Nation & World

'No quick fix' for Papa John's after racist slur prompts founder to step down as chairman

Reuters

John Schnatter, founder of Papa John’s Pizza, arrives at the 2011 American Music Awards in Los Angeles.
Reuters John Schnatter, founder of Papa John’s Pizza, arrives at the 2011 American Music Awards in Los Angeles.

This was the last thing that Papa John’s needed.

With intensifying competition from larger rivals — a tech-savvy Domino’s and a resurgent Pizza Hut — sales at Papa John’s International were slumping even before chairman and founder John Schnatter came under fire for using a racial slur in a call with an advertising agency.

The revelation prompted an apology on Wednesday, followed hours later by his resignation as chairman.

Now the company must find ways to reignite growth while simultaneously rehabilitating its battered reputation.

Investors, for their part, sent a clear signal that they favor a Schnatter-less Papa John’s: The shares rose as much as 16 percent, the most in six years, on Thursday.

Wall Street is betting that the pizza chain can regain its stride and distance itself from the man who built the company and owned about 29 percent of its stock as of February.

It won’t be easy. The Louisville, Ky.-based company — which has stores throughout the Corridor — was named for Schnatter and he’s long been the face of the chain, appearing in television advertisements alongside stars such as Peyton Manning as he touted the quality of Papa John’s ingredients.

He will remain on the board even though he’s no longer chairman.

Unwinding that relationship in consumers’ minds will be difficult, according to Allen Adamson, a branding expert and co-founder of Metaforce.

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“The racism issue is such a lightning rod, consumers tend not to forgive companies that step on that third rail,” Adamson said. “There’s no quick fix once social media takes you to the cleaners.”

For now, it’s not clear where the company goes from here.

One option may be to take the chain private, giving the new leadership a chance to fix the problems outside the glare of Wall Street, Michael Halen, an analyst at Bloomberg Intelligence said. It’s also possible a fast-food company could make a play, banking on Papa John’s domestic and international growth potential.

The chain’s delivery technology is valuable in an era when consumers increasingly want food sent to their homes.

Analysts including Brian Bittner at Oppenheimer have speculated that Restaurant Brands International, which is backed by 3G Capital and Warren Buffett, could be a potential acquirer. The company operates the Burger King, Tim Hortons and Popeyes brands and has been slower than rivals to embrace delivery.

“They have a massive delivery network,” Peter Saleh, an analyst at BTIG, said in reference to Papa John’s. He noted that the market for pizza in the United States still is fragmented. “There’s a lot of market share to gain if it’s managed properly.”

Schnatter’s departure as chairman comes seven months after he stepped down as CEO. That move was prompted by a backlash over his criticism of the NFL and its handling of a national anthem controversy.

On a conference call, Schnatter blamed a slide in sales on a lack of leadership by the league’s Commissioner Roger Goodell. It wasn’t the first time the founder waded into political issues: He had previously railed against the Affordable Care Act.

“All anybody knows about Papa John’s is this guy,” said Richard Frisch, a crisis communications expert. “They have to emphasize that they’re more than that.”

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