Slice, Dice and Devour

By John Greenwald

You know you're a red-hot pepperoni when rivals attack you and employees tremble whenever you come around. A visit from John Schnatter, the perfectionist CEO of the fast-growing Papa John's International pizza chain, makes "the hair stand up on the back of your neck," says Tracy Friedlein, who manages a company-owned pizzeria in Louisville, Ky. "You run to do everything to prove yourself." But Pizza Hut chief Mike Rawlings, who has brought a federal lawsuit charging that Papa John's "better ingredients, better pizza" campaign is false and misleading, sees Schnatter in a harsher light. "They have been spreading misconceptions about us," Rawlings says. "We've got to let the truth be known."

In the $22 billion pizza industry, in which the thickness of tomato sauce and the texture of dough can be all-consuming passions, the truth these days is that Papa John's has been eating everyone else's lunch. The company has nearly doubled its market share in the past two years, to 4.1%--grabbing away business from No. 1 Pizza Hut and No. 3 Little Caesars and battling delivery king Domino's. Papa John's (1997 sales: $868 million) is the only one of the four largest pizza chains whose slice of the pie has grown at double-digit rates over the past five years. Profits? Papa John's earnings jumped 45% last year and are on track for at least a 30% increase in 1998, even as Schnatter opens units at the furious pace of a store a day. "Papa John's has been an incredible success story," says Mitchell Speiser, who watches the restaurant industry for Lehman Brothers. "They have done a great job of emerging out of nowhere."

Schnatter, 36, who gets visibly excited when talking about the sugar-acid ratio in his pizza, which gives Papa John's pies a distinctively sweet flavor, puts simplicity above all else. Pizza Hut offers more variety; Domino's stresses fast delivery; and Little Caesars sells the least expensive pies. Papa John's has no seating, offers just two types of pizza--no salads, sandwiches or buffalo wings--and remakes any pies that rate less than an 8 on the company's 10-point scale. If the cheese shows a single air bubble or the crust is not golden brown, to give just two examples, out the offender goes. This obsessive attention to detail has helped earn Papa John's the title of best U.S. pizza chain in surveys conducted by Restaurants and Institutions magazine for the past two years. (A highly unscientific taste test by members of TIME's New York City staff also gave Papa John's the highest marks among the four major pizza chains.)

Papa John's record is all the more impressive in view of the sluggish growth of the pizza market, which has reached a mature middle age. (Legend traces the modern mass industry to the appetites of Americans after World War II, when G.I.s who had been stationed in Italy returned with enthusiastic tales of open-faced cheese pies.) While Americans consume pizza at the rate of 350 slices a second, the market for restaurant pizzas has been growing just 2% a year. Yet Papa John's customers keep coming back for more. So far this year, Papa John's sales in stores open more than a year--a crucial test of health in the business--have grown a strong 9.2%, one of the best showings in the restaurant industry. Now Schnatter has his sights on loftier goals. "The stage is set for us to become the No. 1 pizza brand in the world," he told throngs of enthusiastic Papa John's managers in Dallas and Denver two weeks ago.

If that sounds like overreaching, for Schnatter it's nothing new. As a 5-ft. 6-in. high school shortstop in Jeffersonville, Ind., Schnatter vowed to become the best player at his position in the history of his school. Rising at 5 a.m. to lift weights and work out with the swim team, he set a record for fewest errors that stands today. (He brings a similar ardor to his current golf game, meticulously studying videotapes of his swing.) At the same time, Schnatter baked pizza at Rocky's Sub Pub, a neighborhood hangout, where he learned to make fresh dough. "That had to be where he got his basics from," says Pat Reel, a current Rocky's manager. "You can't just say, 'Here's the recipe, go do it.' There's a knack to it."

Schnatter perfected that knack while tending bar in Jeffersonville after graduating in three years from Ball State University. He took a sledgehammer to a broom closet and knocked out space for a small pizza kitchen, which soon grew into a business that became Papa John's in 1985 and went public in 1993. But his demanding manner was not to everyone's taste. No fewer than five top executives, including the company's president, quit in 1995 and 1996, in part because of Schnatter's brusque management style. Says Cheryl Bachelder, executive vice president for marketing at Domino's: "He's flamboyant, highly confident and very impressed with his own success."

Small wonder. Schnatter's 24% stake in Papa John's is worth some $250 million. (Papa John's stock tripled from 1993 to 1997 but has recently been down some 20% from its 52-week high.) Schnatter and his wife and three children live in a brick-and-stone mansion set on nearly 16 landscaped acres in suburban Louisville, Ky. One neighbor Schnatter probably doesn't call on: David Novak, the former boss of Pizza Hut and current president and vice chairman of Pizza Hut parent Tricon Global Restaurants, who lives not far away.

Pizza Hut (1997 sales: $4.7 billion), which has a 22% share of the pizza market and four times as many stores as Papa John's, has been busily boosting quality and shutting down poorly performing stores. Under pressure from Papa John's, Pizza Hut spent $50 million last year to roll out what it called Totally New Pizzas, featuring thicker tomato sauce, fresh sliced vegetables and meatier toppings. Meanwhile, Pizza Hut has closed 250 stores since PepsiCo spun it and siblings Taco Bell and KFC into Tricon last year. The new strategy pushed Pizza Hut's same-store sales up a strong 9% in the second quarter, although the company said last week the pace slowed to 4% in the third quarter. "Pizza Hut has generated very strong results since the spin-off," says Speiser. Nonetheless, "as Pizza Hut continues to focus on building sales within its existing pizza operations, Papa John's will continue to gain market share."

That prospect has made Papa John's cheeky "better ingredients" claims particularly galling to the Pizza Hut high command. Taking its cue from Pizza Hut's own challenge to customers to find a better pizza, Papa John's twitted its rival for using tomato sauce made from yucky-sounding "remanufactured paste." To rub in more salt, Papa John's called on Pizza Hut co-founder Frank Carney, who sold the chain to PepsiCo in 1977 and now owns more than 70 Papa John's franchises, to declare in television spots, "Sorry, guys, I found a better pizza." Schnatter professes to be delighted that Pizza Hut responded angrily with a lawsuit, which he calls a publicity stunt. "They took the bait," Schnatter says. "We're now a player."

In fact, Pizza Hut has scored some points of its own. Schnatter concedes that Papa John's sauce comes from canned rather than fresh tomatoes--Pizza Hut's sauce is packed in sealed plastic bags--and that Papa John's mushrooms are canned. (Pizza Hut's are fresh.) An unembarrassed Schnatter is switching to fresh mushrooms throughout the Papa John's chain. "I prefer canned mushrooms," he says with a straight face. "But the consumer prefers fresh."

When it comes to the growth of his company, Schnatter says Papa John's has only begun to expand. Carney alone plans to open at least 600 new stores. To accommodate such whopping increases, Papa John's recently opened a doughmaking commissary in Portland, Ore. It is building another in Pittsburgh, Pa., and plans to add still another in Nevada, which will bring its total to 12. "Now we can get to everywhere in the U.S. and build out," Schnatter says. "We are becoming a national brand." That will give Schnatter even more restaurants to drop in on--and more general managers to keep hopping.

--Reported by Aixa M. Pascual/Louisville and Marc Hequet/St. Paul

With reporting by Aixa M. Pascual/Louisville and Marc Hequet/St. Paul