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1 Strategy Giving Papa John's a Pizza Delivery Advantage

As restrictions remained in place across much of the country forbidding dine-in business, pizza delivery grew to nearly $20 billion in 2021 . The increased demand became a challenge, however, as labor shortages took hold across the entire restaurant industry. For major pizza chains, that labor shortage has specifically translated to a shortage of drivers and an inability to meet increased delivery demand. But Papa John's (NASDAQ: PZZA) has been able to overcome that obstacle, and get ahead of its rivals, because of some forward thinking.

The restaurant industry's workforce remains about 700,000 people below pre-pandemic numbers, according to the U.S. Bureau of Labor Statistics. This trend became especially clear during Q1 2022 earnings calls. Pizza Hut experienced a 6% drop in same-store sales. Executives attributed the loss to "capacity constraints" mainly from delivery driver shortages. Domino's (NYSE: DPZ) executives noted they "have a lot of work to do to restore growth" in the delivery channel, pointing to efforts – like outsourcing its call centers – to help stores be more efficient when they're short staffed.

But Papa John's was positive on the quarter. Not coincidentally, Papa John's was an early adopter of third-party aggregate partnerships, while its peers stuck to their own drivers. Those third-party networks have left the chain better able to fulfill delivery orders during peak hours.

Image source: Getty Images.

Papa John's benefits from early adoption

Though Pizza Hut parent company Yum! Brands (NYSE: YUM) signed a deal with Grubhub in 2019, the chain continued to use its own delivery drivers for orders that came through the Grubhub app. That same year, former Domino's CEO Ritch Allison said, "some random third party won't deliver our pizza."

Conversely, Papa John's has long leveraged its third-party delivery partnerships, dating back to 2019, to increase capacity. The benefits of this strategy became evident in late 2020, when consumers relied almost exclusively on delivery for out-of-home meals.

In November 2020, CEO Rob Lynch said, "Our No. 1 bottleneck, frankly, is drivers. And adding a significant number of drivers through models like DoorDash (NYSE: DASH) helps us in a big way. It helps us manage our labor, but also helps us manage our throughput as they can show up and take delivery."

That continues to be the case. Fast-forward five quarterly conference calls, and Papa Johns executives said third-party delivery orders are "incremental, profitable [and] otherwise may have gone unfulfilled."

Pizza chains start to rethink their delivery models

Therein lies the advantage Papa Johns has at the moment. Without enough drivers to bring customers their delivery orders, Domino's and Pizza Hut are leaving sales on the table. Furthermore, not having enough delivery capacity could lead to longer wait times or inaccurate orders, which could damage their reputations.

Both Pizza Hut and Domino's have indicated a shift in their business to fix their driver shortages. Pizza Hut is adding third-party delivery companies during peak hours and adding its presence on their marketplaces to expand customer reach, for example. Domino's said it is conducting a "deep dive on driver labor," noting that nothing is off the table, including partnerships with third-party delivery companies.

There is likely a sense of urgency for Domino's to come up with some sort of solution. In February 2020, Domino's commanded 50% of the pizza delivery market. Without sufficient staffing, that number could shrink, and fast.

Competition with third-party delivery companies

It's worth noting that while third-party partnerships might be helping Papa Johns outperform its peers, executives said sales could be even higher if it had even more staffing. According to equity research firm BTIG, pizza companies seem to be losing the competition for delivery drivers to third-party companies that offer more schedule flexibility and, in some cases, higher pay.

In other words, pizza chains need to rethink their entire delivery model to compete for labor and maintain or gain sales through the channel. Domino's outgoing CEO Ritch Allison said the company is looking at scheduling, including shorter shifts and more flexibility. Papa Johns is investing in technology to help its drivers be more productive and earn more money.

Such potential solutions have made it clear that third-party delivery has changed the game for restaurant operators. To keep up with demand and labor, pizza chains will have to rethink their approach to the very delivery channel they forged.

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Fool contributor Alicia Kelso has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Domino's Pizza and DoorDash, Inc. The Motley Fool has a disclosure policy.


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