A Papa Johns franchisee in the United Kingdom said he is owed millions of pounds by another international operator after a business deal set to conclude in December 2022 resulted in a breach of contract.
Raheel Choudhary, a British entrepreneur and director of HRC Pizza Group, said Drake Food Service International, the largest international franchisee for Papa Johns, failed to purchase the remaining 40 percent of shares in his company as part of its acquisition of 61 Papa Johns stores in the U.K. In a claim filed in February in Commercial Court, a specialist court in the U.K. that handles international business disputes, Choudhary and HRC “demanded the sum of £12.9m to buy the shares as contractually so obliged.” Twelve million pounds is approximately $16 million.
“The defendants responded by making vague references to alleged breaches but have refused to pay,” according to the claim. “The claimants argue that the defendants are in material breach of contract.”
In March 2021, Choudhary and HRC, at the time the largest franchisee of Papa Johns in the U.K., formed a company called DFSI M25 and including its 61 units. Drake Food Service International then purchased 60 percent of DFSI M25 as part of an acquisition agreement that called for it to buy the remaining 40 percent by December 30, 2022. Drake, led by Chairman Nicolas Ibanez, a Chilean businessman, has more than 450 Papa Johns stores in seven countries.
Raheel Choudhary, director of HRC Pizza Group.
“There was no ‘if’ or ‘but’—they were obligated to purchase the remaining shares,” said Choudhary, who is still a Papa Johns franchisee in Pakistan with 23 locations. In an interview May 26, he noted he remained as a consultant for 18 months following the initial transaction.
“So I was fully available for them to raise any concerns. No concerns were raised whatsoever during that period. In fact, I had some concerns that I raised with them to tell them look, I’m not happy with how the operation is running and maybe we concentrate more on store operations and certain things,” Choudhary said. He noted mediation was offered “and ‘no’ was the answer” as Drake’s legal team has continued to engage in “delay tactics.”
Executives at Drake, including its CEO in the United Kingdom, Nacho Gonzalez, did not respond to requests for comment.
In a new development, Choudhary said he learned May 25 that Papa Johns corporate plans to take control of Drake’s restaurants in the U.K., which now number 91 following additional acquisitions by DFSI.
The move is surprising, he said, because at the Papa Johns operators conference in April he and company executives “talked extensively” about Choudhary reentering the business in the U.K. to “rescue it and fix it, to some degree. But recently we just learned that no, they decided to take all 91 stores that DFSI owned in the U.K. and run them as corporate stores.”
Amanda Clark, chief international and development officer, was not available for an interview, but a Papa Johns spokesperson provided this statement: “Papa Johns International is in conversations with Drake Food Services to transition operation of their U.K. based restaurants. We are unable to share details until the terms have been finalized. We remain steadfast in our commitment to the U.K. market and our team members located here.”
Choudhary, a Papa Johns franchisee since 2001, said of the claim against Drake, “We feel they don’t have a defense. We want a judge to look at it quickly. But if it does go to trial and hearing, it could be six months, eight to 12 months at least while this drags out in the courts.”
If Drake transitions its ownership of the stores, Choudhary said one concern is that DFSI M25 goes into liquidation in the U.K. and his company is unable to collect what it is owed.
“We would like to do it as soon as possible so that they are not able to move the assets around and we can get paid in time. That’s where we think Papa Johns needs to be a responsible organization and make sure that things are resolved and that things are not moved around for the benefit of an ongoing relationship” with a much larger franchisee in Drake, he said.
The international dispute comes as Papa Johns faces challenges in the U.K., which with more than 500 stores is the brand’s largest market outside of North America. Papa Johns has 5,733 total restaurants in 48 countries; 3,384 of them are in North America.
In its annual 10-K filing with the U.S. Securities and Exchange Commission, Papa Johns noted macroeconomic conditions in the U.K. have declined amid ongoing inflation, rising interest rates and the recent energy crisis. “Against this backdrop, the Company has experienced increasing declines in sales and profitability in the UK market. While uncertain how long these conditions will last, the Company is committed to its presence in the UK and is invested in the Company’s long-term success in this region,” according to the filing.
The company said it will be making investments to improve operations and strengthen its U.K. business, and part of its franchisee support efforts include “targeted marketing incentives of approximately $2 million to $3 million.”
The filing also notes that if the company’s efforts to reposition the franchise base are unsuccessful, “we might need to find new operators for certain unprofitable restaurants and/or close them, which could adversely impact the Company’s financial condition and results of operation in the region.”
During the first quarter of 2023, Papa Johns’ global systemwide sales rose by 2 percent year over year, to $1.24 billion. The company reported a 2.9 percent decline in total revenues, to $527 million, compared with the prior year period as it felt the impact of refranchising 90 stores in 2022.