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Data shows ‘tipping point’ for Papa Murphy’s


Ask any franchise development executive and they’ll tell you it’s pretty tricky to focus on a specific market. Franchisees either want to be close to home base, they want exclusive territory or they just don’t think a concept can compete in a certain market.

Papa Murphy’s has been grappling with this problem and with a plan built on data from more than 1,500 locations, it’s giving franchisees a reason to focus.

Jayson Tipp, chief development officer at Papa Murphy’s, has been piecing together data since 2012 when he started at the company as VP of marketing, strategy and technology.

Apart from the clear trend that more stores means more marketing, Tipp saw something else. “While we sort of knew more stores drove more funding, we dug deeper and discovered that brand awareness is directly attributable to the number of stores,” said Tipp.

Tipp, who came out of academic research before transitioning to the restaurant industry at Starbucks and Potbelly, said brand awareness pushed location performance to new heights. It was no small bump that could be attributed solely to more marketing.

“We noticed that the impact on brand awareness was greater when increased marketing spend was combined with accelerated store openings as opposed to increased marketing alone,” said Tipp. “This highlighted the relationship between store penetration, brand awareness and average sales levels within markets. These insights led us to the Model Market program with more specific criteria and increased focus on the role of new store development.”

They were able to plot the efficiency gains growth curve, and as expected it grew gradually from 400,000 consumers per store, but at about 80,000 people per store, the efficiency curve showed a steep incline.

At that tipping point, enhanced efficiency drove store sales within those DMAs from the system average of $623,498 of all stores to $728,000, and at 50,000 people per store, it rises to $837,000. CFO Mark Hutchens explained the financials during the ICR Conference, an analyst conference with a focus on the restaurant industry.

“As the number of stores increases, the increase in transactions per store grows,” said Hutchens, who also outlined how that data will guide the next phase for DMAs near that tipping point.  “We will move them across that flat part of the curve.”

Push to refranchise

To do so, Papa Murphy’s is focusing on 83 select markets where fewer than 10 stores are required to reach that tipping point. That focus will include a refranchising push of about 100 locations and a “shot in the arm” of marketing from the national marketing budget.

Those markets will also benefit from a turnkey development project the company started two years ago that gives operators who prefer acquisitions a way to get into the brand and fill out a market with ongoing development.

The push will also include major incentives for qualified operators looking to build out select markets. The development incentive program offers zero royalties for the first three years and $35,000 to fund opening costs and a $1,500 monthly rebate to franchisees for each store that opens in the first three years in those markets.

 “The program is designed to accelerate frontier market growth across the country. We know that growing store penetration quickly in markets is the best way to increase awareness—and higher awareness improves performance,” said Tipp.

He said that all together, the incentives work out to more than $75,000 per location, but only for well-capitalized, growth-minded operators.

“These are pretty substantial investments. We’re going to be very selective about who we partner with,” said Tipp. “We really want people who understand what we’re doing and want to be part of this brand to come in and fill out the market.”

Tipp said he wanted to be very careful around the message. Given the stock performance and the trend of so many franchises giving in to pressure to unload stores, he said refranchising and the incentives have been part of the growth plan for years.

“In all honesty, knowing the context where we’ve had a challenge year, folks might misunderstand this move,” said Tipp. “We’re executing a strategy that we’ve had for a while. It’s not a fire sale and the ADA incentive is not some Hail Mary, it’s a deliberate strategy to unlock the next 3,000 units.”

Papa Murphy's chart

Papa Murphy’s sweet spot is 80,000 people

This graph from an investor presentation illustrates the acceleration of store transactions as store density rises. Dots signifying Papa Murphy’s locations create an upward curve of transactions in markets with a higher store volume. The tipping point is clear: right around 80,000 to 100,000 people per location, transactions go up significantly, topping out at nearly 1,200 transactions per week in markets with one location per 40,000 to 50,000 people.

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