Analysts: Papa John's better off without a key ingredient: Papa John himself

Grace Schneider | Courier Journal

Show Caption Hide Caption John Schnatter in the hot seat for using the N-word Backlash was swift after reports that Papa John's founder John Schnatter used the N-word. He's resigned as the company's chairman as well as a trustee at the University of Louisville

Analysts and brand specialists watching the implosion surrounding Papa John's John Schnatter say the pizza chain's fortunes may take a turn for the better without the founder in the mix.

Schnatter's hasty departure as chairman provides an opportunity for the Louisville-based company to chart a new course, unshackled from the bonds of a soured relationship with its creator, analysts said.

The markets seemed to agree with that assessment. The company lost $96 million in market value Wednesday, with shares falling to a 52-week low of $48.33, after Forbes reported Wednesday that Schnatter made a racial slur – the N-word – during a conference call aimed at helping him avoid public relations blunders.

Schnatter apologized, resigned from the University of Louisville Board of Trustees and from his company's chairmanship.

On Thursday investors flocked back to the company, with shares closing at $53.67 – nearly $3 higher than before the devastating Forbes story broke.

The pizza maker had 5,199 domestic and international locations last year. Schnatter received $3.6 million in salary and stock. He owns more than 9 million shares of the outstanding stock, or nearly a third of the company.

Experts in reputation and brand management predicted that the Louisville-based company faces an uphill battle to regain the trust of its customers and its franchisees and to rebuild its tarnished image.

Papa John's said in a statement late Wednesday night that it will appoint a new chairman in the coming weeks. Olivia Kirtley, the board's lead independent director, will run the board until a permanent replacement is found, it added.

Papa John's spokesman Peter Collins said in an email that the company had no other comment, other than to confirm that Schnatter will remain on the company's board.

PR brand suicide

Schnatter made a serious blunder last November when he blamed slowing sales on the NFL's handling of black players kneeling during the national anthem, noted Eric Schiffer, chairman of Reputation Management Consultants, a firm that guides Fortune 500 companies and senior leaders through the kind of crisis of which Papa John's is now in the midst.

"This is public relations brand suicide, and it's very serious to spew hate from the founder of the company and the face of the brand. ... He has proven to be a dumb mouthpiece," Schiffer said.

Crisis management

Papa John's top leaders "are in the bunker now," working on emergency strategies to repair the company's relationship with consumers, particularly those in minority communities, Schiffer said.

The company has some work to do to win back African-American customers who are bound to feel insulted by Schnatter's remarks. It also faces the challenge of reassuring employees that they work in an accepting environment where diversity is celebrated, he said.

The company needs to own the problem and be transparent about how it intends to make things right, Schiffer said, which may include reaching out to leaders in the African-American community to forge new relationships. Scholarship funding and other philanthropic support is one way to do that, but it's most important to be sincere. It's a case of "what you do versus what you say."

Starbucks recently found itself in hot water over its managers' handling of black customers in one of its Philadelphia cafes. That was a problem with local management, in contrast with Schnatter as Papa John's highly visible spokesman and brand ambassador. That has a far more extensive effect.

Ties to a toxic boss

Craig Buffkin, managing partner at Buffkin/Baker, an executive recruiting agency, said Papa John's is unique in maintaining such a long connection to the company's roots.

"You don't have too many chairmen and founders that continue as the face of the company for as long as he has," Buffkin said.

Companies often pivot away from their founders and bring in fresh leaders to remain nimble and aggressive, he said.

"The velocity of change right now is incredible," Buffkin said. "It's a challenging process" for anybody walking into the executive offices."

But while Schnatter is stepping down as chairman, he retains huge influence through his large stake in its stock.

And while the company may be going through difficulty now, it likely will survive the embarrassing incident because "the public has a short memory," Schiffer said.