Papa Johns 2006 Annual Report Download - page 8

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Quality Control (“QC”) Centers; Strategic Supply Chain Management
Our domestic QC Centers, comprised of ten regional production and distribution centers in 2006, 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; 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. We consider the current QC Center system capacity
sufficient to accommodate domestic restaurant unit development for the next several years.
Our subsidiary, Papa John’s UK (“PJUK”), leased a distribution center in the United Kingdom until it
was sold in March 2006. Our PJUK subsidiary presently purchases its products from our previously
owned distribution center. In addition, we acquired full-service QC Centers in Mexico City, Mexico and
Beijing, China in 2006. 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 and
non-franchisee third parties, are generally located in the markets where our franchisees have restaurants.
We expect future international QC Centers to be licensed to franchisees or non-franchisee third parties;
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 domestic Papa John’s restaurants are required to purchase seasoned sauce 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 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, Inc. (“PJFS”), our wholly owned subsidiary that operates our domestic Company-
owned QC Centers, has a purchasing arrangement with BIBP Commodities, Inc. (“BIBP”), a third-party
entity formed by franchisees for the sole purpose of reducing cheese price volatility to domestic system-
wide restaurants. Under this arrangement, PJFS purchases cheese at a fixed quarterly price based in part
on historical average cheese prices. Gains and losses incurred by BIBP are passed to the QC Centers via
adjustments to the selling price over time. Ultimately, PJFS purchases cheese at a price approximating
the actual average market price, but with more predictability and less price volatility. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Consolidation of BIBP
Commodities, Inc. (“BIBP”) as a Variable Interest Entity,” and “Note 5” of “Notes to Consolidated
Financial Statements” for additional information concerning BIBP and the purchasing arrangement, and
the related financial statement treatment of BIBP’s results.
Marketing Programs
All domestic Company-owned and franchised Papa John’s restaurants within a given market are required
to join an area advertising cooperative (“Co-op”). Each member restaurant contributes a percentage of
sales to the Co-op for market-wide programs, such as radio, television and print advertising. The rate of
contribution and uses of the monies collected are determined by a majority vote of the Co-op’s members