Business

“When people don’t listen, bad things happen.”

Papa John's International founder John Schnatter's relationship with the giant pizzeria chain he created was hopelessly damaged by a racist scandal.

07/31/2018 Julie Jargon Photo: Rob Kim / Getty Images

Most recently, Schnatter was CEO and Chairman of the Board of Directors of Papa John's. He agreed to leave his first position last December in the wake of public outrage: he criticized National Football League (NFL) players who began kneeling during the national anthem before the start of American football games. (Papa John's became the "Official Pizza" of the NFL in 2010, but terminated its existing contract with the NFL in February of this year, maintaining separate agreements with the league's 22 teams. San quarterback was the first to take a knee during the anthem in 2016 Francisco Colin Kaepernick - in protest against the oppression of African-Americans. Then entire teams began to kneel; Donald Trump is irritated by this, he on Twitter suggested firing players for disrespecting the flag and country; Schnatter said in November that such protests are hurting business: The ratings for watching games are falling, which is why pizza sales are falling. - Vedomosti) Schnatter was replaced as CEO by Papa John's COO Steve Ritchie.

Who is to blame for what?

After this story, Schnatter, 56, who owns 29% of Papa John's and a seat on the board of directors, became increasingly dissatisfied with the chain's performance, he told the WSJ in a July 21 interview. Schnatter was preparing to unseat Ritchie, gain more power at Papa John's and once again become the advertising face of his company. Then it was revealed that he had called African-Americans the “n-word” during a conference call in May, and his plans fell apart. He publicly apologized, saying he did not use the word as a slur, and agreed to resign as chairman on July 11. A few days later, other directors suggested that he consider resigning from the board, sources told WSJ.

On July 22, the board of directors voted to introduce a "poison pill" to prevent Schnatter from accumulating a controlling interest in Papa John's. The day before, Schnatter admitted in an interview that he was not going to give up his seat on the council. "What's next? They will want me to sell my shares. Then they'll say I can't use the Papa John's logo,” he fumed, dressed in a black polo with the pizzeria's logo. – I own 30% of the company. I want to have a seat on the council."

People close to the company say Schnatter is to blame for poor sales figures and that it was because of his criticism of the NFL that revenues went downhill and are still not growing. As the face of the brand, they say, he alienated consumers with his statements. “At least four outside companies told us that John was the firm’s Achilles heel,” says one.

Hints of his scheming against Ritchie have heightened growing tensions within the company, says one person with knowledge of the network's affairs, and news of his racist remarks have come to a head. Papa John's formed a special committee of independent board members that banned the use of advertising and marketing materials involving the company's founder, and prohibited him from using his office at Papa John's headquarters in Louisville, Kentucky.

Ritchie issued a public statement condemning "inappropriate language regardless of context." Papa John's has removed all references to Schnatter from its website. Ritchie declined to talk to WSJ reporters.

Papa John's founder resigns after racism scandal →

Schnatter admitted that he quickly came to regret his decision to step down as chairman and believes he is the right person to return the company to growth. Schnatter says that, looking at the network's weak performance, he was considering asking the board to name him executive chairman. A month before the n-word incident went public, he said he began working on a detailed analysis of Ritchie's activities. He planned to share this document with the board of directors. The meeting was scheduled for July 26 (but on that day, Schnatter sued the company and said in an interview with Reuters that Richie could not lead the network. - Vedomosti).

How to return a Chevrolet Camaro
John Schnatter admitted in his autobiography Papa: The Story of Papa John's Pizza (2017) that his father's regular business failures gave him the desire to become a successful entrepreneur....
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How to return a Chevrolet Camaro

John Schnatter admitted in his autobiography Papa: The Story of Papa John's Pizza (2017) that his father's regular business failures gave him the desire to become a successful entrepreneur. At age 15, he got a job as a dishwasher at a local pizzeria, Rocky's, and sometimes helped the chefs cook. There he learned many secrets, such as the fact that yeast is put on pizza depending on the weather.
Local pizzerias prepared delicious food, but did not deliver. You could order franchise pizza at home, but it was of worse quality. Schnatter saw a business niche in this. The bank loan was not enough to start the business; in 1983, I had to sell my favorite Chevrolet Camaro Z28 from 1971 for $2800. The cost of pizza, with all the attention to quality, was $2, competitors usually sold it for $10, and Schnatter set a price tag of $5 and began to win due to volumes. Then the network began to rapidly develop as a franchise.
Having become rich, Schnatter began searching for the Camaro, the Associated Press reported, publishing advertisements, creating a website, and announcing a reward for the search. In 2009, he bought a car for $250,000 from a man who had bought it for $4,000 four years earlier. Another $25,000 went to the man who once bought the Chevrolet from Schnatter for his help in the search.

Face of the brand

Schnatter often portrays himself as the savior of Papa John's, having stepped down as CEO twice before, only to return when sales began to decline and heal the company. Papa John's has long done well under Schnatter's leadership, posting strong annual sales growth from 2011 to 2016.

Schnatter founded Papa John's by refurbishment of a closet in his father's bar in Jeffersonville, Indiana. He made Papa John's the third largest pizza delivery chain after Domino's Pizza and Pizza Hut, opening more than 5,000 locations in 45 countries. Papa John's success is largely due to its emphasis on quality pizza. Schnatter personally promoted his brand, and numerous appearances at sporting events turned him into a celebrity.

People who worked with Schnatter describe him as a man who tried to help employees when they fell on hard times and cared about his subordinates - as long as they agreed with him. One of them said that Schnatter is famous for the phrase: “I am a fortress, and everyone here is a moat. Your job is to defend the fortress.”

Schnatter clarified that by fortress he did not mean himself, but business. Given the company's strong performance in 2015, Schnatter said he felt ready to retire. His choice was COO Ritchie, a 22-year Papa John's veteran who started out as a $6-an-hour customer service associate.

Schnatter recalls that he handed over operational control to Ritchie in mid-2016 and remained CEO in name only, planning to sharpen Ritchie's public relations and marketing skills so that he would be ready to handle all the responsibilities of a CEO. But the change of power occurred earlier than Schnatter expected. Sales growth had been slowing since late 2016 before unexpectedly faltering in the third quarter of 2017. People close to the company argued that declining college football television ratings due to the protests were to blame, as well as competition from rivals with higher low prices and high-tech Domino's Pizza.

At an Oct. 27, 2017, meeting in Atlanta, the board told Schnatter not to say anything about the NFL on a conference call with investors for fear it would cause a stir, according to a source with knowledge of the meeting. Player protests and controversial opinions about them were all over the news at the time. Schnatter agreed, the source continues, and “then went completely off-script on the call.” On November 1, 2017, Schnatter told investors that the NFL was not moving quickly enough to resolve the anthem protests and was hurting Papa John's sales: "Leadership comes from the top, and this is an example of bad leadership."

On social media, people began calling Schnatter a racist, seemingly equating his disapproval of the NFL's failure to deal with the protests with his disapproval of the protests themselves, which were intended to draw attention to police brutality in America, especially when it comes to African Americans. This had an immediate impact on sales, sources said. Many African Americans and people under 35 have abandoned the brand, one said, citing data from the chain's customer loyalty program and the mass removal of Papa John's smartphone ordering app.

Second time to the same river
Schnatter loses power in his company for the second time. In 2005, after three years of falling profits, he resigned as CEO, says Forbes...
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Second time to the same river

Schnatter loses power in his company for the second time. In 2005, after three years of falling profits, he resigned as CEO, Forbes says. In his place, as this time, they appointed the operating director and president, Nigel Travis. Schnatter remained chairman of the board of directors and began to fight for control. For example, he invited other board members to decide - to choose between him and the general director. Or ruined the franchise agreement after Travis spent months negotiating. Schnatter hired employees to spy on management. It ended up that in 2008, Travis became CEO of Dunkin' Brands, and Schnatter returned to the post of CEO and changed some of the top management.

A few weeks later, the board of directors and Schnatter agreed that he should hand over the CEO position to Ritchie. At the time, Schnatter said, “We could not have found a more capable leader to lead Papa John's through its next phase of growth.” And in private, Schnatter claims, Ritchie said, “Look, you got the title, but you still have to listen to me when it comes to PR and marketing.”

When Schnatter gathered staff to announce Ritchie's appointment, he assured that nothing would change and he would still make decisions, says one person present: “Steve [Ritchie] was never given any real power to be CEO. Everything had to be handled through John [Schnatter]. It was a puppet regime."

Schnatter recalls explaining to employees that he would be involved in some, but not all, company decisions. In an interview with the WSJ when his appointment as CEO was announced, Ritchie said: “Obviously, all this PR was pretty beside the point. “I want to put the focus back on our people and pizza.”

As CEO, Ritchie has already hired a new chief marketing officer, a new chief information and digital officer, and contracted a digital marketing agency, Laundry Service, to help the company reduce its reliance on television advertising and create advertising on social media.

Even after he stepped down as CEO, Schnatter says, he helped Richie with everything from marketing to new product creation: “I had to tell him, ‘When people listen, Papa John's is good. When people don't listen, bad things happen."

Things are getting worse

The company's performance continued to deteriorate in the fourth quarter of 2017. Sales in North America fell 3.9% compared to the same quarter in the previous year. Schnatter claims that he periodically raised concerns with Ritchie about the way the business was being run. And he responded by insisting that sales would improve. Then Schnatter began to share his concerns with the board of directors.

Ovechkin is an investor in Papa John's
Captain of the Washington Capitals hockey club Alexander Ovechkin is investing in the Papa John's business. At the end of 2017, he invested in master franchisee PJ Western, which operates Papa John's in Russia, the CIS and Central Europe....
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Ovechkin is an investor in Papa John's

Captain of the Washington Capitals hockey club Alexander Ovechkin is investing in the Papa John's business. At the end of 2017, he invested in master franchisee PJ Western, which operates Papa John's in Russia, the CIS and Central Europe. In total, during the third round of financing, he raised $10 million; Ovechkin’s share was not disclosed. Prior to this, in 2016, Ovechkin starred in an English-language Papa John's advertisement for charity, and in September 2017 it was announced that he would become the face of the Papa John's brand in Russia.
Ovechkin earned more than other Russian sports and show business stars last year, Forbes calculated. His income is $14 million. He overtook Philip Kirkorov, Grigory Leps and Timati. Among NHL stars he is in fourth place. Ovechkin said that he invests about 20% of his earnings. As a rule, they buy American bonds.

“We know our potential far exceeds our results, and we are taking significant steps to reinvigorate our earnings growth and value creation,” Ritchie said in the financial results statement. Ritchie outlined plans for new marketing and improvements to the loyalty program: “With these initiatives, we expect significant improvements in sales throughout 2018.”

Schnatter said he disagreed with the concept of the new ad. According to him, it is too far from the essence of the brand. One video shows puppies playing. Another features BMX bikes. He says Richie didn't show him the ad before it aired. Schnatter is also frustrated by the speed at which the company is shifting advertising from TV and radio to social media. He says this contributed to the drop in sales, but he has no concrete evidence.

“I expected that until Richie fully understood the entire Papa John's business, which is very complex and complicated, that I would have a lot of influence on major decisions,” Schnatter said. On a conference call in May, Ritchie said the new commercials were aimed at younger audiences, "who are the future of the business." He also said that in order to be competitive, the chain needs to offer other products besides pizza.

Ritchie was one of the few executives who dared to disagree with Schnatter, some people close to the company said. Papa John's announced that its pizza sales in North America decreased 5.3% in the first quarter of 2018 compared to the same quarter last year.

Schnatter said new products were being introduced too quickly - the company began selling pan pizzas, donuts and sandwiches without removing anything from the menu, which he said made the kitchen more difficult, slowed service and created confusion among employees: "In some ways I admire the fact that Steve was going to do things a little differently. The point is, I think he's trying to do too many things at once."

A person familiar with the company's business said the sandwiches are being tested only in some markets and that the company has reduced its offerings of specialty pizzas.

Schnatter said there had been a lot of back and forth with Richie and the marketing team over his return to advertising in recent months. According to him, the history of the company shows that such a move gives an impetus to sales due to his celebrity status. Richie and the marketers backed down, a number of people close to the company know. “He fought with every piece of evidence that contradicted his opinion,” says one. “We have consumer research that shows people rank John on par with Trump.”

Schnatter, on his own initiative, ordered the commercial, in which he personally starred, to “see if anyone would be upset about my return to commercials.” According to him, none of the spectators complained. The board of directors approved the ad, a source close to the company said.

The network agreed to have him back at events like the National Hot Rod Association drag race this past May in Chicago, and used the agency Laundry Service to stage a simulated press conference with tough questions from reporters. When Schnatter was asked if he was a racist, he answered “no” and explained the use of the “n-word”: Colonel Sanders (founder of KFC - Vedomosti) used this word, but they don’t say it at Papa John’s. He said he was against the marketing firm's proposal to use [black] rapper Kanye West in the ad specifically because his songs featured the "n-word."

Laundry Service declined to comment on the simulated press conference.

What does laundry have to do with it?

Schnatter lost his position as chairman of the board of directors of Papa John's on July 11, when Forbes reported that Schnatter made a racist statement. This news plunged the company's shares by 12%. Schnatter's comments on the ill-fated conference call were the final straw, says one person close to the company: “I don't think he's a racist, but that doesn't matter. How can you not know in our day and age that you can’t say this word?”

The founder of Papa John's sued the company after his resignation →

In a letter to the board, Schnatter said the information was made public as part of a "smear campaign" by Laundry Service. The company itself denies the accusations. He also said he was shocked how quickly the board of directors acted to distance Papa John's from him, banning him from its headquarters office and removing him from all advertising materials, with no investigation into the circumstances leading up to the conflict. did not have.

Schnatter said no one from the special committee spoke with him, despite his request. One person close to the company explained that the board did not need to investigate because Schnatter himself admitted to using the word.

Schnatter said he plans to seek re-election to the board at the next shareholder meeting in May.

Translated by Anton Osipov