Jack in the Box has talked about returning to unit growth, but never again in the two years since Darin Harris became CEO.
The company has taken many steps to achieve this, including improving relationships with franchisees, building site selection capabilities, selectively acquiring some stores, rebuilding the company’s franchise sales departments and signing agreements with existing operators to build more units. The objective is to achieve 4% annual unit growth by 2025.
But the company finds that it has been slow. Jack in the Box shut down weaker units and struggled with supply chain issues. And the franchisees just had no intention of building more locations. “I think we as the management team underestimated how thin the pipeline is,” Harris told investors this week at the Goldman Sachs Travel and Leisure Conference, according to a transcript on the financial services site. Sentio.
Perhaps few channels need as much unit growth as Jack in the Box. Its failure to do so is a demonstration of the importance of franchise relationships to the overall health of a brand.
Franchisees operate 93% of Jack in the Box’s 2,200 locations. The company once operated 80% of its restaurants, but has steadily and steadily sold them to franchisees for the past two decades. While franchising is more profitable than restaurant management, it also means unit growth is not in the hands of the company.
Jack in the Box has experienced net unit declines in four of the past five years, although the company has averaged same-store sales growth of 3.27% over that period. It’s similar to Wendy’s, although the largest burger chain added around 200 locations during this time.
Jack in the Box, on the other hand, has the fewest restaurants in the system for over 10 years.
Number of Jack in the Box Units
Harris’ arrival came following a franchisee uprising over cuts to franchisee support and marketing. These carriers have largely been resistant to adding locations, and Harris’ comments suggest the company has done little to change that, at least successfully.
Jack in the Box approached existing franchisees who have completed their development agreements, asking if they want to build more restaurants. “We knew we had to focus on existing franchisees,” Harris said, noting that 30% of operators signed a new pledge. He expects more than half to do so by next year.
The result is a pipeline of 218 units, bigger than the company has had in years.
This pipeline is strengthened by improving the unit economy. Harris said franchisees generated record earnings before interest, taxes, depreciation and amortization, or EBITDA, last year. The average franchisee, he said, owns more than 20 locations and generates about $5 million in EBITDA “with very low leverage.”
Harris noted that the company had created a “margin task force” to come up with strategies to improve profits without relying solely on price to offset rising labor and food costs. He said the group was able to devise strategies that should do just that over the next 12 to 24 months.
He said the company’s goal is to steadily increase unit growth, from 1% to 3% to 4% by 2025. Yet adding 4% per year to the number of units means building around 90 restaurants during the year. This is an ambitious goal for Jack in the Box. The only time the chain has come close to that number in the past 16 years was in 2009, when it added 70 locations.
On top of that, the company has had other challenges to achieve even some unit growth, including closing weak locations, “cleaning up” the system, Harris notes.
There are also supply chain issues that have caused various delays and increased construction and equipment costs. As such, Harris was reluctant to commit when Jack in the Box begins to show positive unit growth.
That said, he remains confident that the business will soon start posting unit growth and hit that 4% figure by 2025. “It’s all in the strategy we’ve laid out and the timing is starting to come together,” Harris said. , adding that Jack in the Box may also begin adding business sites to complement this growth.
“We are very pleased with this growth rate,” he said.
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