Article

Papa John's franchisees' attorney: Past year had 'a big, big impact on the franchisees' net income'

Immediate relief, and a new direction for the brand, is what franchisees operating 1,200 Papa John's U.S. stores want, according to Miami-based attorney Robert Zarco. Zarco spoke to PizzaMarketplace about what brought the franchisees to his door in the first place, as well as what they now expect to happen as a result.

November 14, 2018 by S.A. Whitehead — Food Editor, Net World Media Group

The well-known Florida-based franchise attorney representing the Papa John's franchisees for 1,200 U.S. locations said the restaurateurs are hurting badly as a result of the brand's past year of negative press related to the words of founder John Schnatter. 

"It's affecting them dramatically. ... It's had a big, big impact on the franchisees' net income."                                               -Robert Zarco

Miami attorney Robert Zarco said he started talking to franchisees — members of the Papa John's Franchise Association (PJFA) — around the start of this year. It was shortly after the brand's first media nightmare erupted when Schnatter blamed flagging sales at the pizza chain on the brand's marketing affiliation with the NFL which was then embroiled in controversy over handling of players' national anthem protests.

And the problems grew exponentially after news broke that Schnatter had made racial slurs during a May media training, according to Zarco, who spoke late Tuesday with PizzaMarketplace about his clients' business situations. 

Simply put, Zarco said franchisees want action from the brand to put a tourniquet on "bleeding" sales and get a new brand direction. In a phone interview Zarco relayed franchisee goals in hiring his firm, Zarco, Einhorn, Salkowski and Brito. 

Q: How have the Papa John's franchisees you represent been affected overall by the brand's turmoil over the last year?
A: Some of their sales are down 15 or 20 percent. It's affecting them dramatically. ... It's had a big, big impact on the franchisees' net income. 

Q: Can you give me an example of what the franchisees you're representing are doing operationally to survive the storm?
A: Well, you know the pizza business doesn't run differently because less customers are coming in, okay? Franchisees can try to do more local store marketing, if that's possible, or they can try to further improve their service and the manner in which they treat their customers. 

But the product is the same product. The way it's made is the way it's made. They have very little they can do to alter a negative market image created as the result of an unfortunate statement many wish would not have been made. 

Q: So you've said you started talking to these franchisees early this year, after brand founder John Schnatter's statement regarding the brand's NFL affiliation late last year. But then things intensified you've said after news broke of Schnatter's racial comments during a May media training call. Can you qualify the impact of each event on franchisees? 
A:I think the first statement had a negative impact, but I think the second one exacerbated the problem because it created the exponential negative publicity that did not exist or was not pervasive after the first statement.

Q: So are franchisee problems more with John Schnatter or Papa John's current leadership? 
A: The problem that's hurting the brand is that they're fighting each other, which in my view, diverts resources (from) ... addressing the issues to positively build up the brand. ... I know there's a new ad program ... the one with all the different minorities? I believe that is a good faith effort by them (Papa John's) to let the world or the community know they are inclusive. ...

But, my only concern is that — while I recognize Papa John's efforts to try to send out a message that reflects their intent and desire of demonstrating their culture of being inclusive — I am concerned that this ad may be considered overcompensating by many of Papa John's historical customer base. 

Q: Have you heard that feedback from the franchisees you're representing? Is that their sentiment?
A:I have heard that comment from several members of the community. 

"The problem that's hurting the brand is that they're fighting each other, which in my view, diverts resources (from) ... addressing the issues to positively build up the brand. "

Q: What will you be doing to help these franchisees?
A:My role is to be the voice of the franchisee to impose on the franchisor the will and desire of the franchisees to work together with the brand to come up with countermeasures to help improve whatever deficiencies may exist in the brand image so that customers' loyalty for the brand and its product can be regained as quickly as possible. 

Q: Are you, in essence, saying the franchisees you're representing don't feel their voices are being heard, so they have gone to you to open a channel of communication with corporate leadership?
A: The franchisees come to me for two reasons, one is to try to effectuate change going forward and No. 2 is to correct the problem and obtain a financial or other form of remedy that will make them whole for the damage they have experienced due to no fault of theirs.

Q: In that area then, what specifically are you considering?
A: At this point, we have several things up our sleeves that we believe will help the brand to upright itself in way that franchisees and franchisor will be able to align their interests. But it would be premature and inappropriate for me to publicly disclose the measures we are considering — whether it be unilaterally or bilaterally — with the brand to rectify the current situation. 

Q: If you took a read from the franchisees you're representing, do you think they'd want to sell this brand?
A: You will get different answers, but I believe most would prefer not to have the company sold as long as John (Schnatter) is separate from the brand. 

There is a tremendous amount of activity from potential investors in franchise companies, such as private equity firms that can provide a substantial financial injection, as well as:

• A more fresh look at the brand (and) its potential ...
• Different marketing vehicles and/or product development to take the brand in a more positive direction ... 
• Creative public relations maneuvers (to) communicate ... the brand is not discriminatory ...
• The best possible product to consumers during each visit to a Papa John's restaurant. 

And — to the extent that there is any force or wedge that exists, or attempts to come between that objective (and franchisees) — that wedge would have to be neutralized or eliminated. 

Q: What are franchisees telling you they need to happen now? 
A: The franchisees are telling me that they need help in making sure that we communicate to the brand how important it is for them to take immediate action to rectify the current situation.

Papa John's responded to PizzaMarketplace Wednesday afternoon with the following statement, as well as pointing out that in the brand's Q3 earnings call, leadership gave information about some of the actions taken to assist franchisees whose businesses may have suffered as a result of negative publicity. 

In a statement this afternoon, the company said, "We have been and continue to be committed to our franchisees' long-term financial health and will continue to work constructively with them in our efforts to move the company forward."

In its earnings call on Nov. 7, leadership said that during the quarter they specifically worked with franchisees to understand some of their problems. The company said in that call that in August they committed to help franchisees through extension of Papa John's "assistance program for North America."

Likewise, leadership said that a commitment to invest $10 million this year in the brand's marketing fund was made in early October. Those funds are going toward "additional media support," the brand's leadership said. 

Photo: iStock
 

About S.A. Whitehead

---

Pizza Marketplace and QSRweb editor Shelly Whitehead is a former newspaper and TV reporter with an affinity for telling stories about the people and innovative thinking behind great brands.