From Chicken to Pizza: Papa John’s, Obamacare, and the Intelligent Consumer

I admit I was astonished by the blatant self-interest and attempt at manipulation of consumers that John Schnatter, CEO of Papa John’s Pizza, offered recently, saying that he would pass on the cost of Obamacare to consumers in the form of pizza costing at least $.10 and perhaps as much as $.20 more.

This is a man whose annual salary is well over $2 million, but who resents having to provide improved healthcare to his employees and will penalize his customers rather than see a slight reduction in his own enormous profits.

Those who are concerned about ethical matters could already find much to object to. Personally, I would rather pay more for pizza and other products to a company that I know is dealing ethically with its employees.

But one doesn’t have to be an ethical consumer to balk at Schnatter’s attitude. You just have to be an intelligent one.

Most of us discovered long ago that there are two different ways to maximize profits in the business world. One is to cut corners wherever possible so as to appeal to those who care only about paying low prices, and also maximize your own profits. What thinking consumers know is that, if you resent having to give your employees health insurance and do it only because the government requires you to, then you probably would also happily not keep your cooking area clean, since paying someone to clean it is money that would otherwise be profit. Those who take this approach will maximize profits whenever possible, and so will offer me as low a quality of product or service as they can get away with. If they will cut costs rather than take proper care of their employees, then what sort of care will they take of me, the customer?

The other approach knows that there are consumers who would rather pay more for a car that will run well than pay less up front for a car that will cost more in repairs in the long run. We would rather pay more for a pizza that is made well than less for one where the concern was to maximize a CEO’s profit. And ultimately, because a company realizes this, they make money. But there is a recognition that a successful business involves a compromise between the need to make a profit and the consumer’s desire that enough be spent on giving us a high-quality product.

You don’t need to be concerned about ethics to find Schnatter’s attitude objectionable. Being a self-interested consumer ought to be enough.

But I am not just someone who tries to be a smart consumer. I am also an ethically-concerned one. And so I will be listening carefully to hear what other pizza companies that want my business have to say.

  • dmabs
  • Ryan

    I don’t understand your reasoning. Papa John’s CEO was crass as heck, and I expect him to pay for this politicized effort, however, I don’t really see most of your reasoning as holding.

    The job of a CEO and of the entire business enterprise is maximizing shareholder profits. CSR may be a catchword, but it doesn’t match the incentives at all, making it only a buzzword. So, to pass this on to his consumer really is just the guy doing his job, and even econ 101 is going to show this is what happens to a tax increase. Taxes can’t perfectly pass through because of how supply and demand work together, but…. this isn’t absurd.

    Additionally, I kind of doubt this suggests a poor purchase. Every single food place tries to economize on cost to a significant degree. This includes labor-market purchases. Every business does this as well. Maybe you may think there is a signalling effect, but I doubt it. If anything, I expect most businesses in the same niche in the industry had similar labor policies because businesses are goal-oriented and the competitors had the same goal. So… I doubt this really suggests this business is different than literally every other.

    I mean, look, I understand you are on the left. I agree that politicizing this is stupid. I don’t think it tells us anything though.

    • http://www.patheos.com/blogs/exploringourmatrix/ James F. McGrath

      It isn’t his passing on of the cost to customers that I find problematic – indeed, hopefully I was clear that I would rather pay more for pizza and know that people are getting better health coverage. My point is the message that is implicit in his public statement of resentment about having to do this.

  • Gary

    I can identify with this. Don’t care if the pizza is a little more. I have two granddaughters both working at Papa John’s. The Affordable Health Care Act (Obamacare is a derogatory Republican term for it) first…provided the 19 and 21 year old’s with health care by extending their father’s coverage to them. Second, if they hit 26 and are still working for Papa John’s (I certainly hope not, higher goals, but I can’t do anything about that), they will have health care through a group plan provided by their employer….but I am sure my granddaughters will be forced to pay something for it out of their paycheck (probably shared payment, some employee, some employer). However, I do know my granddaughters. If they were not forced to pay something for health insurance, they would not, with the attitude that nothing is going to happen to them. Wrong choice. Then you taxpayers end up paying for their emergency health care. I heard it best explained, by saying the government is just preventing freeloaders from getting by, not having insurance, who then stick it to the taxpayer when they do need care – which everyone does, eventually. So yes, I love my granddaughters, but they would be freeloaders on the health care system if allowed. Most 21 year old’s mind set = health care, or new ipod. No Brainer = ipod. By the way, all those Papa John’s pizza delivery people, that come to your door? They are driving their cars, and most likely not telling their auto insurance agency what they are doing. Most insurance companies WILL NOT insure a 19-21 year old to delivery pizzas, unless you have a Romney as your grandfather. Cost prohibitive. So those young people doing the delivery are in big trouble if they have an accident. My granddaughters don’t deliver (at least that is what they tell me).

    • Gary

      And by the way, the Papa John’s pay scale stinks. $10/hour. A manager gets a $.50 raise. Try paying for health insurance and auto insurance out of that. No Papa John’s employee will ever have a Swiss or Caymon Islands bank account, not that there’s anything wrong with that.

  • Straw Man

    I’m seeing a certain amount of economic ignorance here, coupled with hubris. “Most of us discovered long ago that there are two different ways to maximize profits in the business world”? Have you, in fact, ever started operated a business? It’s easy to dictate to another how he should be running his business, when: we have no idea of the factors that actually go into his decisions; and we lose absolutely nothing if our advice bankrupts the business (leaving the employees without income or benefits of any kind).

    Note that I didn’t characterize your particular view as good or bad advice; it would be a straw man to impute that to me. I only remarked that such advice is generally offered in ignorance, with complete disregard of the potential consequences. A particularly annoying example is the tendentious politician who says, “By doing this, the businesses will make even more money!” If they knew they would make more money, they would obviously do it. I don’t know whether they would or they wouldn’t, but the politician is certainly not specially qualified to make such pronouncements, and loses nothing if his advice instead costs the business money or shuts it down completely.

    I mentioned “economic ignorance” above. It’s true in a very broad sense that profit equals revenue minus cost, and therefore that one can increase profit either by increasing revenue or reducing cost–or sometimes by reducing revenue but reducing cost even more, or increasing cost but increasing revenue even more. Those are technically four options, rather than two, but we could focus on the net effect and say it’s either “increase revenue” or it’s “decrease cost.”

    One key takeaway here is that increasing cost while revenue remains the same or decreases, will decrease profits, and similarly decreasing revenue while costs remain the same or increase, will decrease profits. That’s true as far as it goes. But one thing you omit from your consideration, however–and it’s partly Schnatter’s fault as well–is that it’s not in principle possible to “pass the cost on to the customer” simply because you wish to. Customers are free to decide which of many competing products to purchase. If another pizza is more expensive but tastier, they might buy that one. If another pizza is equally tasty but cheaper, they might buy that one. It’s true that they might purchase the more expensive (but equally tasty) pizza because they believe that the excess price is devoted to a good cause, such as charity or health care. Or they might not. It’s entirely up to them. Even if Papa John’s were the only pizza in the world, they might decide to go with meatloaf instead.

    The rate at which increased price causes decreased purchases is a function of supply and demand (specifically, it’s the first derivative of the function giving quantity in terms or price), called the elasticity of demand. If the elasticity is high, then an increase in price will strongly affect sales; if the elasticity is low, it will not. Life-saving healthcare has a very inelastic demand: if you’re dying, you’ll pay anything to live. Pizza is relatively very elastic. I have no idea what the effect of a $0.20 increase would be on the sales of pies. It wouldn’t effect me; the high price of pizza today has already caused me to be an infrequent consumer of it, and 20 cents won’t really change that much. How it will affect others I have no idea–but it’s a bit ignorant and more than a bit hubristic of you to pretend you do know.

    But you make two contradictory arguments in your post. On the one hand you (rather self-righteously, I might say) argue that “doing the right thing” will be rewarded, because the pizza-buying public would be delighted to fork over an extra quarter per pie in order to see the employees get Obama care. Therefore, you imply, he should go ahead and raise the price, confident that he will in no wise suffer for it.

    Yet at the same time, you castigate him for not wanting to “see a slight reduction in his own enormous profits.” Papa Johns has about 6% of the pizza market, which in the US is about 3 billion pizzas per year, or about 180 million pizzas. At $0.10 per pizza, that’s about $18 million per year. If he paid that out of his “annual salary of over $2 million,” he would need to take out a personal loan for about $16 million each year.

    In short, you reasoned that $2 million is “a lot,” and $0.10 is “not a lot,” so therefore Mr. Schnatter should be able to pay this out of his own pocket–but refuses to, because he’s too greedy. That you ran with that, instead of doing even a back-of-the-envelope reality check, speaks volumes. It suggests that your motivation isn’t based in reality, but in envy. What else would prompt you to condemn a man for failing to spend 9x his annual income paying everyone else’s medical bills? And why is he greedy for receiving a hefty paycheck, but you are not greedy for wanting to see it taken away from him? Does your “altruistic” wish that it be taken from him on behalf of someone other than yourself, justify it? If so, is that a general moral principle? For example, if I take money from passers-by at knifepoint, but donate every penny of it to the children’s cancer ward, does that make me a noble benefactor, or would I still be guilty of breaking the eighth commandment?

    Note that here I’m not commenting in favor or against Obama care, so please don’t reply with a straw man accusation that I somehow object to the poor receiving quality medical care. (And if I did oppose Obama care, that would not by itself imply that I don’t want the poor to get good medical care, BTW.)

    What I’m pointing out is: (1) contrary to your accusation, he could not simply pay this money himself rather than passing it on to his customers; (2) you can in no way predict the effect on his business of such a price increase; and (3) your willingness to plow ahead despite #1 and #2 suggests that you may be breaking the 10th commandment. I.e., you may covet his wealth not for himself, but for others, or perhaps for the satisfaction of seeing him pulled down from a more comfortable station in life than you enjoy. It’s a curiosity of the times that people not only covet so openly, but in fact are self-righteous about it.

    • http://www.patheos.com/blogs/exploringourmatrix/ James F. McGrath

      I did not mean to suggest that he could pay all of this himself. My point was about profits, using him as an example because he was the one who made the statement. Papa John’s regularly discounts their pizzas through coupons and other means, and so there is a profit margin that can absorb at least a slight reduction in income per pizza. And since the AHA is legislation that will affect all businesses, I don’t see that this is affecting only Papa John’s, unless they were currently providing inferior health coverage to employees.

      But my point was mainly that Schnatter’s statement suggests a resentment at being required by government to treat employees fairly, and that it makes me wonder what other corners he would be willing to cut if he could get away with it. What if the government did not require that meat be used by a certain date? What if the government did not require certain standards of cleanliness? I would rather give my business to a place that understands that through government we normally can only impose a bare minimum if safety, justice, etc. As a customer, I want to be offered something that goes beyond the bare minimum, and am normally willing to pay for it. There are plenty of cheap electronics from China for sale on eBay. You only have to buy them once to learn that it is worth paying more to get something that is of higher quality. And presumably the cost of paying employees at least minimum wage and keeping the kitchens clean are already being passed on to me, the consumer, without fuss or public declaration.

      While I may be influenced by the Bible’s predictions that God will bring the rich down from their high estate while elevating the poor, I believe that my concern is for as much of the basics of income and health care and other necessities be available to everyone. Beyond that, I have no principled objection to those who are successful being wealthy. I’ve lived in other countries where there is an infrastructure in place to try to provide this, and I find it frustrating that my own country lacks what others have. And so if I covet anything, it is Britain’s health care system, not John Schnatter’s wealth.

      • Dharts

        Your main point being that the employees are not being treated fairly? By what standard? There is nothing that says an employer must give company profits to employees. Why the CEO chose to use the terms excessive when there is no definition of excessive profit in a business sense is something I can’t fathom but he is correct. Company profit is owner profit which is stockholders in most cases. In large part that means you and I and millions of others who have stocks, 401ks at work, pension plans and other investments.
        No one forces people to work at Papa Johns or anywhere else. No one forces people to buy their products. It is when people start telling employees that they should have some right to company profits and foist the idea that companies belong to the workers that a conflict arises. I would love to see employees make up any company losses at the end of the year. Employees risk their jobs and owners risk their money. Someone can possibly find another job but money lost can’t be found, it has to be earned again.

        • http://www.patheos.com/blogs/exploringourmatrix/ James F. McGrath

          A society must set the standard. Obviously when employers are given absolute freedom to maximize their own profits at the expense of those who do the majority of the work in their businesses, they will do so. But it is not self-evident that that is what is best for a society.

    • Ian

      Sure, demand for pizza is elastic. Which is all the more reason why Schnatter is doing a rather stupid thing by making himself and his business a lightning rod for people tired of “sore loser” Republicans. I’ve never been much of a Papa John’s customer so this is a small sacrifice, but after this I have no intention to ever buy their pizza again. Sure, it’s possible that some of the people I buy from might have beliefs that I find far more objectionable. But as long as they’re smart enough to not do something this stupid, I’ll never know.

  • VellicateAlgid
  • http://www.facebook.com/joenaiman Joe Naiman

    You do realize that his is America, right? Profit is a good thing, not a bad thing. The poverty rate is the same as it has been for 50 years.

    • http://www.patheos.com/blogs/exploringourmatrix/ James F. McGrath

      If the poverty rate is the same as it has been for 50 years, you consider that a good thing?

      • http://www.facebook.com/joenaiman Joe Naiman

        Nope, but the point is that all these, “social safety nets” have done absolutely nothing. Before they existed, the rate was the exact same. Why lower my lifespan so that 15% of the population that doesn’t have a work ethic and leeches off my tax dollars have a higher lifespan. This socialist attitude in insanity.

        • http://www.patheos.com/blogs/exploringourmatrix/ James F. McGrath

          I am not sure how your paying more for pizza lowers your lifespan, unless your choice is between pizza and deep-fried state fair food. But this discussion is about healthcare, and I am guessing you have never lived in one of the countries like Canada or Britain that offers its citizens equal access to healthcare in a way that Americans consistently refuse to.

        • Eric Lilly

          You do know that the Affordable Care Act, allowing people and businesses to choose from a larger pool of health insurance providers and forcing those providers to actually GIVE care is far from “socialist” don’t you?…. don’t you?

          Maybe you are thinking of Medicare???????

  • tecno40

    I don’t think the author of this story really
    understands the Affordable Health Care Act. I was looking for articles to help
    me better understand it, but this entire piece seems to be an emotional,
    “hate the big companies” piece. It does not explain how the act effects
    papa-johns, their employees, or me in any way past saying “It dun helps
    you”.

    • http://www.patheos.com/blogs/exploringourmatrix/ James F. McGrath

      I think perhaps you arrived her by mistake. This is a blog post about the recent comments made by the Papa John’s CEO. If you are not aware of what he said, please click through the links in the blog post. If you are looking for fuller information about the Affordable Healthcare Act, try here: http://www.healthcare.gov/law/index.html

  • T. Webb

    Dr. McGrath, ALL COSTS come down to the consumer. Tax businesses? The consumer pays. More taxes on evil gas & oil companies? The consumer pays. Yes, we should pay more, AND be taxed more to give health insurance to all (which Obamacare does not yet do), and yes, the standard of living in the West must be lowered so that of the rest of the world can be raised, but please. You & I will pay. We should, of course, but don’t fool yourself, we will.

  • http://twitter.com/d_pardee Darren Pardee

    Hm. Do Papa John’s pizzas cost 10 cents more in Massachusetts?

  • Dominic

    It’s an absolute disgrace that the lower classes are coming to expect health care as a right and not a privilege. This is how natural selection works — losers die. What is now going to happen is that we’re going to be lumbered with a generation of losers and their families that survive and reproduce and those of us in the top 1% will be expected to subsidize people who are too lazy or too stupid or too disabled to take care of their children. Why should *I* have to care for some other man’s children??? This is so unChristian and so obviously in opposition of the very faith-based Law of Subsidiarity. I am solidly behind Romney. If someone like me gets a fat tax cut, rather than having to pay more to support the uentermeschen of this world, it’s trickle down and the lower classes will be shown there’s something they can aspire to (if they can make it, which they probably don’t have the ability to do).

    • http://www.patheos.com/blogs/exploringourmatrix/ James F. McGrath

      That is a brilliant bit of parody! It would be fun to reverse it as well, and point out that their wealth should not allow the rich, most of who, are not in particularly good physical shape, to survive and thrive and pass on their genes when they are in most cases nowhere near as strong or resilient as the people who work in their factories and production lines.

  • http://www.facebook.com/stubabyqeditor Stu Brown

    What a bogus assumption that if a restaurant should have to pay for healthcare that they would not keep their kitchens clean! Some of your comments make incredible assumptions just to support your point of view– a bad habit. I am all for you having a moral concern however, you display the mercy of a Pharisee– too religious.

    • Ian

      Why is it a “bogus assumption” that people who cut corners in one area are likely to cut corners in other areas? And what’s the connection with Pharisees? The biblical condemnation of Pharisees is that they are overly legalistic. Are you saying that we should be willing to understand the when a business owner bends the rules with regards to keeping a clean kitchen in order to make more profit?

  • SickofPoliticks

    What the heck did you people expect. These are business people and they have to pass their costs on to the consumer. Jeesh… get a grip. He’s doing what any good business person would do!!

    • http://www.patheos.com/blogs/exploringourmatrix/ James F. McGrath

      Not all businesses make a point of commenting on legislation that requires them to take care if their employees, and blame it for cost increases. If the price of pizza had gone up without the CEO turning it into a political statement himself, everyone would simply be paying more for pizza without objection, I suspect.

    • rmwilliamsjr

      re:
      good business person

      as an ethical term, is “good” modifying “business” or “person”?
      does “good business” have to trump “good person”?

    • Ian

      No – a good business person doesn’t set out to alienate the half (or more) of the country who think workers should get health care. That’s the free market – people who believe workers should get health care can buy their pizzas from one of a dozen other pizza places whose owners either don’t endorse Mr Schnatter’s decision to punish his workers for Obama’s victory, or who are smart enough to know that injecting yourself into political fights rarely is a good idea in the long run.

  • Jay Raskin

    I just got an E mail with 15 free points from Papa Johns. Since 25 points allows me a free pizza, this is 3/5ths of a $10 pizza or $6. I assume he gave away these points to millions of other customers. If he can afford to give away a couple of million dollars like this, he should be able to give healthcare to his customers. In fact the Affordable Health Care Act will lower the cost of insurance premiums to small and large businesses alike.
    The man may know about making pizza, but his knowledge of insurance and the Affordable Health Care Act is suspect.

  • US Patriot

    Obamacare isn’t only about PJ employees, it is about the everyones’ healthcare. If guarantee access to quality health insurance means 20 cents extra for pizza, that is a deal I will take. Having said that, I don’t think ‘burger flipping’ is a career, and to that end, if Papa John want to shorten shift hours to avoid obligation to provide health care, I’m okay with that. It is unfortunate because, by virtue of size, a company like PJ can possibly innovate in health care for hourly workers. If John Schnatter want to keep more than 10% of the profits for his salary and stiff his employees, he’s a dick, but his employees should consider a better line of work. The upside of his dickishness, is that he will have to hire more people to make up for shortening his employees’ hours.

  • Bill

    I believe Papa John’s estimate of $.10- $.20 per pie doesn’t take into consideration the increase in the cost of goods. What happens to the price of pizza when the suppliers of pepperoni, sausage, olives, cheese, produce, flour, spices, tomato sauce all raise their prices to cover the increased costs of Obamacare? What happens to the price of the pizza when the cost of cardboard packaging, the cost of printing, the cost of trucking, when all of the increased costs are passed onto the customer (i.e., Papa John’s)? Well, Papa John’s could pass on all the increase to his customers, too, or he could do what many business owners have done. He could start getting his produce, sauce, cheese, etc from Mexico, get his cardboard and printing from Chinese state of the art facilities, and basically bypass the entire US supply chain. If I am a vendor whose contract with Papa John’s makes up 20% of my business, what do I do when I lose my largest customer? I lay people off, that’s what I do.

    The crafters of Obamacare were ignorant of how business really works and also guilty of overlooking the Law of Unintended Consequences. Prediction: Papa John’s will sell fewer pizza in the coming years, but so will Pizza Hut and Domino’s. One of the consequences of Obamacare is that a significant number of full time employee jobs will be cut to part time status, companies will lay off employees, and what little manufacturing is currently done in the US will suffer as more businesses look overseas to lower costs. The Affordable Health Care Act will make nothing affordable, and the cost of pizza will be the least of most people’s troubles….

  • RJR

    “his own enormous profits”? I noticed you failed to mention the raw numbers of Papa John’s profits. 100 million in profits on 3 billion is sales. That’s a whopping 3.3% ….DUH! ….. Suggest a refreshers course in Math 101….. Really.

    • http://www.patheos.com/blogs/exploringourmatrix/ James F. McGrath

      So the only thing that matters is what percent of sales the profits are, and not whether the money goes to the executives rather while workers do not get adequate health care benefits? I do not share your assumption that it is moral for corporations to be a means of harnessing the workforce in a way that only benefits the taskmasters and not the workers. It isn’t just a question of math, but also of morality.

      • Michael Wilson

        Revisiting this old story, I came across this. http://www.forbes.com/sites/calebmelby/2012/11/12/breaking-down-centi-millionaire-papa-john-schnatters-obamacare-math/

        I learned here that he probably cost himself more bitching about Obamacare than the added cost of providing health care.

      • http://youcallthisculture.blogspot.com/ VinnyJH

        I would also point out that corporations are themselves a product of government regulation. The natural forms of doing business are sole proprietorships and partnerships where ownership and liability are joined. Corporations allow investors to share in the profits of a business while limiting their liability to the amount invested. Corporations are artificial people created by the government to produce a benefit for society in greater efficiency in the use of capital. However, corporations also produce negative side effects in the form of excessive concentrations of wealth and power. The same government which permits the existence of corporations for the benefit of society is justified in imposing regulations to mitigate the negative side effects.

      • Preston Garrison

        He was commenting on whether the profits were really enormous, and showed that for the company they weren’t. Your response is a straw man in that it addresses something that his comment didn’t. He didn’t say anything about “the only thing that matters.” How do you know what his assumptions are, since this is his only comment on this post, and he just dealt with one narrow point?

        • http://www.patheos.com/blogs/exploringourmatrix/ James F. McGrath

          When someone snidely says little more than “learn to do some math” in response to a post that is fundamentally not about number-crunching alone but the ethics of a just society, they don’t make the impression that they are concerned about the latter. If the comment had merely pointed out mathematical issues in a respectful tone, I might have gotten a different impression.


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