them were forced to sign the contract of repurchasing the contracts and quit the arbitration to save their losses.
“All these ten franchisees lost RMB 2 million or so，” says Xu Baotong.
According to a fax file from Shanghai Shida about gaining the franchise， an investor needs to have the cash amounting to over RMB 4 million， including the fixed assets valuing RMB 2.5 mil- lion. The investment into a single store includes the franchise fee of RMB 400 thousand， the cost of starting the business that amounts to US$17.5 thousand， the design cost of RMB 400 thousand， the facility expenditure of RMB 800 thousands and the decoration cost of RMB 800 thousand.
After the start of the business， each franchisee needs to pay a certain amount of fees each month. The fees include the brand usage cost， taking 7.5% of the before-tax sales revenue， and advertising cost， accounting for 5%-6% of the before-tax sales revenue.
It is known that the fees for starting the business is directly submitted to the U.S. headquarters of Papa Johns. In addition， the design and decoration of the restaurant must be done by Papa Johns and self-sponsored activities of franchisees are not allowed. Therefore， the expenditure on the two items cannot be dismissed. What’s surprising is that only the purchase margin can be fully returned to franchisees if loss happens. The repurchase of facilities depends on the situations and conditions while the other spending cannot be returned. That means a franchisee has to afford the loss of at least RMB 1.8 million if it meets the loss. This even does not include the brand usage fee and advertising fee that are collected on a monthly basis.
“Why are so many franchised restaurants of Papa Johns outside Beijing and Tianjin closed？ Do Papa Johns’headquarters and the Beijing branch know nothing about this？ Can we say that a mother is irresponsible for her child’s fault，” complains a franchisee.
Another franchisee says， “Papa Johns asks us to pay for the advertising every month but we never see any ads in any form of Papa Johns. I wonder where the money is spent.”
The rising complaints of franchisees are accompanied by the complaints of consumers， who criticize the bad services， low-quality products and long preparation and delivery of food.
On the other hand， it is an enigma about the term of validation of the contract between Shanghai Shida and Papa Johns. Franchisees are offered No when they asked about this thing.
“Once we had a look at the contract about this general agency and what we saw showed that Shanghai Shida’s identity as Papa Johns’ general agency only lasts till 2015. If the contract is not lengthened， then Shanghai Shida might violate the laws by recruiting franchisees now，” says Xu Baotong. “It is a commercial fraud.”
The Shadow from Pizza Hut
“I have never seen a Pizza Hut restaurant in front of which a long queue is not waiting， and I have never seen a Papa Johns restaurant crowded with people，” a consumer says.
Pizza Hut is considered to be Papa Johns’ biggest rival. As the third largest pizza brand in the world， Papa Johns already had more than 3，400 restaurants in the world. Its market position is much higher than Pizza Hut.
But things are different in China. Papa Johns is living in the shadow of Pizza Hut. It entered the Chinese market in 2003， 13 years later than Pizza Hut.
In the 13 years of Papa Johns’ absence， Pizza Hut has established itself firmly in China. Now it has over 800 chain restaurants in China. In comparison， Papa Johns has met a great failure.
But Papa Johns do have the ambition to take the Chinese market. In 2010， its vice president Miles Filter said that Papa Johns is going to increase the number of its restaurants twofold to 300 restaurants in three years. But the wave of closing restaurants turned this ambition declaration into a joke.
As experts point out， if Papa Johns does not improve its service， change the menu and make some innovations， it will never catch up with Pizza Hut and win the heart of customers.
According to its official website， in the past 10 years， Papa Johns only opened about 170 chain restaurants in 30 cities of China. More specifically， it only opened 10 restaurants in the past three years.
The number of newly-opened restaurants is heavily outmatched by the number of closed outlets as this company closed at least 66 franchised restaurants from 2011 to 2013. Most of its franchised stores are suffering heavy losses.
Actually， early in 2011， Papa Johns was reported to have closed 100 outlets after the 7-year loss in the Chinese market. However， the top-level management of Papa Johns denied this. In the same year， several franchisees of Papa Johns appealed to the court， accusing Papa Johns of providing no brand support they deserved after paying the franchising fees. Though Papa Johns has won in the court， it met an unprecedented credit crisis and worsened the situation of recruiting franchised stores.
A general look at the development path of Papa Johns reveals that the shortage of promotion and push is the evil behind the massive closure of stores. After being in China for ten years， Papa Johns never impressed the Chinese consumes as a global professional pizza maker. The Chinese consumers have too many complaints about the restaurants and the service， but quite a few have been solved.
The Wave of Closing Restaurants
“The Papa Johns restaurant in Tian’an Area， Shenzhen was just closed. This is the first restaurant Papa Johns opened in Shenzhen. Which is the next one？” asked Mr. Chen， a businessman engaged in the pizza making and delivery. He spoke of this in June 2011， when he forecasted the incoming wave of closing restaurants of Papa Johns.
Things were just as he expected. In the following months， Papa Johns closed several restaurants in Shenzhen. Once upon a time it had 15 restaurants in Shenzhen， but in 2011 the number dropped to 5. By September 2013， there have been only three restaurants in Shenzhen， which are all directly owned by Papa Johns.
The case in Shenzhen is just an epitome of Papa Johns’ predicament in China. In Shanghai， where Papa Johns is headquartered in China， the wave of closing restaurants did not stop there. By September 2013， Papa Johns totally has 55 restaurants in Shanghai. In 2011， two of its restaurants in Shanghai were closed. In 2012， six restaurants were closed. Though the year of 2013 has not been finished， one Papa Johns’restaurant in Shanghai has already been closed.
Actually， the wave of closing restaurants just started from the year of 2005 when Papa Johns opened up its franchise system. According to the investigation， the massive closure of restaurants was spread to Hangzhou， Changsha， Fuzhou， Guiyang and other cities in China.
By September 2013， Papa Johns has closed at least 66 restaurants in China， accounting for 27% of the total number of restaurants of Papa Johns in China. That means one of every four restaurants of Papa Johns is to be shut off.
“Such a proportion is apparently too high for a well-established enterprise like Papa Johns. Globally， 95% of the franchised restaurants of wellknown brands will succeed and KFC even saw the 100% success rate，” says Li Weihua， an expert in the franchising operation.
A careful study into Papa Johns’closing restaurants could reveal a strange pattern. First of all， most of the closed restaurants are located in South China， but none of the 50 restaurants Papa Johns opened in Beijing and Tianjin have met the same fate. In addition， the number of Papa Johns’ franchised restaurants keeps decreasing while its directly-owned restaurants are expanding in the number.
“This shows that Papa Johns’ franchising system is not matured and full of problems. Such a high proportion of closed franchised restaurants shows that the general agent of Papa Johns is extremely irresponsible towards franchisees. If the general agent is capable but not willing to take the responsibility， it should be blamed and criticized. If it has not ability to take this job， Papa Johns is the one to recruit an incapable agent，” says an expert.
The Greedy Agent
Different from the common pattern that one brand has one agent in the catering industry， Papa Johns has two different agents in China.
When Papa Johns entered the Chinese market in 2003， it appointed Shanghai Shida Catering Management Co.， Ltd as its general agent in 33 cities of the 35 cities – except Beijing and Tianjin – it included into its map of development. Later， Papa Johns founded Beijing Papa Johns Development Company Limited to take charge of its business in North China. “We （the Beijing-based company） directly report to the U.S. headquarters and are only responsible for the surrounding markets. To be more specifically， we only manage our restaurants in Beijing and Tianjin. Those franchisees in Shanghai， Guangzhou and Shenzhen are managed by the Shanghai-based company. The two companies work independently and barely have any connections in the work，” says Miss Feng from the marketing department of Beijing-based Papa Johns.
This time， the market of South China is trapped in the massive wave of closing restaurants， placing Shanghai Shida Catering Management Co.， Ltd， which is the general agent of Papa Johns in South China， under heavy scrutiny.
Early in 2010， some businessmen who jointed in Papa Johns’ team of franchisees through Shanghai Shida blamed the company for only collecting the franchising fees without any necessary support. It is even reported to ex- port the benefits to DQ， a brand closely related with it as well.
Xu Baotong， a lawyer who had worked for these franchisees， says that the case was arbitraged by the Shanghai Branch of International Arbitration Council. About ten franchisees appealed to the court， most of whom were in Zhejiang， Jiangsu and Shanghai.
At that time， franchisees wanted Papa Johns to open some of its administrative and financial documents to them， but some of them were forced to sign the contract of repurchasing the contracts and quit the arbitration to save their losses.
“All these ten franchisees lost RMB 2 million or so，” says Xu Baotong.
According to a fax file from Shanghai Shida about gaining the franchise， an investor needs to have the cash amounting to over RMB 4 million， including the fixed assets valuing RMB 2.5 mil- lion. The investment into a single store includes the franchise fee of RMB 400 thousand， the cost of starting the business that amounts to US$17.5 thousand， the design cost of RMB 400 thousand， the facility expenditure of RMB 800 thousands and the decoration cost of RMB 800 thousand.
After the start of the business， each franchisee needs to pay a certain amount of fees each month. The fees include the brand usage cost， taking 7.5% of the before-tax sales revenue， and advertising cost， accounting for 5%-6% of the before-tax sales revenue.
It is known that the fees for starting the business is directly submitted to the U.S. headquarters of Papa Johns. In addition， the design and decoration of the restaurant must be done by Papa Johns and self-sponsored activities of franchisees are not allowed. Therefore， the expenditure on the two items cannot be dismissed. What’s surprising is that only the purchase margin can be fully returned to franchisees if loss happens. The repurchase of facilities depends on the situations and conditions while the other spending cannot be returned. That means a franchisee has to afford the loss of at least RMB 1.8 million if it meets the loss. This even does not include the brand usage fee and advertising fee that are collected on a monthly basis.
“Why are so many franchised restaurants of Papa Johns outside Beijing and Tianjin closed？ Do Papa Johns’headquarters and the Beijing branch know nothing about this？ Can we say that a mother is irresponsible for her child’s fault，” complains a franchisee.
Another franchisee says， “Papa Johns asks us to pay for the advertising every month but we never see any ads in any form of Papa Johns. I wonder where the money is spent.”
The rising complaints of franchisees are accompanied by the complaints of consumers， who criticize the bad services， low-quality products and long preparation and delivery of food.
On the other hand， it is an enigma about the term of validation of the contract between Shanghai Shida and Papa Johns. Franchisees are offered No when they asked about this thing.
“Once we had a look at the contract about this general agency and what we saw showed that Shanghai Shida’s identity as Papa Johns’ general agency only lasts till 2015. If the contract is not lengthened， then Shanghai Shida might violate the laws by recruiting franchisees now，” says Xu Baotong. “It is a commercial fraud.”
The Shadow from Pizza Hut
“I have never seen a Pizza Hut restaurant in front of which a long queue is not waiting， and I have never seen a Papa Johns restaurant crowded with people，” a consumer says.
Pizza Hut is considered to be Papa Johns’ biggest rival. As the third largest pizza brand in the world， Papa Johns already had more than 3，400 restaurants in the world. Its market position is much higher than Pizza Hut.
But things are different in China. Papa Johns is living in the shadow of Pizza Hut. It entered the Chinese market in 2003， 13 years later than Pizza Hut.
In the 13 years of Papa Johns’ absence， Pizza Hut has established itself firmly in China. Now it has over 800 chain restaurants in China. In comparison， Papa Johns has met a great failure.
But Papa Johns do have the ambition to take the Chinese market. In 2010， its vice president Miles Filter said that Papa Johns is going to increase the number of its restaurants twofold to 300 restaurants in three years. But the wave of closing restaurants turned this ambition declaration into a joke.
As experts point out， if Papa Johns does not improve its service， change the menu and make some innovations， it will never catch up with Pizza Hut and win the heart of customers.