Papa Johns 2002 Annual Report Download - page 7

6
We provide layout and design services and recommendations for subcontractors, signage installers and
telephone systems to Papa John’s franchisees. Although not required to do so, through 2002, substantially
all Papa John’s franchisees purchased most of their equipment, fixtures and smallwares needed to open a
Papa John’s restaurant from us. Beginning in December 2002, complete new store equipment packages
could be purchased through an approved third party supplier under a commission arrangement with the
Company. We continue to sell smallwares and related items to our franchisees through our Support
Services subsidiary.
Quality Control Centers; Strategic Supply Chain Management
Our domestic QC Centers, comprised of 11 regional production and distribution centers, supply pizza
dough, food products, paper products, smallwares and cleaning supplies twice weekly to each restaurant.
This system enables us to monitor and control product quality and consistency, while lowering food costs.
Our full-service QC Centers are located in Louisville, Kentucky; Dallas, Texas; Pittsburgh, Pennsylvania;
Orlando, Florida; Raleigh, North Carolina; Jackson, Mississippi; Denver, Colorado; Rotterdam, New
York; Portland, Oregon; Des Moines, Iowa; and Phoenix, Arizona. The QC Center system capacity is
continually evaluated in relation to planned restaurant growth, and facilities are developed or upgraded as
operational or economic conditions warrant.
Our subsidiary, Papa John’s UK, leases a distribution center in the United Kingdom. The primary
difference between a full-service QC Center and a distribution center is that full-service QC Centers
produce fresh pizza dough in addition to providing other food and paper products used in our restaurants.
International full-service QC Centers, licensed to franchisees, are located in Canada, Mexico, Honduras,
Saudi Arabia, Alaska, Puerto Rico, Costa Rica, Venezuela, and Guatemala. We expect future international
QC Centers to be licensed to franchisees; however, we may open Company-owned QC Centers at our
discretion. We also have the right to acquire licensed QC Centers from our international licensees in
certain circumstances.
We set quality standards for all products used in our restaurants and designate approved outside suppliers
of food and paper products that meet our quality standards. In order to ensure product quality and
consistency, all of our restaurants are required to purchase proprietary spice mix and dough from our QC
Centers. Franchisees may purchase other goods directly from our QC Centers or approved suppliers.
National purchasing agreements with most of our suppliers generally result in volume discounts to us,
allowing us to sell products to our restaurants at prices that we believe are below those generally available
in the marketplace. Within our domestic QC Center system, products are distributed to restaurants by
refrigerated trucks leased and operated by us or transported by a dedicated logistics company.
PJ Food Service, our wholly-owned subsidiary that operates our domestic Company-owned QC Centers,
has a purchasing arrangement with a third-party entity formed at the direction of the Franchise Advisory
Council (see Franchise Program – Franchise Advisory Council) for the sole purpose of reducing cheese
price volatility to our restaurants. Under this arrangement, PJ Food Service purchases cheese at a fixed
quarterly price based in part on historical average cheese prices. Gains and losses incurred by the selling
entity are passed to the QC Centers via adjustments to the selling price over time. Ultimately, PJ Food
Service purchases cheese at a price approximating the actual average market price, but with more
predictability and less volatility than the previous purchasing method. See “Note 3” of “Notes to
Consolidated Financial Statements” for additional information.
Marketing Programs
All Company-owned and franchised Papa John’s restaurants within a co-developed market are required to
join an advertising cooperative (“Co-op”). Each member restaurant contributes a percentage of sales to