‘No quick fix’ for Papa John’s, which was hurting even before racist slur by founder

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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 Inc. 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: 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-based company, which traces its roots to southern Indiana, was named for Schnatter and he’s long been the face of the chain, appearing in television advertisements alongside stars like former Indianapolis Colts quarterback 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.

“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.”

Paths forward

For now, with its stock price down about 30 percent over the last two years through Wednesday, 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 & Co. have speculated that Restaurant Brands International Inc., 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 U.S. is still 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 NFL Commissioner Roger Goodell. It wasn’t the first time the founder waded into political issues: He had previously railed against Obamacare.

NFL link

As a longtime NFL sponsor, Papa John’s rode the the league’s popularity for years—a period during which the chain’s stock surged more than 600 percent. The shares closed 2016 at $85.58, versus a Wednesday closing price of $48.33 that left it with a stock-market value of $1.56 billion. The chain has also advertised heavily with Major League Baseball, and customers responded.

But growth started to slow in 2016. In recent quarters, same-store sales have turned negative as competition among national pizza chains heated up.

Domino’s has used technology to improve its delivery and is expanding its restaurant network in the U.S. Meanwhile, an initiative to improve the quality of its pizza has resonated with consumers. That, coupled with Domino’s lower prices, such as a long-running offer of two items for $5.99 each, has eroded the benefits from Papa John’s quality advantage.

Yum! Brands Inc., meanwhile, is focused now on boosting the Pizza Hut brand after spinning off its China unit in 2016. The company has vowed to improve its delivery while taking over Papa John’s position as an official partner of the NFL.

These efforts have hurt Papa John’s, Bloomberg Intelligence’s Halen said.

For now, the chain needs time for the controversy to die down. Major moves like changing the name don’t make sense in the immediate aftermath of the recent incident, but the company will likely do consumer research over the next few months to see if that makes sense, said Richard Frisch, a crisis communications expert.

Longer term, Papa John’s needs to emphasize that it’s more than just its founder, he said. As of the end of last year, the company had more than 22,000 employees. These workers, as well as franchise owners, are also taking a hit from Schnatter’s repeated missteps.

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

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