What’s the next step for Papa John’s?

Here’s why the chain will need to make big changes, and probably needed to even before John Schnatter’s racial slur, says RB’s The Bottom Line.

The Bottom Line

Papa John’s has a problem. Papa John.

The Louisville, Ky.-based pizza chain had done consistently well for a long time. In the third quarter of last year, the company had posted 28 straight quarters of same-store sales growth, thanks to its use of technology, its quality positioning and its relationship with sports leagues.

The company’s founder, John Schnatter, had cultivated an image as a self-made sports fan. He was on the University of Louisville athletics board and is friends with Peyton Manning and Jerry Jones, the owner of the Dallas Cowboys.

But then, in November, Schnatter dove head-first into the single most divisive topic of our era: NFL players taking a knee during the national anthem to protest police brutality.

“NFL leadership has hurt Papa John’s shareholders,” he said back in November. “This should have been nipped in the bud a year and a half ago.”

Essentially, Schnatter was blaming NFL protests for his chain’s weakening same-store sales.

And weakening they were. Between the third quarter of 2016 and the third quarter of 2017, Papa John’s same-store sales growth had slowed from 5.5% to 1%. And it was clear back in November that it had slowed further. Schnatter, as the company’s founder and CEO at the time, was clearly frustrated.

But his comments would only make matters worse.

Here’s why: Schnatter is not just the founder. He wasn’t just the CEO. He is the company. He is its primary spokesman. He says, “Better ingredients, better pizza, Papa John’s” at the end of every commercial. His face appears on the company’s logo.

Agree with Schnatter or not, no company wants its primary spokesman to wade so publicly into so divisive an issue.

That’s especially true today, when such controversies can take on a life of their own—and Schnatter’s November comments lit the social media world on fire.

According to Technomic Consumer Trend Report data, Papa John’s consumer survey results fell across the board over the past year. For instance, the percentage of consumers who said that Papa John’s is "a place I can trust” declined by 4.7 percentage points.

The percentage of people who said Papa John’s is "socially responsible” declined 4.9 percentage points. And the percentage who said that Papa John’s “has values that are similar to my own” declined 5.4 percentage points.

Same-store sales, meanwhile, deteriorated even further, declining 3.9% in the fourth quarter and then 5.3% in the first quarter of this year.

The deterioration is starker when you analyze those sales on a two-year basis. In the fourth quarter, two-year “stacked” same-store sales were down 0.1%. In the first quarter, they were down 3.3%. That’s a 340-basis-point deterioration—suggesting that the controversy over Schnatter’s comments led some customers to stop using the chain.

Papa John's deteriorating same-store sales

And then, on Wednesday, Forbes reported that Schnatter used the N-word during a conference call with the company’s marketing agency, which was training Schnatter on how to avoid public relations disasters.

Schnatter was apparently trying to convey his antipathy toward racism with his comment, but the agency, Laundry Service, was so disturbed that it ended its relationship with the company.

Schnatter acknowledged the comments and apologized late Wednesday. But the damage had already been done—essentially compounding his comments from back in November.

And then, later in the day, MLB ended its Papa Slam promotion with Papa John’s, in which the pizza chain would give customers 40% off their order the day after a player hit a grand slam. Schnatter shortly thereafter resigned as chairman

Already, Papa John’s had ended its relationship with the NFL in the wake of Schnatter’s other comments.

So not only has Schnatter’s comments damaged the reputation of its primary spokesman—himself—they damaged the second leg of the company’s three-legged marketing stool: its marketing to sports customers.

At this point, Papa John’s needs to overhaul its brand, removing Schnatter’s likeness from its logo and his appearances on the company’s television advertisements. And it needs to find a new marketing direction.

Schnatter himself will only go so far: He owns nearly a third of the company, and 30% shareholders don’t exactly disappear.

But he would be wise to follow the example of another company founder who recently stepped down as CEO: Chipotle’s Steve Ells, who has let his successor, Brian Niccol, have free rein over the chain, its headquarters, its marketing and everything else. And Ells has been quiet in the background, at least publicly.

Papa John’s still has its quality messaging, which is a good place to be in 2018. And consumers still really like pizza. But extracting Papa John from Papa John’s will be no easy process.

And, indeed, investors believe the chain will be better off. Papa John’s stock price, which had fallen 28% since the November comments going into Thursday’s trading, surged 12%.

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