Obamacare-Bashing Hurts Papa John's, Applebee's
After the comments, on a scale from 100 (totally positive) to -100 (totally negative), Papa John's score fell from 32 to 4, Applebee's score fell from 35 to 5, and Denny's went from 10 to zero, then back to 6, according to a new survey.
Rachael Rothman, Susquehanna Financial Group analyst, shares her outlook on the restaurant operator, and explains why she downgraded the stock to "neutral" and maintains a $58 price target.
Along with everyone else, the casual dining restaurant sector has been struggling to cope with the effects of the economic downturn. For example, Darden Restaurants, which operates Olive Garden, Red Lobster and LongHorn Steakhouse, on Tuesday lowered financial expectations, sending shares down 10.7 percent. Prior to that the company had been leading the industry.
In October, Darden experimented with using more part-time employees in an effort to avoid Obamacare costs. A flurry of negative media coverage ensued.
The reputation results come from an online YouGov BrandIndex survey of 5,000 adults who had eaten at casual dining restaurants in the past month. The survey asked respondents if they'd heard anything in the last two weeks positive or negative about the brand and gives a score from 100 to -100. A score of zero means equally positive and negative feedback.
There was a notable dropoff in the scores after company representatives made remarks about how the Affordable Care Act — or Obamacare — was going to hurt their business.
For instance, Papa John's founder John Schnatter estimated in an August 1 earnings call that Obamacare would add 11 to 14 cents in costs to every pizza.
"Let's say fuel goes up, which it does from time to time, and we have to raise delivery charges," said Schnatter in the Aug. 1 earnings call. "We don't like raising delivery charges, but the price of fuel is out of our control, as is Obamacare. So if Obamacare is, in fact, not repealed, we will find tactics to shallow out any Obamacare costs. And, of course, strategies to pass that cost onto consumers in order to protect our shareholders' best interest."
In November, Schnatter told a college class that he supposed Papa John's franchises would decide to cut worker hours to avoid paying health insurance. Under the Affordable Care Act, employers have to provide health insurance for employees working more than 30 hours a week or face fines.
Reached for comment, Papa John's told NBC's TODAY that Papa John's franchises are independently owned and operated, and decisions about hiring and wages were up to individual franchise owners. Andrew Varga, chief marketing officer of Papa John's, told TODAY the publicized YouGov BrandIndex findings "were contradicted by the results of BrandIndex's own general population study which showed a significant improvement in reputational scores" for the pizza chain.
Despite the drubbing the brand has taken in the press and social media following Schnatter's remarks, which Papa John's CFO Lance Tucker said have been "misquoted and misreported," the company said "there is also no change in its current positive sales or earnings guidance."
Zane Tankel, CEO of an Applebee's franchise running 40 locations, caught flack after he told Fox Business News that the Affordable Care Act would cost millions and force him to stop building restaurants. Voice and email messages left for Tankel were not returned.
A Denny's franchise owner in West Palm Beach, Fla., John Metz, told the Huffington Post that Obamacare would force him to charge each customer 5 percent more to offset costs. Calls were referred to an external PR firm, which did not respond to a request for comment.
Both Applebee's and Denny's released statements saying that while they respected the free speech rights of their franchise owners, the comments by Tankel and Metz did not reflect corporate opinions or positions.
Mary Ellen Muckerman, head of strategy at international brand consultancy Wolf Ollins, told TODAY: "Franchises are just as close to the brand as the corporate parents." Political statements per se are not forbidden, but the question is, "are the statements consistent with the overall brand purpose?"
"A brand is just a collection of ideas," Barbara Findlay Schenck, author of Branding for Dummies, told TODAY. "When suddenly the brand message shifted to political stances, bottom line prices, price increases and staff cutbacks, the inconsistency rocked brand strength, confidence, and preference."
And that can leave the consumer's brand preferences up for grabs by a stronger, more confident brand.