How does the external environment influence the company’s strategy? (PESTEL analysis)

EXECUTIVE SUMMARY
Pizza is an iconic food in America, with 43% of Americans eating it at least once a week. This comes as no surprise, as pizza is a relatively low-cost way to feed a family, while providing variety through its toppings. Delivery and take-out are a huge part of this, with?36% of Americans? regularly eating fast food. Pizza from franchise restaurants is central to this market. Pizza franchise restaurants have done $46 billion in sales per year over the last two years in a US fast food industry valued at?$281.7 billion in 2021 (The 26 Best Pizza Franchises of 2022 (Updated Rankings), 2022). Over the past five years, the pizza franchise industry has grown at an annual rate of 2.9%?(Quan, 2021).
The biggest player in the pizza franchise market is Domino’s, which accounted for 19% of all pizza sales in the US in 2019 and 36% of all delivery sales (The 26 Best Pizza Franchises of 2022 (Updated Rankings), 2022). Other top contenders are Pizza Hut, Little Caesar’s, Papa John’s, and Papa Murphy’s. This paper will focus on the industry’s inferior performer, Papa Murphy’s.
Founded in 1985 and franchising since 1986, the number of Papa Murphy locations have declined in recent years to the current total of 1,287 (down from the previous total of 1,318), of which 59 are company-owned and 33 are located outside the US (The 26 Best Pizza Franchises of 2022 (Updated Rankings), 2022). Papa Murphy’s?claim to fame is being the only national-scale pizza chain based solely on the “take and bake” approach, where pizzas are assembled in the store and baked by customers at home. Papa Murphy’s emphasizes the freshness of its ingredients, noting its stores do not have freezers, its dough is made fresh from scratch daily, 100% whole-milk mozzarella cheese is grated daily, and veggies are hand-sliced.

  • Key information about the external and internal analysis
  • A short description of conclusion (to be linked with the strategy/performance/internal/external analysis)

EXTERNAL AND INTERNAL ANALYSIS
MMAN – How does the external environment influence the company’s strategy? (PESTEL analysis)
Political Factors:
Economic factors
Social factors
Technological factors
Environmental factors
Legal factors
How does the five forces analysis influence the company’s profitability?
Threat of New Entrants: Opening a new pizza venture requires a moderate level of financial investment. However, the remarkable presence of large firms that are already well known and established in the market represents a major bump for new entrants. New entrantswill face the pressure of keeping up with low prices to attract customers, while also trying to make a profit. Another advantage that large firms possess over potential new entrants is that they have already established economies of scale, meaning they have the advantage of producing enormous quantities of pizza at a lower cost due to long term contracts with suppliers that often allow them to buy supplies at a fixed cost. Therefore, the threat of new entrants is moderatefor Papa Murphy’s.
Bargaining Power of Suppliers: Papa Murphy’s operates in an industry in which there are more suppliers than buyers (Pizza chains). Papa Murphy’s in their annual reports mentioned that they have deals with multiple suppliers, just like their competitors (Domino’s, Pizza Hut). This gives less power to raw material suppliers over the pricing of supplies. Also, the switching cost from one supplier to another is low. Furthermore, the products that are needed by pizza businesses are not highly differentiated and can be bought from anywhere. Therefore, the bargaining power of suppliers is a weak force within the pizza industry and is an advantage for Papa Murphy’s as it positively affects the company’s profitability (lower costs allow higher profits).
Threat of Substitutes: In the pizza industry, the threat of substitutes is high, given the number of fast-food options available. These options include hamburgers, tacos, chicken, and sandwiches. To reduce the threat of substitutes, many pizza chains such as Pizza Hut and Domino’s have added substitute fast food items to their menus. In addition to pizza and salads, both chains offer chicken wings and pasta to their customers. Domino’s and Papa John’s also offer sandwiches on their menu. Papa Murphy’s is lagging and is heavily exposed to the threat of substitutes. Their unique “take and bake” business model does not allow them to offer additional items on their menu.
Bargaining Power of Buyers: The switching costs associated with changing from one restaurant to another are incredibly low, given the elevated level of competition between industry rivals. Indeed, pizza buyers are looking for good tasting pizza at affordable prices, and since pizza is not considered a high-end food item, they will certainly not buy over a certain price. Also, pizza chains offer about the same varieties of toppings; so, switching from one place to another is not hurting the buyer (especially if it is cheaper). Therefore, buyers have a high bargaining power, and this power has a huge Impact on the profitability of Papa Murphy’s.
Rivalry among competitors: The number of existing competitors within the pizza industry is high; with more than 75,000 restaurant units spread across the country. In addition, industry rivals are going to war with different discounts and exclusive offers as attractive as each other. With such an intense level of rivalry, it can be difficult to get margins, and Papa Murphy’s profits can be reduced or limited due to more spendings in terms of advertising, research, and development. The only way to overcome this level of rivalry is by creating a unique offer that differentiates itself from your competitors. In that matter, Papa Murphy’s scores a point with their unique model. This suggests that the company should be performing better than the four other competitors. However, in today’s world, people do not only want affordable food; they also want quick food. Not everyone is willing togo to a restaurant to get an unbaked pizza and bake it at home. What was supposed to be Papa Murphy’s strongest force happens to be somehow a weakness for the company.
What strengths and weaknesses exist given the internal environment?
Strengths: Papa Murphy’s strengths are its differentiated brand and menu of fresh ingredients, which appeal to a range of consumer preferences. Papa Murphy’s is the first of its kind to offer the “take and bake” model. A benefit of this strategy is that it results in a low-cost operating model. This strategy will be covered in detail later. Another strength is Papa Murphy’s menu, which offers traditional crowd-pleasing pizzas, specialty pizzas, and customizable pizzas which allow the customer to personalize their pizza any way they want. Papa Murphy’s also offers add-on items including cookie dough, cheese bread, s’mores bars and salads. All of Papa Murphy’s ingredients, including those used in add-on items, are all fresh and never frozen. Pizzas are made to order using made from scratch dough, high-quality chopped vegetables, butcher quality meats, and freshly grated mozzarella cheese, all of which is made fresh in-house daily (Hultgren, 2020). Papa Murphy’s menu appeals to those following restricted diets and caters to both gluten-free and keto friendly diets. Papa Murphy’s gluten-free crust is a popular choice among customers, and the company also offers a crustless pizza option to accommodate keto-friendly diets. Papa Murphy’s distinguishes keto-friendly toppings and sauces by marking them “KF” on their menu. In addition, Papa Murphy’s has detailed product information and a nutritional calculator available both on their website and on the app.
Weaknesses: The company’s differentiation factor is also a potential pitfall as consumer trends continue to move towards convenience. Papa Murphy’s unique product offering goes completely against convenience, as customers still have to do the work of baking the pizza (Quan, 2021). In addition, Papa Murphy’s does not provide in-house delivery services such as those that are offered by all industry leaders. Instead, Papa Murphy’srelies on third-party delivery, using the likes of DoorDash and Grubhub. Utilizing third-party delivery services increases a business’s ongoing financial commitments but reduces costs per delivery.While convenient, third parties can keep up to 30% of a bill, significantly eating into profits. (The 26 Best Pizza Franchises of 2022 (Updated Rankings), 2022)
Opportunities: Papa Murphy’s has recently acted on an opportunity to improve customer services by way of digitalization. Digitization provides customers with convenience. Apps and online ordering are ways to streamline operations while improving customer service delivery (Quan, 2021). Digital innovation has shown to be a key factor in the restaurant industry, with 60% of digital orders coming through apps. This is an area where being part of a franchise helps, as Papa Murphy’s can provide a high-quality customer ordering app and a higher profile in third-party apps (The 26 Best Pizza Franchises of 2022 (Updated Rankings), 2022). In addition to the app, Papa Murphy’s website is easy to operate and allows for customer convenience. Both the website and the app essentially mimic the in-store experience.
Threats: Papa Murphy’s greatest threat is its competition. There is a high level of competition within the pizza franchise market. In addition to competing with other pizza franchises, Papa Murphy’s also competes with frozen pizzas and non-pizza concepts and fast-food options.Aside from salads, Papa Murphy’s does not have any ready-to-eat options, thus missing out on a large portion of the marketplace (weekday lunch consumers).
How has the company done relative to its competitors?
Within the pizza franchise industry, the competitive landscape is high. The top four pizza franchise companies make up approximately 49% of the market. Domino’s leads in market share with 19.3% of the market, followed by Pizza Hut with 14.4%. Despite being the 5th?largest pizza chain in nation, Papa Murphy’s holds only 2.1% of the market share (Quan, 2021).?
Table 1: Locations of 2022’s Top Five Pizza Franchises

Founded Total Locations Number of Company Owned Locations Locations Abroad
1. Domino’s 1960 17,020 342 10,894
(60+ countries)
2. Pizza Hut 1958 16,588 53 11,225
(100+ countries)
3. Little Caesars 1959 5,463 N/A N/A (24 countries)
4. Papa John’s 1985 5,400 588 2,266 (44 countries)
5. Papa Murphy’s 1985 1,287 59 33
(US, Canada, UAE)

(The 26 Best Pizza Franchises of 2022 (Updated Rankings), 2022)
Table 1 provides a snapshot of the number of locations per franchise. Domino’s and Pizza Hut have significantly more locations than all other competitors, with more than 16,500 locations each. Little Caesars and Papa John’s ranked third and fourth, with roughly 5,400 locations each, about a third as many locations as Domino’s and Pizza Hut. Papa Murphy’s ranks fifth with 1,287 locations, of which 59 are company-owned and 33 are located outside the US (The 26 Best Pizza Franchises of 2022 (Updated Rankings), 2022). All five franchises compete globally to some degree, but Domino’s and Pizza Hut have the largest footprint in the global market.
Table 2: Financial Data of 2022’s Top Five Pizza Franchises

Franchise Fee Initial Investment Range Average Return on Investment Royalty Fee
1. Domino’s $10,000 $100,000 – $600,000 40% 5.5%
2. Pizza Hut $25,000 $297,000 – $563,000 21% 6%
3. Little Caesars $20,000 $250,000 – $335,500 25% 4%
4. Papa John’s $25,000 $250,000 – $300,000 31% 5%
5. Papa Murphy’s $25,000 $296,075 – $534,731 25% 5%

Franchise Fee and Initial Investments Ranges: (What Is The Best Pizza Franchise To Own? – VF Franchise Consulting, 2022)
Domino’s Average ROI and Royalty Fee: (Domino’s Franchise Cost, Franchise Fees & Initial Investment Costs – The Grubwire, 2019)
Pizza Hut’s Average ROI and Royalty Fee: (Pizza Hut Franchise Cost – The Grubwire, 2019)
Little Caesars Average ROI and Royalty Fee: (Little Caesar’s Franchise Cost – The Grubwire, 2019)
Papa John’s Average ROI and Royalty Fee: (Papa John’s Franchise Cost – The Grubwire, 2019)
Papa Murphy’s Average ROI and Royalty Fee: (Papa Murphy’s Franchise Cost – The Grubwire, 2019)
Table 2 provides a financial snapshot of Papa Murphy’s and its top competitors in the pizza franchise market. Below are key takeaways:

  • Domino’s, the industry leader, has the lowest franchise fee and initial investment range and a superior return on investment. All other contenders have comparable franchise fees, initial investment ranges, and return on investments. Overall, Domino’s dominates the market both in terms of sales and locations.
  • Papa Murphy’s franchise fee islargely comparable to most pizza franchises. The franchise fee is an upfront payment a franchisee makes to the franchisor for the right to use the company’s brand, products, and intellectual property (Daszkowski, 2020).
  • Papa Murphy’s initial investment range is nearly identical to Pizza Hut’s initial investment range. Papa Murphy’s minimum initial investment range is $269,075 which is similar to Pizza Hut’s, Little Caesars, and Papa John’s minimum initial investment range. Papa Murphy’s maximum initial investment range is s$534,731 which is similar to Domino’s and Pizza Hut. Initial investment costs ranges provide a broader look at the entire investment a prospective franchisee would need to make. Initial investment cost ranges depend on numerous factors, including geographic areas, condition of the premises and construction costs (Papa Murphy’s Franchise | Pizza Franchise Opportunity, 2022).
  • Papa Murphy’s average return on investment is close to the combined industry average.
  • Papa Murphy’s royalty fee is largely comparable to most pizza franchises. Royal fees are on-going fees the franchisee pays to continually benefit from the franchisor’s assets.

STRATEGY
What business strategy (low cost, differentiation, or focused low cost, focused differentiation) do the firms use? Does it work?
Papa Murphy’shas a differentiated “take and bake” business model and a low-cost operating model (Quan, 2021). The company’s “take and bake” model has allowed it to differentiate itself from its competitors on the values of quality and freshness. This differentiator also gives rise to Papa Murphy’s second success factor, its low-cost operation (Quan, 2021). Papa Murphy’s “take and bake” model means no ovens, no freezers, and no dine-in services. This allows franchise owners to focus on providing fresh ingredients and building relationships with customers. Additionally, due to the limited tasks required for operating the business, franchisees do not need a large amount of space for their store. These factors compound together to provide a low-cost model for franchise owners (Quan, 2021). For potential franchisees, the company provides a unique product offering in an industry dominated by ready to eat delivery. The “take and bake” pizza model allows for franchisees to focus on a limited number of business functions. It also enables the company to be flexible in their variety as the only thing they need to change are the ingredients (Quan, 2021).
Like other pizza franchises, Papa Murphy’s generates revenues by collecting franchise fees. Franchise owners benefit from the franchise model through franchise support and brand recognition. Papa Murphy’s has developed one of the most comprehensive training and ongoing support platforms in the industry. The company’s structured training program includes print, e-learning, and virtual reality training opportunities, focused on helping franchise owners build effective teams and helping teach them the leadership skills needed to be successful (Papa Murphy’s Franchise | Pizza Franchise Opportunity, 2022).
CONCLUSION AND RECOMMENDATIONS (MMAN)
Some thoughts….

  • Investigate recent store decline 2%
  • Focus on expanding locations. Provide some incentive to encourage new investments…perhaps reduce franchise fee?
  • Consider broadening menu offerings to include ready-to-eat options. Papa Murphy’s is missing out on a large share of the market by only offering salads as the only ready to eat option. In doing so, Papa Murphy’s is essentially missing out on lunchtime customers. With the addition of a small toaster oven (like that of Subway’s, etc.) Papa Murphy’s could offer ready-to-eat sandwiches and personal pan pizzas while utilizing the same ingredients used today (meat, pizza toppings, ingredients used to make dough).

REFERENCES
America’s Best Franchises |. 2022.?Papa Murphy’s Franchise | Pizza Franchise Opportunity. [online] Available at: [Accessed 24 March 2022].
Daszkowski, D., 2020.What Is a Franchise Fee?. [online] The Balance Small Business. Available at: [Accessed 26 April 2022].
Franchise Chatter. 2022.?The 26 Best Pizza Franchises of 2022 (Updated Rankings). [online] Available at: [Accessed 20 March 2022].
Hultgren, K., 2020.?Papa Murphy’s CMO Talks Social Media Strategy, Promotional Activations and Pandemic Pivots – Chief Marketer. [online] Chief Marketer. Available at: [Accessed 21 March 2022].
Quan, K., 2021.?Papa Murphy’s – Case Study. [online] Getting People Right. Available at: [Accessed 20 March 2022].
The Grubwire. 2019.?Domino’s Franchise Cost, Franchise Fees & Initial Investment Costs – The Grubwire. [online] Available at: [Accessed 27 March 2022].
The Grubwire. 2019.?Little Caesar’s Franchise Cost – The Grubwire. [online] Available at: [Accessed 27 March 2022].
The Grubwire. 2019.?Papa John’s Franchise Cost – The Grubwire. [online] Available at: [Accessed 27 March 2022].
The Grubwire. 2019.?Papa Murphy’s Franchise Cost – The Grubwire. [online] Available at: [Accessed 27 March 2022].
The Grubwire. 2019.?Pizza Hut Franchise Cost – The Grubwire. [online] Available at: [Accessed 27 March 2022].
VF Franchise Consulting. 2022.?What Is The Best Pizza Franchise To Own? – VF Franchise Consulting. [online] Available at: [Accessed 19 March 2022].
Other potential sources that may be helpful…
https://www.qsrmagazine.com/exclusives/papa-murphys-reaches-spotlight-new-brand-evolution

Papa Murphy’s


https://www.qsrmagazine.com/exclusives/papa-murphys-reaches-spotlight-new-brand-evolution

The Papa Murphy’s Take-and-Bake Story


Brand Differentiation
https://adage.com/article/marketing-news-strategy/papa-murphys-ads-emphasize-brand-differentiation/2394556
Financial Metrics
https://incfact.com/company/papamurphysstores-vancouver-wa/

Papa Murphy’s Franchise Review: Q&A with In Kim

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