What if I told you that I could build a market leading company with some of the thickest profit margins, the lowest level of service, and that I could gain a unique competitive advantage in selling this product in a highly-competitive industry to a demographic with the least disposable income?
You’d think that I was nuts. One company did it.
Papa Murphy’s Take’n Bake
Papa Murphy’s Take’n Bake is quickly sweeping across the nation. Their business model hinges on a Subway concept for pizza—you walk in, pick your pizza dough in the size you’d like, and design your own pizza from the bottom-up. Sauces, cheeses, toppings, and everything else; you walk down the assembly line as a helpful employee loads up your pizza with all the finest ingredients. But at the end of the line, the pizza is handed to you over the counter—and it’s uncooked.
Yep, that’s the “take n bake” part of the name—you have to take it home, and bake it yourself.
When I first heard of this company and its model, I thought it was crazy. Who would bother going to a pizza shop where you bought cold pizza? That’s just insane, I thought, since it would seem to me that pizza is a convenience food; why else is pizza virtually synonymous with at-home delivery if it wasn’t intended for convenience? Obviously, my love for greasy, convenient pizza is not in line with most pizza connoisseurs.
I wanted to know more.
Pizza Business in the United States
Thankfully, there’s a great pizza industry trade publication PMQ Pizza Magazine that provided me with tons of market data:
- There are more than 65,000 pizza restaurants in the United States
- $36.286 billion worth of pizza was sold in the US in 2010
- 45% of pizza is ordered for carry out, 36% for delivery, and 20% for dine-in
That’s a big pizza. A single slice would be huge…so who owns it?
Pizza industry market share:
The “Big 4” (pizza companies, not accountants!) controls some 31% of the American pizza industry. But it is still the independent chains that make up the majority—51.66%–of all pizza sales in the United States.
Papa Murphy’s Unique Competitive Advantage
Despite failing to register as one of the largest four pizza chains in the United States, I assert (perhaps boldly) that Papa Murphy’s will be the second largest pizza chain soon enough. And that’s because of its very unique competitive advantage: Papa Murphy’s accepts food stamps.
Yes that’s right, you can use food stamps to purchase Papa Murphy’s pizza. Data suggests some stores do anywhere from 10-25% of their sales from food stamps. Incredible!
Because Papa Murphy’s doesn’t cook the food—it’s intended to be eaten at home, a defining element of a food product that can be purchased with government aid—it can lock down a very important, non-core customer. And you wouldn’t believe how many people are on food stamps…blame the poor economy:
Since the Great Recession, food stamp participation has grown from 12.7 million households to more than 21 million households. The number of beneficiaries has risen from 21 million to 42 million people.
Meanwhile, the benefit per household increased during the recession, but average benefit per household is showing the beginning of a decline:
The data in the two charts above is from the US Department of Agriculture’s March 2011 data on food stamp use.
Food stamps are used by 1 out of every 7 Americans, or 14% of the total population. This works out excellently for Papa Murphy’s Take-N-Bake, which is the only national chain that currently accepts food stamps (also known as EBT, or SNAP).
Having fun with boring numbers:
My goal with this blog is to get everyone to think like an economist—that is, to think about things logically, but creatively, and to see how small happenings at the margin affect the greater economy, and individual firms within an economy. If there’s anything I want you to remember, it’s “incentives matter,” as does structural advantage.
In thinking like an analyst, we have to come up with some assumptions. My assumptions are as follows:
- All people are rational in the aggregate.
- A family who utilizes government aid is just as likely to love pizza as any other American family.
- A family who utilizes food stamps is likely to want to spend their benefits on pizza, just as they would (and did) spend their own cash on pizza before the Great Recession.
- I assume that price is important even for those using government aid, but maybe with a minor twist. While price may not be as important, (I don’t know) I do know that I would prefer spend food stamps on pizza and save my cash for bills I can’t pay with EBT/SNAP. Makes sense. 68% of consumers say price is important.
- I assume that proximity to a pizza shop is as important–maybe even more important–for food stamp users, who likely have sporadic or no access to reliable transportation. Proximity to a location is important to 66% of all pizza eaters.
Following these assumptions, I know that Papa Murphy’s is in an excellent position to tap into 14% of all pizza lovers that receive government aid. Let’s bring back that old chart that shows the American pizza marketshare:
Assuming Papa Murphy’s attracts a customer that is structurally more likely to eat its pizza, it will necessarily become one of—if not THE—largest pizza company in the United States. If it attracted EVERY food stamp using customer, it would be the #1 pizza shop, even if it never saw a customer pay with cash. Obviously it won’t catch every food stamp recipient, so we’ll dig deeper.
What Americans want in pizza companies
We’re Americans. We like things the way we like them— we want to call the shots. The data supports this:
- 86% of pizza eaters prefer to choose their own toppings vs. purchase what I call a pre-planned specialty pizza.
- 33% of all pizza fans say their pizzas aren’t made correctly to order all the time.
- 25% say that getting an incorrect order is a sure way to lose their business.
Papa Murphy’s fits perfectly in these criteria; they allow you to sculpt your own pizza. They shouldn’t mess it up, either, since you can watch carefully as it is assembled. These points provide a brilliant second layer on top of their already large competitive advantage in locking up the food stamp using consumer. I’m loving it already.
Papa Murphy’s Fantastic Growth Potential
It may be the fifth-largest pizza chain in the United States with $630 million in sales in 2009, but it still has plenty of room to grow. Quantitative factors aside, it has the qualitative going for it, too.
I’m not too keen on it, but many believe Papa Murphy’s has excellent pizza. The company has earned the title “Best Pizza Chain in America” by Restaurants and Institutions Magazine every single year since 2003, according to Funding Universe.
It also won the platinum award for pizza chains from Consumers’ First Choice in 2006. Pizza Today named them Chain of the Year in 2001, 2006, 2008, and 2009.
Let’s go back to the quantitative…
The “Take n Bake” and “food stamp model” give it some other advantages:
- Non-cyclical business – Because the business is buoyed by food stamps, they don’t have to starve margins to keep up volume. Every other pizza chain deeply discounted during the recession, but Papa Murphy’s barely budged on its pricing relative to other firms. It’s far easier to lower prices than raise them–how many chains do you know that have successfully wound down deep discounts?
- Time sensitivity – The pizza industry is constrained by the clock. Only 11% of pizza fans order pizza for lunch—that’s lost revenue on top of additional overhead for companies that don’t use the take n bake model. Take n bake companies can sell throughout the day, as their core customer isn’t going to eat the pizza straight from the store. Good luck selling a cooked pizza at 12:30pm for reheated consumption at 6pm.
- Small footprint – Take n bake stores have a benefit in that they don’t need a large storefront for eat-in traffic. Smaller stores mean less overhead. Also, there is no backlog in making, cooking or delivering the pizzas. More volume and lower fixed costs bring serious cash flow. I’m salivating at the prospect of selling more product that is made of…less? (Insert shoulder shrug here.)
- Market penetration – We know that 68% of consumers choose a pizza company based on proximity. Take n Bake’s small stores allow for more locations while maintaining the same operating costs as a percentage of revenues. Cha-ching! Pizza meets coffee.
- Inexpensive franchising – Scale, scale, scale—the best business models are scalable. Papa Murphy’s small stores make for more affordable franchises. Total investment to open a new store is $200,000 to $300,000. Net worth requirement for franchisees is only $250,000. Papa Johns, by contrast, wants entrepreneurs to have a net worth of $2 million and “substantial” cash on hand. Twenty-five percent of American households had a net worth large enough to afford opening a Papa Murphy’s in 2006; only 5% had a net worth large enough to open a Papa John’s.
- First mover – It was only recently that the CA legislature considered allowing one competitor, Pizza Hut, to join in on the food stamp action. Papa Murphy’s is still way ahead of the competition.
- Freebies – I like getting freebies. To take n bakes, food stamp customers are freebies–they have economic incentive to buy your product. Owning a take n bake, with its free customers, is analogous to buying Boardwalk and Park Place in a game of Monopoly and getting Mediterranean and Baltic Avenues for free. Sure, compared to Boardwalk and Park Place, the purple spaces may account for little more than a rounding error, but it’s cash flowing value-add in the form of two more properties against a finite number of spaces. That’s a win!
With a model that is infinitely more efficient than its rivals, and with a competitive advantage no competitors can touch, this chain will be the dominant force in pizza soon enough. Hats off to you, Papa. I can say with certainty that you’ve already carved out every possible avenue for solid margins, growth, and sustainability. This is a company that could easily handle leverage, too, since it is anti-cyclical.
Too bad the buyer, a private equity firm, is a known unlevered buyer. It might be the right time to ask Mr. Lee, “Where is your exit? Because I want in.”
Questions for Readers
Do you have a Papa Murphy’s near you? Can you dig it?
Do you own a restaurant, or know someone who does? Care to share any cool stories?
Would you ever open a franchised restaurant? Is there anything that interests you about restaurants?
P.S. I hope that readers choose not to turn the comment section into a debate about government aid, especially foodstamps. Regardless of how awesome our econoMEs might be doing, the average American is still in a world of hurt.
I may be critical of social programs, and government spending as a whole, but we have a responsibility, in public or private, to take care of people who need a helping hand. If you really think that food stamps are breaking the US Federal budget, then I hope you go take a look at the data.
That said, I believe in free speech, and I will not censor any opinion you might have. Let’s aim to shoot above the circus that I see on news websites and blogs.
Photo by: Undertow851