That was one of those "very special episodes" that sitcoms back in the day used to do.
Happy Days was set in 1955 Milwaukee so a bunch of white people either being overtly or unintentionally racist makes sense and it was the show trying to illustrate that even the characters you liked could hold bigoted views and buy int stereotypes.
They probably should have hired some black writers or the episode instead of having 2 middle-age white guys writing it.
It is also kind of fukked up that Sticks only appeared in 2 episodes.