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Papa John’s wants to bring its founder along for its comeback

Speaking on CNBC, CEO Steve Ritchie said the chain hopes John Schnatter the shareholder will benefit from its turnaround, says RB’s The Bottom Line.
Photograph by Scott Mitchell

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Yesterday, Papa John’s new chairman, Jeff Smith, was on CNBC alongside CEO Steve Ritchie to discuss the recent investment in the pizza chain by Smith’s investment firm, Starboard Value.

The interview was an interesting look into the minds of the two executives as they set about turning around the Louisville, Ky.-based pizza chain.

Late in the interview, however, Ritchie said this about the company’s embattled founder and former chairman and CEO, John Schnatter:

“John’s a very large shareholder,” Ritchie said—and indeed he owns about 26% of the company’s shares following the dilution created by Starboard’s $200 million investment. “The decision we arrived at was about what’s best for shareholders. He’s going to benefit from that.

“John believes in the core values of the brand, its quality and people. We hopeful we can bring John along.”

“We’re hopeful we can bring John along” is a lot different from “John Schnatter could return to the company.” And Schnatter through a representative did not comment.

At the very least, however, it’s an olive branch of sorts from the current Papa John’s CEO to the former one, the person who has been filing lawsuits against the company while writing letters highly critical of its existing executive staff.

It’s also a reminder that Schnatter himself is a wild card unlike any we’ve seen in the restaurant business: A huge shareholder with deep emotional ties to the company who clearly wants to regain a more prominent role.

The investment in Papa John’s by Starboard is a definite positive for the company and its franchisees. It provides the company with some financial stability in the face of steeply declining sales and closing franchisees.

That will enable Papa John’s to invest behind its initiatives to rebuild sales. And it gives the company a pair of sophisticated financial executives on its board that could help the company get back on track—even if a Papa John’s turnaround will be difficult, to say the least.

But that wild card is still there. He has been agitating for change. He submitted his own investment offer in response to the Starboard deal, one the company rejected and Schnatter has since pulled, and also said in a filing that he is exploring his legal options.

Schnatter won one lawsuit he filed against Papa John’s seeking to get access to documents related to his dismissal.

It’s not certain how much Schnatter’s agitating would have on the company or its marketing efforts. Consumers don’t pay attention to corporate battles, which can sometimes provide incentives to management teams to perform at their best. But they can be distracting.

And this one is different from just about any other, given Schnatter’s status as a public figure thanks to his being the face of the company for so long.

As such, it would seem that any comeback strategy for a Starboard-backed Papa John’s would have to involve some sort of strategy for dealing with that wild card.

Smith’s presence at Papa John’s has recalled the Starboard takeover of the Darden Restaurants board of directors and its role in the turnaround at the company and especially its flagship, Olive Garden.

As I said this week, Papa John’s is in a more difficult situation. But Smith said on CNBC that the turnaround of the franchised pizza chain would be similar to the company-owned casual dining concept.

“At the time we made the investment Olive Garden was struggling,” Smith said, noting that the chain was dying and that its customers were aging. “We got involved and really focused on the positives, its competitive advantages. We built up the quality and the customer experience.

“We’re going to do the same thing here. We believe the same opportunity exists. We’re going to focus on the competitive advantage and the customer experience.”

Indeed, improving service and quality is the best strategy for building long-term sales growth in the restaurant business, and that’s true whether the business serves pasta and breadsticks from dine-in complexes or it delivers pizza.

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