Papa John’s Founder Is at War With His Company

(Bloomberg Businessweek) -- Editor’s Note: Sometimes the boss can put his company in a tough place. Here’s an overview of the types of key man risk.

“I am the American dream,” said John Schnatter. That was in 2014, when he was still running Papa John’s Pizza, the chain he started three decades earlier in the back of his father’s Indiana tavern and eventually turned into a $3.3 billion operation. Papa John’s was the official pizza of the NFL, and Schnatter was the company’s biggest cheerleader, always seen in a red-collared shirt, his face on each of the 350 million pizza boxes the chain used every year.

Now, Schnatter is at war with the company he founded. After blaming Papa John’s slumping sales on national anthem protests at NFL games and, months later, using a racial slur on a conference call, he stepped down as chief executive officer and then as chairman. He apologized for his statements, and said his language had been taken out of context. Even so, his hand-picked successor, Steve Ritchie, has promised to change the company’s culture. “Papa John’s is not an individual,” Ritchie said in a statement on July 13.

The company has begun removing Schnatter’s image from the pizza boxes. The University of Louisville is scrubbing the Papa John’s name from its football stadium, and Schnatter’s hometown of Jeffersonville, Ind., is returning a $400,000 donation to renovate an historic gym and field house. On July 22 the board adopted a poison pill designed to prevent Schnatter from adding to his roughly 30 percent stake in a bid to gain majority control.

Some founders who’ve brought trouble on themselves and their namesake brands leave quietly, like Steve Wynn; some, like Paula Deen, hope they’ll return some day. Others fight to the bitter end, like Dov Charney at American Apparel, and take their company down with them.

Schnatter won’t let go easily. He remains on the board and is the company’s largest shareholder. He’s continued to talk publicly about his displeasure with Ritchie and other executives and his desire to take a role in mounting the company’s comeback. On July 26 he responded to the poison pill with a lawsuit, accusing the board of a coup. “Steve is drowning,” Schnatter says. “I don’t see one glaring thing, but I see a lot of small changes that could add up to the problem. The company always does better when I’m there.”

The turmoil is having an impact on Papa John’s finances. Its shares have lost more than a third of their value over the past year, while same-store sales in the U.S. have fallen for the past two quarters. And Schnatter’s unhappiness adds to Ritchie’s challenges as he tries to revitalize the business. The franchisee system that dominates the fast-food industry—the parent companies devise marketing and strategy, and the small-business owners handle day-to-day operations—is inherently fraught. In good times, when sales and profit are growing, it can be good for both parties. But when business slows down, there can be conflict. “They’ll put up with a lot if they’re making money,” says John Gordon, a restaurant consultant who works with franchisees across the industry. “But they get upset very quickly if profit goes south.”

One potential flashpoint is advertising. At Papa John’s, franchisees pay a percentage of their sales, about 4 percent, into a national advertising fund managed by the company. With Schnatter and management disagreeing over his presence in the ads, franchisees will likely choose sides, setting up a conflict as Ritchie plots the course forward.

Schnatter has hired Patricia Glaser, a lawyer also representing Harvey Weinstein, and Mike Sitrick, a crisis manager who’s advised Rush Limbaugh and Naomi Campbell. On July 25, Schnatter criticized Ritchie and the board for the company’s diminishing prospects and said he was its “best hope” to revive them. “You don’t demean or defame the founder, especially when he’s your No. 1 asset as far as spokesmanship,” Schnatter said. “I need to talk to the employees, I need to talk to the franchisees. They’re dying to hear from me, and I’m dying to talk to them.” Schnatter has stepped back from Papa John’s twice before, from 1996-2000 and from 2005-08. According to two people familiar with the company, he tried to undermine those he’d put in charge during those years.

But Schnatter’s campaign will continue to inflict damage on Papa John’s. “We’re witnessing the single greatest brand suicide in recent consumer history,” says Eric Schiffer, chairman of Reputation Management Consultants.

“His persona is fused with the company,” says Mark Lipton, a management professor at the New School. “That’s a classic founder’s dilemma: Even if they get him off the board, he’s going to be a ghost hanging around.” 

To contact the editor responsible for this story: Silvia Killingsworth at skillingswo2@bloomberg.net

©2018 Bloomberg L.P.