From an Ex CEO: Why John Schnatter's comments about a 20 cents add on are laughable. [View all]

[grantcart]

Last edited Fri Aug 10, 2012, 12:30 PM - Edit history (3)

Last week, John Schnatter, the founder and CEO of Papa John's Pizza, announced that the Affordable Care Act will raise the cost of his pizza 11 to 14 cents each, or 15 to 20 cents per order.

In 1988 I cashed in my retirement account and started a factory making leather furniture in Thailand and within 2 years we had grown the company to 450 employees and dominated the discount leather furniture market in Europe, replacing cheap discount production in Italy with better quality and lower priced product. IKEA was our largest, but not only customer and Ingmar Komprad came to visit our factory. We had Thai and Japanese shareholders, shipped more than $ 10 million a year, paid our workers 30% more than the market and had zero turnover. A few years later they took down the Berlin Wall and IKEA took our model to Poland where the inflated post liberation currency made labor virtually free and they could ship directly to their European stores, saving a 20% warehousing fee. We had signed personal guarantees on our loans we lost everything, house, retirement account. But I really enjoyed it, everyday was a different problem solving exercise.

I did learn however to look at markets like a CEO and I am continually shocked how idiotic statements by American CEOs are allowed to stand. Now I am not talking how their are idiotic from a public policy or morals point of view, as this one is, but how they are idiotic from a CEO point of view. I keep waiting for somebody with some business background to make the points in the national media but they never do.

Putting aside all morale, ethical, human issues regarding the wisdom of adding of dimes to a pizza so that the employees can have access to a doctor there are numerous reasons why they are just plain stupid from a CEO's point of view.


1. Marginal increase in costs are completely irrelevant.

The only thing that is relevant is are you going to get a cost disadvantage versus all of your competitors. Is Papa John's going to have to pay an additional 20 cents a pizza that other pizza makers are not going to have to pay? Of course not. So where's the harm? To think of it another way the direct cost of gasoline that goes up because say "President Romney attacks Iran and with 1/3 of the oil going through the Persian Gulf gas prices would go to $ 6.00" would have a much greater multiplier effect on Papa John's per pizza cost because not only would his raw material costs, direct energy costs and delivery costs would go up much much more than the lousy 20 cents he has mentioned. But Schnatter doesn't really care about this because he knows that if those costs go up for him then they will also go up for all of the other Pizza makers.

For this reason marginal increase in costs are completely irrelevant if they are applied to all the manufacturers equally, there is no competitive advantage or disadvantage, they are irrelevant to the manufacturer's position in the market place.

2. It eliminates one of his major benefit nightmares

Now Papa John's doesn't have to fight it out in the benefit wars where a competing company poaches his workers by offering better benefits. Working as a management consultant my first task was to ask the CEO what his major problems were. They were never the real problems but you had to let the guy ventilate. Sometimes they would say "unions" and this was never the case. Most of the time they were in prevailing wage bids so that the union rate had to be paid whether they were union or not. I would ask "since you are costing and paying on prevailing wage set by they government and your union now becomes responsible for discipline (if you had a problem with a particular worker he could simply notify the shop steward and they would send that pipe fitter back to the shop and get another one) where is the disadvantage? None.

By having a universally defined benefit Papa John's is spared the headache of trying to compete in the market place trying to convince workers that his companies health benefits are competitive with another company, they are now all going to be more or less equal.

3. It puts more disposable income into his customers pockets

What is Papa John's major problem? Disposable income in his customary base is declining. The Affordable Health Care Act will mean that when the working Mom has to go to the doctor and get breast examination or a new prescription her monthly budget isn't going to be wiped out. Now when she is on her way home from the doctor and doesn't have enough time to make dinner, she can order a pizza rather than feeding the kids breakfast cereal.

There is a famous story about how Ford increased his daily labor pay to $ 15 per day even though he had plenty of workers willing to work for half of that. He wasn't being generous, he needed them to be able to make enough money to buy a car.

I predict that eventually the management of Walmart will become big advocates for increasing minimum wages. They are coming quickly to the point where there are not that many quality locations to build new stores. They are trying to expand the range of quality products and services that they provide to get in more customers. But as the disposable income of the middle and lower class continues to disintegrate they will see (and I believe that they are already seeing) that the per trip ticket for their customers start to decline. In the stock market they are competing against other companies for investment and they are required to find ways to increase profits. For their domestic market they are fast approaching the point where the only way that they can increase profit is to increase the per ticket total of their customers buying and that can only happen if the minimum and working wages at the bottom increase.

4. Communicating a negative message to your employees

In addition to all of the above is the callous, heartless point that John Schnatter is communicating to his employees. He is saying I will not provide and I do not care if you have access to medical services and he is putting his lack of care with a price tag, 20 cents a pizza. Businesses can only be successful on the long term if a) their suppliers win b) their employees win and c) their customers win. If any of those three are threatened then the long term viability of the business is uncertain. Papa John's has now communicated to all of their employees that they are nothing more than cannon fodder and are completely disposable. This puts Papa John's at a competitive disadvantage in hiring and attracting the best workers, or keeping morale up. And he created this disadvantage without gaining any comparative bottom line advantage. It doesn't help your bottom line to alienate your employees, especially when you do it without actually increasing your bottom line performance, it is an unforced error.



Of course there is the whole moral, ethical and public policy point of view as well. But looking at it strictly from a business point of view Schnatter's comments rise to the level of a junior high school business class. If I was a major shareholder in Papa John's I would be worried about how competent a CEO was managing my investment.

The fact that the media simply passes on statements like this without challenging them simply shows again that they are becoming less and less professional with each election cycle and are completely intimidated by business people no matter how senseless their comments are.