Papa John’s–Franchise Lessons To Be Learned

By now everyone has heard about the public feud between Papa John’s Pizza and the company’s famous founder and former CEO and Chairman, John Schnatter. The problems started in November 2017 when Schnatter blamed the NFL and how it was handling the players’ National Anthem protests for declining pizza sales. Two months later Schnatter voluntarily stepped down as CEO, but remained as the company’s Chairman. Then in May 2018, Schnatter reportedly used a racial slur during a conference call which resulted in Schnatter stepping down as Chairman. In July 2018, Papa John’s announced it was removing Schnatter and his likeness from all marketing efforts, including commercials, pizza boxes and the company’s logo. That same month, Papa John’s evicted Schnatter from the company’s headquarters and requested that he stop making any media appearances on behalf of the company.

In response, Schnatter stated that he regretted resigning as CEO in 2017 and that his alleged racial slur was taken out of context. Schnatter further stated that Papa John’s new management was trying to push him out of the company and he sued Papa John’s to obtain documents relating to his ousting. Schnatter then took out a full-page ad in the company’s hometown newspaper in Louisville, Kentucky, directing employees to a website he launched called savepapajohns.com where he criticized the company’s new leadership. Schnatter wrote on his website that “the Board wants to silence me…so this is my website and my way to talk to you.” He added “Papa John’s is our life work and we will all get through this together somehow, some way.” Schnatter even posted many of the legal documents from his legal fight with the company on his site.

Schnatter claims that employees and they accomplish this by requiring uniformity from their franchisees are rallying around him. However, other franchisees have distanced themselves from him, including franchisees from Florida who issued a statement that they “do not share the same sentiments as the founder of Papa John’s.”

Regardless of whose side you are on, everyone can agree that this dispute has been handled improperly. This type of dispute between a company’s founder and its board is not uncommon. However, similar disputes are usually handled discretely and in a private setting away from the attention of customers and employees. Unfortunately, Papa John’s and Schnatter have decided to air their dirty laundry for all to see and resolve their dispute in the court of public opinion. As a result, the public image of the franchise and the brand has been damaged. This situation has resulted in slumping sales for the franchise and a lower stock value. Specifically, the AP reported that same-store sales fell 10.5% in July 2018 and the company predicts sales will fall 7 to 10% for the year. Also, the price of Papa John’s stock has fallen over 10%.

Lessons to be Learned

There are many lessons both franchisors and franchisees can learn from this unfortunate situation. The most obvious lesson is the risk associated with relying heavily on one individual for a company’s marketing strategy. While Wendy’s successfully utilized its founder, Dave Thomas, to promote its brand, Subway was not as fortunate when it relied upon Jarod Fogle to be the company’s spokesman. In 2015, Jared Fogle plead guilty in federal court to possessing child pornography and travelling to pay for sex with minors. Subway’s sales declined and it took a considerable amount of time for the franchise to recover. Franchisors and franchisees need to understand that, to some degree, the public subconsciously associates the company’s reputation with its spokesperson. As a result, when that spokesperson makes a mistake or has a fall from grace, a certain amount of the shame associated with the spokesperson’s transgression is transferred to the company.

From the franchisor’s perspective, they owe certain duties to their franchisees to select and hire the appropriate spokesperson for the brand. By contract, franchisors usually have complete and ultimate control over any and all national and/or regional advertising campaigns. Franchisors need to understand that their decisions related to marketing and advertising can have a negative effect on their franchisees who are contributing or paying for most, if not all, of the franchise’s marketing and advertising budget. While the franchise as a whole will suffer when there is an unfortunate incident involving a spokesperson, the franchisees who have made significant personal investments into their businesses are usually the ones that feel the effects the most. As a result, if the franchisor was negligent or reckless in hiring or retaining a spokesperson, there could be civil liability for claims by its franchisees.

To protect themselves and the franchise as a whole, franchisors should adequately vet and evaluate their choice of spokesperson. They should also make sure they are contractually protected in their agreements with their spokespersons. This is especially true when the spokesperson is the founder, CEO, Chairman or anyone from the leadership team because there is an additional risk that a dispute can arise regarding the management of the company that could negatively impact the franchise’s public reputation, like what has happened with Papa John’s. In this situation, there should be airtight confidentiality, non-disparagement, and dispute resolution provisions in all contracts between the franchise and any such leaders who are also serving as the company’s spokesperson. These types of contract provisions can greatly limit any negative effect on the franchise, especially the possibility that the dispute will be fought in the court of public opinion.

From the franchisee’s perspective, there should always be concern when you are investing in a franchise that relies heavily on one individual for any aspect of the business – regardless of whether it is marketing, management or creative skill. Before investing in a franchise, potential franchisees should review the Franchise Disclosure Document to determine if the franchise is, in fact, heavily dependent on any one individual for any aspect of its business. Potential franchisees should then ask the franchisor what, if any, precautions have been taken to protect the franchise should something happen to that key person or if that key person decides to leave the franchise. Franchisors should have plans in place to replace any key person and to keep that person from later competing with the franchise he or she previously served.

Recommendations

It is strongly recommended that franchisors have all of their contracts with key personnel reviewed and evaluated by an experienced attorney. LegalStandard.com can review these contracts at a fixed price, starting at $295.00 per contract. LegalStandard.com also recommends that anyone considering investing in a franchise concept, as a franchisee, should have an attorney experienced in franchise law review and explain the Franchise Disclosure Document. LegalStandard.com can explain your rights and obligations under the applicable franchise documents as well as identifying any causes of concern. LegalStandard.com’s Franchise Disclosure Document review starts at $895.00.