Fast food is an American innovation that has been around for over 80 years. Despite its enduring durability, the unit economics of fast food brands and franchises are reaching their limits.
As my team and I grew Papa John’s to more than 5,000 locations around the world, I didn’t see Papa John’s as one large corporation, but as 5,000 independent restaurants. These small businesses are struggling right now, and action is needed to save them.
Rising prices, higher taxes, and a rising minimum wage are pushing the entire fast-food industry, including pizza delivery, to a tipping point. What happens next will determine what foods future generations of Americans enjoy, how much they spend dining out, what their cities and suburbs will look like, and what kind of culture they export to the world.
Some will adapt to changing conditions and thrive for decades to come, while others will be overtaken by evolving markets and tough regulations, falling from household names to historical obscurity. Examples of once-famous chains that have fallen into obscurity include Bob Evans, Long John Silver’s, Godfather’s Pizza, and Checkers/Rally’s.
Part of the reason is that the very nature of fast food is changing.
Fast food is quick, easy and above all Affordable It’s a way for middle-class families to enjoy their meals, but in recent years, the prices of fast food have started to rise. Outpacing wage growth For working Americans, the news media Full of stories About consumers frustrated by the rising prices of seemingly simple dishes.
This could pose an existential problem for an industry built primarily on affordability: Customers willing to pay for “good food fast” have plenty of alternatives. The niche that McDonald’s, Burger King, Wendy’s, and other iconic fast-food brands have painstakingly carved out for themselves over decades cannot exist if these companies cannot compete on price.
Customers enter a Papa John’s International restaurant in Louisville, Kentucky on May 1, 2015. (Luke Charette/Bloomberg via Getty Images)
This is becoming conceptually even more difficult in some places, such as California. Last fall, Governor Gavin Newsom signed a law raising the minimum wage for fast-food workers to an astronomical $20 an hour, while simultaneously empowering an unelected regulatory oversight board to implement future increases. Even before the law went into effect, California fast-food companies 10,000 jobs cutThousands more people lost their jobs in the first month after the new minimum wage came into effect.
To make matters worse, the new law forced fast food franchises to raise their prices. In the first month alone, Wendy’s raised their prices by 8%, Chipotle by 7.5%, and Starbucks by 7%. These huge increases are enough to make many customers look for other options. Everyone expects hardworking food workers to earn a decent income, but that’s not possible if they lose their jobs because small businesses can’t afford to pay the mandated minimum wage.
Remember: in most cases, employees in fast food, pizza delivery, and other franchise industries get their salary not from the corporation that owns the brand, but from the franchisees who own most of the actual restaurants. Prices are also set at the franchisee level. We’re not necessarily talking about big, profit-hungry corporate overlords trying to squeeze pennies out of every burger sale, but middle-class franchise owners just trying to make ends meet in the face of skyrocketing prices.
Many of these same franchise owners will likely be hit even harder when Congress lets the Tax Cuts and Jobs Act (TCJA) expire next year. The TCJA contained many provisions designed to help small business owners, and letting those provisions expire would effectively raise taxes and pull the rug out from under fast food franchisees.
That’s why I’m so concerned about our Papa John’s franchisees, the company I started. Papa John’s executives mistakenly assumed that the artificial boost that COVID gave to the pizza delivery business was the new normal. Now that lockdowns are over, this inflationary economy is ravaging businesses with rising interest rates, commodity costs, wage increases, supply chain delays, staff shortages, and more. As a result, pizza delivery orders are down and our franchisees are feeling the same pressures other businesses are experiencing.
Papa John’s International Inc. founder, chairman and CEO John Schnatter rings the NASDAQ opening bell in New York City on January 31, 2014. (Rob Kim/Getty Images)
When I ran Papa John’s, we differentiated our brand by offering a higher quality product. Under my leadership, “Better Ingredients. Better Pizza. Papa John’s” wasn’t just a slogan, it was a commitment to our customers and employees to offer better at an affordable price.
The people who suffer most when fast food companies fail to adapt are franchisees, frontline employees, and customers, which is why it’s so important that managers make decisions with them in mind.
Decision-making would be much easier if our elected officials stopped creating artificial barriers to success like inflation-inducing deficit spending, unaffordable minimum wages, and burdensome taxes and regulations.
No business can operate successfully in an anti-business, and especially anti-small business, administration. Eventually, competitors and changing market conditions will overtake you. These harmful effects are affecting fast food investors at this time, and we are hopeful that our national leaders will realize this, change course, and provide the relief these small businesses need to survive and thrive again in the future.
John Schnatter is the founder and former chairman and CEO of Papa John’s International.
