Courtesy of Papa John’s

Papa John’s took a giant step toward a potential sales turnaround last Monday by teaming up with the New York investment adviser Starboard Value, but public relations experts warn that a public spat with founder John Schnatter isn’t in the best interest of either side.

“There are two sides, but those sides don’t matter as much as getting to the core of the situation,” said Kirk Hilbrecht, who joined Boxcar PR in December as crisis communications and relations ranger. “We would tell them that you really need to kind of compartmentalize what is going on here.”

The focus should be on where Papa John’s is going and what of value it already has, such as good employees and good product, he said. Both Papa John’s current leadership and Schnatter need to keep their dispute behind closed doors because ultimately, the company’s future is tied to pizza sales.

Kirk Hilbrecht

“None of that will affect the taste of pepperoni,” Hilbrecht said, adding: “No one actually wins when the fight is happening on the forefront when it doesn’t need to be.”

Carolyn McLean, a Louisville-based senior strategist for the public relations agency kglobal, expressed similar concerns about Papa John’s and Schnatter feuding publicly.

“This is a pivotal point in the history of Papa John’s,” she said in an emailed comment. “Without John Schnatter, there really isn’t a Papa John’s right now, but he has become a major liability for the company and may have to be sacrificed for the long-term good of the corporation.

“If Mr. Schnatter fights management in court, it probably will make things worse for everyone involved. Meanwhile, consumers will start looking elsewhere for their pizza. The quick-service food business, especially in pizza sales, is highly competitive, and consumers can be easily lured away from brands like never before.”

How it started

The troubles for the Louisville-based pizza chain first began in November 2017 when Schnatter blamed the NFL for Papa John’s declining sales. Schnatter pointed the finger specifically at what he perceived as the owners’ and NFL leadership’s failure resolve a dispute with players regarding the protests of racial inequality.

“… by not resolving the current debacle to the player and owners’ satisfaction, NFL leadership has hurt Papa John’s shareholders,” Schnatter said during a call with analysts. ” … The NFL has been a long and valued partner over the years, but we are certainly disappointed that NFL and its leadership did not resolve the ongoing situation to the satisfaction of all parties long ago. This should have been nipped in the bud 1.5 years ago.”

Papa John’s formally apologized for Schnatter’s comments. In December 2017, Schnatter stepped down as chief executive but stayed on as chairman of the board, and a few months later, Papa John’s, which for many years was the NFL’s official pizza sponsor, parted ways with the football league.

Sales remained sluggish in the first two quarters of 2018 but nose-dived after Forbes reported in July that Schnatter used a racial slur in a conference call, a fact that he later confirmed when resigning from the University of Louisville board of trustees. Hours later, he resigned as chairman of Papa John’s board, though he is still a member of the board and owns a significant stake in the chain.

Schnatter’s name was subsequently removed from a gymnasium in Jeffersonville and the free enterprise centers at UofL and the University of Kentucky, and the Papa John’s name was removed from UofL Cardinal Stadium.

John Schnatter | Courtesy of Business Wire

He apologized for the incident but blamed the media agency he was on the conference call with, accusing it of goading him to use a racial slur. Schnatter’s media interviews prompted Papa John’s other leaders to ask him to cease giving interviews and move out of the company’s headquarters. The board also adopted a “poison pill” to prevent a hostile takeover.

Then Papa John’s start taking steps to change negative consumer sentiment. It announced a franchisee assistance program to help ease the pain of declining sales; it hired a chief diversity officer, went on a listening tour; instituted mandatory bias training; and eliminated Schnatter’s face and name from the brand, instead opting to highlight other people at all levels of the company.

In a statement to Insider, Papa John’s Chief Brand Officer Melissa Richards-Person said: “Since the launch of our ‘Voices of Papa John’s’ campaign in September, we’ve had an ongoing strategy to move from one voice of the brand to many voices. The response to the ‘Voices’ campaign, which featured franchisees and team members across the country, was overwhelmingly positive. We immediately saw a change in sentiment about our brand.”

The campaign has included television advertising and social media marketing.

In Papa John’s second-quarter earnings call, CEO Steve Ritchie said the company was attempting to move on from the controversy without Schnatter.

However, Schnatter had other ideas. He created his own website to get “the truth out there” and communicate directly with employees and franchisees. He sued for the right to emails, text messages and other documents related to his ousting, with a judge ruling in his favor last month, and he posted a letter online that accused current Papa John’s executives of mismanagement, requiring the company to release its own letter disputing the claims.

Papa John’s hired two investment banks in late August 2018 to vet potential investment and buyout offers, and despite dismal sales during the third quarter, Ritchie told analysts that the company was taking steps in the right direction.

Boxcar PR’s Hilbrecht said actions such as adding a diversity policy and a chief people officer are positive changes, but good news from the company seems to get trumped by other news, which is another reason it’s important to take the dispute with Schnatter out of the public eye.

“It just doesn’t seem like there’s been any moving on” from the scandal, he said. “You are not looking behind anymore. You are looking straight ahead.”

Bringing an experienced partner

A Papa John’s ad highlighted others who are part of the brand besides founder John Schnatter | Screenshot

The company’s sales are still suffering, with same-store sales in North America declining 7.3 percent in 2018 and 10.5 percent in January of this year, but its stock price buoyed after Papa John’s announced Monday that Starboard Value — a firm with a track record of turning restaurant chains around — plans to invest a minimum of $200 million in the company.

Papa John’s stock closed down 1 percent on Friday, to $42.98. The stock started the week at $41.81.

The price still has not recovered to where it was before the start of the controversy, which cut the company’s stock price in half, though Hilbrecht believes bringing on heavy hitters like former Pinnacle Entertainment CEO Anthony M. Sanfilippo and Jeffrey C. Smith, chief executive of Starboard, as a board members will bolster Papa John’s stock. Smith notably led efforts to resuscitate Darden Restaurants’ Olive Garden.

“These guys know how to do this. They will have enough runway to reemerge as a new company, a new brand,” Hilbrecht said, later adding, “Their connections are vast, so we are talking within quarters that you should see an uptick in their stock price and a newly energized franchisee base.”

He noted that public perception is very fickle. A company that is down and out can be revived with the right actions and marketing push, and vice versa.

But “by making this a public dispute between the founder and the company he founded, it keeps this story alive when it could have been put to bed a long time ago,” Hilbrecht warned.

Schnatter, who indicated that he’d make his own investment offer to Papa John’s, filed paperwork with the U.S. Securities and Exchange Commission last week asserting that he made a similar but superior offer to the Starboard deal and will look at his legal options.

Meanwhile, Ritchie told CNBC last Tuesday that he was hopeful that Schnatter would come around to see that the decision was right for Papa John’s and end the feud.

Hilbrecht said the two parties, however, only seem to be talking through lawyers and the media when they should be sitting down at the table together.

“The best potential outcome is that the company Papa John and its founder John Schnatter work out their differences privately and move on,” he said, acknowledging, “I don’t know how you get there.”

Steve Ritchie

In Papa John’s news release announcing the deal with Starboard, the company said it would spend roughly half the money it gets from the investment partnership on five areas: people, brand, value/product, technology and unit economics.

Richards-Person said in her emailed statement that consumers will start to see investments in branding and product soon.

“For the past year, brand differentiation has been one of the five strategic priorities outlined by our CEO Steve Ritchie. In line with that priority, we have continued to market the crave-able products with high-quality ingredients that differentiate our brand from our competitors,” she said. “What consumers will see in the coming months is Papa John’s leaning into our products and ingredients in a way that is modern and unexpected for the brand, speaking to a new generation of customers. BETTER INGREDIENTS. BETTER PIZZA. is our brand equity, and we will bring fresh, new meaning to the idea of ‘better.’ ”

Papa John’s is running a social media campaign asking people to vote on the chain’s next specialty pizza: either Huevos Rancheros or Hot Honey Chicken & Waffles.