Papa Johns 2011 Annual Report Download - page 10

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5
QC Center System and Supply Chain Management
Our domestic QC Centers, comprised of nine full-service regional production and distribution centers and
one distribution-only center, supply pizza dough, food products, paper products, smallwares and cleaning
supplies twice weekly to each restaurant throughout the contiguous United States. The primary difference
between a full-service QC Center and a distribution-only center is that full-service QC Centers produce
fresh pizza dough in addition to providing other food and paper products used in our restaurants. This
system enables us to monitor and control product quality and consistency, while lowering food and other
costs. 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 own full-service international QC Centers in the United Kingdom, Mexico City, Mexico and Beijing,
China. Other international full-service QC Centers are licensed to franchisees or non-franchisee third
parties, and are generally located in the markets where our franchisees have restaurants.
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 tomato sauce and dough from
our QC Centers. Franchisees may purchase other goods directly from our QC Centers or other 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, had a purchasing agreement 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 through February 2011. Under this agreement, PJFS purchased cheese from BIBP on a
monthly basis at the projected spot market price, plus a certain adjustment based on BIBP’s cumulative
financial position. Gains and losses incurred by BIBP were passed on to PJFS and therefore to Company-
owned and franchised restaurants through adjustments to the selling price. Over time, PJFS purchased
cheese at a price approximating the actual average market price, but with more short-term predictability.
See also “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 3” of “Notes
to Consolidated Financial Statements” for additional information concerning BIBP and the related
financial statement treatment of BIBP’s results.
Beginning in fiscal 2011, for franchisees who signed a new cheese purchasing agreement, PJFS continues
to lock in the price of cheese to the system on a period-by-period basis. The cheese purchasing agreement
requires the franchisee to commit to purchase cheese through PJFS, or to pay the franchisee’s pro rata
portion of any accumulated cheese liability upon ceasing to purchase cheese from PJFS when a cheese
liability exists.
Marketing Programs
All domestic Company-owned and franchised Papa John’s restaurants within a defined 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. The contribution rate for Co-ops may generally not be below 2.0% without approval from Papa
John’s.