Compounding Machines

Archive for the ‘Chick-Fil-A’ Category

The Chick-Fil-A Owner/Operator Model

with 6 comments

On Thursday, Chick-Fil-A reported unbelievable 2008 sales figures including record system-wide-sales of nearly $3 billion, a 12.2% increase from 2007 and a very impressive same-store-sales increase of 4.6%. 2008 was its 41st consecutive year of system-wide sales gains.

In case you are not familiar with Chick-Fil-A, it is the second largest U.S. quick service chicken restaurant chain with nearly 1,425 locations in 38 states. They are known for being the first fast food chain to offer boneless chicken breast sandwiches and chicken nuggets and the first to locate inside of shopping malls. To learn more about the history and the guiding principles of the company, I recommend reading Eat Mor Chikin Inspire More People: Doing Business the Chick-Fil-A Way by company founder, S. Truett Cathy.  You will learn that the values espoused by Cathy that makes the company the success that it is today are simple, but not easy to execute consistently day in and day out (except Sundays!).

What really makes Chick-Fil-A different from its competitors is its Operator model. Most restaurant companies have minimum net worth requirements for their franchisees, usually exceeding $1 million, of which up to $500,000 of liquid net worth is needed just to get the first restaurant up and running. From there, the franchisee must pay the franchisor an ongoing royalty fee of around 4-6% of gross sales and around 3- 5% of gross sales for an advertising fee. If the franchisor owns the land underneath the restaurant, another fee is charged to the franchisee for rent which is usually in the neighborhood of 6-9% of sales. This percentage of sales arrangement makes franchising a fantastic business. A pure franchising model can produce up to 50-60% EBITDA margins with very little capital required.

Chick-Fil-A does things a bit differently.  In fact, Chick-Fil-A really doesn’t really franchise restaurants in the traditional sense since they retain the equity in its restaurants. What they really do is recruit young, hungry entrepreneurs that embody the Chick-FIl-A values, then offer them an attractive profit sharing program. The company gives the Operator all the tools it needs to succeed, but from there the Operator is the “CEO, manager, president, and treasurer of his or her own business.” At the Steak n Shake Investor Day in November of 2008, Sardar Biglari commented that he loves the Chick-Fil-A owner/operator model. I suspect and hope this admiration will eventually lead to emulation.

You don’t have to be worth millions to be a Chick-Fil-A Operator, instead you have to pay an upfront fee of $5,000 (just to prove you are serious I guess). From there, Chick-Fil-A pays for everything to get the restaurant up and running including real estate and equipment which they then sublease to the Operator. Chick-Fil-A charges 15% of gross sales, and then splits the net profit 50/50 with the Operator. Under this arrangement, most Operators are able to make over $100,000 per year. The company doesn’t do too shabby either. They have a disciplines growth strategy, building only 75-100 new stores per year, reportedly taking on only modest amounts of debt to build each location. I can’t see how the company could be doing anything but printing cash.

This system produces entrepreneurial owner/Operators that are both emotionally and financially committed to the business. As Cathy said, “the bottom line depends on the Operator’s honesty, integrity, commitment, and loyalty to customers and to us. We trust our Operators to make good decisions – and they do.”

Below are the tenets Operators are expected to adhere to (from Eat Mor Chikin: Inspire More People):

  • People want to work with a person, not for a company
  • Each new Operator is committed to a single restaurant
  • Operators will hold no outside employment or other business interest
  • We choose Operators for their ability and their influence, so we want them in the their restaurants
  • We expect quality interaction between Operators and team members
  • We expect quality interaction between Operators and customers, both in the restaurant and in the community
As shown by the sales figures reported on Thursday, the Operator model (and great food and marketing of course) is clearly working for Chick-Fil-A. I am not aware of anyone that has successfully copied this Operator model on a large scale.
 

 

Advertisements

Written by sdinvest

January 31, 2009 at 10:29 pm