Yum! Brands keeping headquarters in Louisville, moving executives to Texas

March 1, 2016

Caitlin Bowling
INsider Louisville
February 24, 2016

With Yum! Brands Inc. relocating five key C-suite executives to Plano, Texas, Louisville may become a show headquarters for the restaurant conglomerate, while employees in Texas are the ones actually steering the ship.

Yum Brands Inc. is headquartered at 1900 Colonel Sanders Lane. | Courtesy of Yum! Brands

Yum Brands Inc. is headquartered at 1900 Colonel Sanders Lane. | Courtesy of Yum! Brands

“Whenever you move your C-level team … in effect you are moving your headquarters because that is where your heads are,” said Darren Tristano, president at Technomic, a Chicago-based restaurant industry research firm.

Business First previously reported that Yum CEO Greg Creed, chief public affairs and global nutrition officer Jonathan Blum, chief legal officer Marc Kesselman, chief people officer Tracy Skeans, and a yet-to-be-named CFO will move to Plano, where Yum’s global operations team and its subsidiary Pizza Hut are located.

Yum’s former CFO Pat Grismer resigned effective Feb. 19, Insider Louisville previously reported.

The company is adamant that Louisville is and will remain Yum’s home. Virginia Ferguson, a spokeswoman for Yum, told IL that none of its nearly 1,000 Yum and KFC U.S. employees are moving to Texas.

“We are proud to be here,” Ferguson said.

IL was scheduled to interview Blum this afternoon about the impending move; however, a few minutes before the appointment, IL was told he was suddenly pulled away and would be unavailable for comment. Ferguson forwarded along statements from Yum explaining the decision.

Creed and the other four executives “will be highly mobile, traveling to many of our international markets and offices throughout the year, including Louisville for 1-2 weeks each month,” Ferguson said in an emailed statement. “Given the global nature of our business, which has transformed over the years, the YUM executive team’s office will be in Plano, but they will retain an office in Louisville.”

She also noted that Yum has based its international operations in Texas since 1997, when the company spun-off from PepsiCo.

It makes sense that the company’s leaders would want to be close to its overseas operations, Tristano said. “Today, a lot of the growth restaurant companies are seeing takes place outside our borders.”

Texas also is home to a number of other restaurant chains and restaurant-related businesses, including Pie Five Pizza, Dickey’s Barbecue Pit, Romano’s Macaroni Grill and Apex Restaurant Group.

“Dallas is considered a very big restaurant town,” Tristano said, noting that many industry events and restaurant innovation happens there. It also is warm, has a large population and is somewhat centrally located.

While Louisville city leaders often tout the city’s location and its proximity to other places, the truth is one of the few ways to get a direct flight is to be a box the United Parcel Service is shipping.

The Louisville International Airport has fewer than 20 nonstop flights to cities in the United States. The Dallas/Fort Worth International Airport is a major transportation hub; it has nearly 50 nonstop flights to international cities and countless more within the continental United States.

“There is no way to overlook that,” said Nat Irvin, the Strickler executive in residence and professor of management at the University of Louisville College of Business. “We can get to the airport in 20 minutes from any place in the city, but part of the downside is you can’t get to any place directly.”

And Dallas is closer to China — where Yum will spin-off its operations this year — offering a nonstop flight to Beijing. Although Yum China will technically operate as its own company, Yum leaders will no doubt be keeping a close eye on how the company is faring in China’s sometimes volatile market.

Already, Yum executives spend a good portion of their year abroad, according to the company.

“I think what (the move) represents is the importance of face-to-face communications when you are developing strategy,” Irvin said. “You like to see them; you like to hear them; you like to be close to them.”

The only factor in Yum’s decision, according to Ferguson, was the fact that the company’s global operations offices are in Texas

“Our business is a global business, and it makes sense,” she said.

Tristano said he wouldn’t be surprised if Yum moved more jobs to Texas in the future, but the company also has good reason to remain in Louisville. If the company said it planned to move its headquarters but keep jobs in Louisville, it could end up with a retention problem.

“It would make sense for them to continue to have that (Louisville) location regardless of what they call it,” he said. “This is a less disruptive strategy for them.”

With its name plastered around the city (see KFC Yum! Center), Irvin said he is confident Yum will continue to maintain a large presence in Louisville.

“I think Yum is fully ensconced in this community. The company has a very broad footprint in this community, and I think the heart still remains right there,” Irvin said. “I think what they have made is a decision for the company. I don’t think it’s a detriment to the community — a good idea for them, not necessarily a bad idea for us.”

Still, the decision by Yum is an unusual one.

Tristano could not think of any comparable examples, except possibly Tim Horton’s and Burger King. However, the quandary over where to headquarter those two restaurant chains is the result of their merger back in 2014. As of now, Tim Horton’s base of operations remains in Canada, while Burger King resides in the United States.

Overall, Tristano said he thinks Yum is making good decisions to focus more globally and try to appeal to younger generations.

“They seem to be moving in the right direction strategically.”

McDonald’s reaps the benefit of all day breakfasts and table service

February 9, 2016

McDonald's signature rangeEven though we’re only into its second month, 2016 been rather a good year for Steve Easterbrook, McDonald’s chief executive. His football team, Watford, is enjoying its best season in years and much the same can be said for the US fast-food giant.

The company surprised analysts with its latest quarterly results last week, with sales up 5.7pc in the US – nearly twice as much as had been predicted. Global sales are up by 5pc.

It has taken a Briton – albeit one steeped in McDonald’s corporate culture – to revive the most American of institutions, which was in danger of being left behind by rather nimbler competitors in the fast food industry.

From introducing all-day breakfasts throughout the US to testing waiter service at some of its outlets, including in the UK, Easterbrook has overhauled how the company operates at a bewildering pace.

The chain was in something of a mess when Easterbrook took over as chief executive in March 2015. Last August, for the first time in more than 45 years, McDonald’s announced that it was closing more outlets than it was opening.

European sales had dropped by 1.4pc, between 2008-14. In the US, the decline was 3.3pc and in Asia, the Middle East and Africa, once considered a growth region, a rather frightening 9.9pc.

It was not just the dire figures which suggested that McDonald’s was in need of a cultural shift. The company was facing competition from not only its traditional rivals, such as Burger King and Wendy’s, but also from hipper new competitors entering the market, such as Honest, Byron, Five Guys and Shake Shack.

It was pretty clear that the golden arches had lost their sparkle. Within weeks of taking over the reins, Easterbrook appeared on CBS’s This Morning television progamme in the US to signal that the 60-year-old company was in for a radical overhaul.

“We really want to assert McDonald’s as a modern burger company. To do that you have to make meaningful changes in the business,” he said. “The pace of change outside McDonald’s has been a little quicker than the pace of change within. You act your way to success, you can’t talk your way to success.”

For once, this was not empty corporate-speak. All-day breakfasts were tested in San Diego in April, and within months were available at all the company’s 16,000 US restaurants. This has brought back customers who might have gone elsewhere and even tempted in newcomers.

Other changes have seen the introduction of a “McPick menu” where US customers can have two items for only $2, despite the wafer-thin profit margin the deal provides.

The range of burgers has also been increased to include Pico Guacamole and Buffalo Bacon, and diners are now being allowed to customise their burgers. McDonald’s has also launched its first loyalty programme for people who register their details, offering, for example, a free cup of coffee for every five bought at one of its restaurants.

Easterbrook has also done something to improve McDonald’s corporate image, announcing a 10pc pay rise for the 90,000 people who work in outlets directly owned by the company in the US. This has taken their hourly minimum wage to $9.90 an hour – increasing to more than $10 this year – considerably higher than the legal minimum of $7.95.

The one caveat, however, was that the pay rise was limited to those staff who work for the 10pc of restaurants which are owned by the company rather than franchisees. Even the white packaging is being ditched after more than a decade. Instead, food now comes in brown paper bags which, in theory, are seen as more environmentally friendly.

According to a company spokesman, the change is “consistent with our vision to be a modern and progressive burger company” –a phrase now something of a corporate mantra.

“One of the things Easterbrook has done is create a sense of urgency in the the McDonald’s business culture,” said Mark Kalinowski, a restaurant analyst at Nomura in New York. “When the company started trialling the all-day breakfast in San Diego county in April, it only took until October before it went nationwide.

“He doesn’t want to waste time, he operates on speed to market and saw it was clearly something customers wanted.

“For McDonald’s, that is rather quick. Although it can be innovative, the company is traditionally slow- moving. I think it’s a reflection on its sheer size.” Even though Easterbrook has spent much of his career with McDonald’s, having joined in 1993, he also spent time with the rather more upmarket Wagamama and Pizza Express chains. He returned to McDonald’s in 2013 as chief brand officer, having held previous roles including its head of Europe.

“Most of the presidents and chief executives at McDonald’s we have seen have been promoted from within. Having somebody with an outside perspective is exactly what the company needed” said Darren Tristano, president of Technomic, a Chicago-based company specialising in the food industry.

Tristano believes that Easterbrook’s strategy has been shrewd. “He has aggressively marketed the all-day breakfast, which has put McDonald’s back at the top of the mind of consumers.

“The price point appeals to lower and middle-income consumers who are looking for something which is less expensive than the dinner menu. This has helped McDonald’s get back some of the market share which it had been losing to rivals.”

McDonald’s has also been helped by the rehabilitation of the egg in the mind of the consumer, Tristano added.

“If you go back a few years, eggs were seen as high-cholesterol. Now they are seen as high-protein and eggs are a key part of breakfast.

“The sales growth on a year over year basis is over a few years of weak sales performance, so the numbers are good but we should expect to see sustainable growth and especially year over year, fourth quarter 2016 would signal McDonald’s is officially back.

“McDonald’s appears to be listening to their customers and staying more true to their brand under Easterbrook.”

The consensus appears to that Easterbrook has enabled McDonald’s to regain its mojo. “He has brought a sense of strategic clarity, said John Quelch, professor of marketing at Harvard Business School.

“There is a tendency when a company gets into trouble to sling products at the wall and see what sticks. All that does is adds complexity. If you reach a point when you can’t explain to an employee or a franchisee what the point of a product is, then how can you expect them to explain that to a customer?

“The bench strength of McDonald’s is enormously good. It is no surprise that they were able to find somebody like him to step up,” added Quelch.

What McDonald’s Learned From Burger King’s Turnaround

May 13, 2015

Devin Leonard
http://www.bloomberg.com/news/articles/2015-05-06/what-mcdonald-s-learned-from-burger-king-s-turnaround picture

McDonald’s chief executive officer, Steve Easterbrook, unveiled his turnaround plan for America’s biggest burger chain, making a big deal out of an initiative to carve up his company into four geographic segments and put them under new management. “It will spread insight faster, it will enable quicker decision making, it will eliminate mistakes, reduce costs, and unlock growth,” he said in a videotaped presentation this week. He also touted the promise of McDonald’s sleeker operations in Australia.

What Easterbrook neglected to mention was even more intriguing: McDonald is following the lead of Burger King, its second-largest competitor. Burger King seemed to have lost its way until 3G, the Brazilian private equity group, took it private in 2010 as part of a $4 billion billion leverage buyout. The new owner rejuvenated the troubled chain with young leadership and a restructuring plan that was highly controversial at the time.

Some in the fast-food business believe that burger chains need to own a significant number of their stores to truly understand the market. That has been McDonald’s philosophy. The Brazilian private equity crew had different ideas. Arguing that franchisees would run them better, 3G sold off all but 52 of the 12,174 restaurants owned by Burger King around the world. Instead of falling on its face, Burger King’s overall sales in the U.S. rose 1.6 percent last year, outstripping both McDonald’s (-1.1 percent) and Wendy’s (-0.4 percent), according to Technomic, a Chicago-based restaurant consultancy.

Not surprisingly, Easterbrook’s turnaround blueprint for McDonald’s includes a plan to sell 3,500 of his company’s stores to franchisees. When the disposal process is over in 2018, McDonald’s will own only 10 percent of its stores, compared with 19 percent today. No, Easterbrook’s plan isn’t as radical as the one 3G put into place at Burger King, but it’s a validation of the private equity firm’s strategy.

Dave Henkes, a Technomic vice president, believes McDonald’s proposed selloff makes sense. “Franchisees tend to perform better,” he says. “They are driven, motivated owners who are more innovative and think outside of the box.” McDonald’s specific numbers in the U.S. last year bear this out. Henkes says sales at McDonald’s company-owned stores in the U.S. fell 3.6 percent last year. By contrast, its franchisee-owned ones suffered a decline of only 0.8 percent.

Even so, McDonald’s shares fell after Easterbrook made his announcement. Perhaps he hasn’t been bold enough. When 3G bought Burger King in 2010, the chain still owned 11 percent of its stores worldwide. The new owner got rid of nearly all of them as fast as it could. Based on McDonald’s recent numbers, Easterbrook needs to do the same. Why wait until after 2018?

On the Horizon: Five Trends for U.K. Restaurants

January 24, 2014

The trends driving restaurant growth and innovation are driven by consumer demands for transparency, quality, flavour, and flexibility.

The U.K. foodservice scene continues evolving in unique and interesting ways. Looking forward to next year, Technomic’s analysts and consultants have identified five key trends that expected to play major roles at British restaurants.

Catering to the Millennial customer

As the influence and collective spending power of the U.K.’s Millennial generation grows, expect to see restaurant operators amplify efforts to target these consumers via foods and brands that appeal more directly to a Millennial demographic.

For instance, consumers aged 18–34 display the strongest interest in ethnic flavours. And a greater proportion of younger than older consumers indicate that it is important to them that cafés offer a variety of side options and seasonal menu items, according to Technomic’s U.K. Café Consumer Trend Report. Further, 31% of consumers aged 18–34 strongly agree that they would order limited-time offerings (LTOs) at cafés, compared to just 22% of all consumers polled.

Also watch for new mobile apps and digital tools that integrate seamlessly into Millennials’ lifestyle. Offering free WiFi in-store and letting customers place orders online are great starting points for connecting with these on-the-go, always-connected guests. Leading operators are also going beyond these steps.

Last spring, Wagamama partnered with Blippar, an image-recognition mobile application, to introduce augmented-reality place mats. Guests who downloaded the free Blippar app could hold their mobile device over (aka “blip”) the special place mats to access promotional information about the Wagamama Lounge, a pop-up concept featured at London-area summer music festivals.

Domino’s last September rolled out the free Pizza Hero app in the U.K., giving customers the chance to play professional pizza maker, rolling out pizza dough virtually, adding tomato sauce and then sprinkling on cheese and assorted toppings. A direct link takes users to the ordering page on Domino’s website.

And Apple’s Passbook lets iPhone users group their coupons, loyalty/rewards cards and more in one quasi mobile wallet—giving them quick access to their most-used or most-important passes. Last fall, casual-dining chain Harvester Salad & Grill became one of the first U.K. restaurant concepts to offer Passbook integration, and gave diners who used the app at Harvester £5 off when they spent £30.

The evolution of pubs

Classic British pubs will push even harder in 2014 to transform and grab market share from conventional restaurants by focusing more attention on creating upscale, premium food and drink (particularly speciality coffee and American craft beer); launching repositioned outlets in nontraditional sites; introducing web-enabled ordering systems that emphasise convenience and speed of service for guests; and promoting low-price-oriented menus and new loyalty programmes designed to spur customer traffic and strengthen the value perception.

Die-hard traditionalists might scoff at the idea of having a coffee and working on a mobile device at the pub, but a customer-centric evolution can help pubs maintain their relevance with a new generation of consumers.

Throughout 2013, we’ve seen examples of how pubs and pubcos are tackling the task of serving consumers who have higher expectations for food/drink, amenities and service at pubs. We expect the focus on this imperative to be that much keener in the year ahead.

For example, Orchid Group—whose approximately 250 pubs are now up for sale—realised that those establishments best positioned for success in Ireland and some U.S. cities after smoking bans took effect there were those that emphasised attractive food offerings. Orchid re-evaluated its menus and added pizza and Thai food, among other items, driving increases in food’s share of the sales mix. The company also took efforts to appeal to women.

Similarly, Marston’s PLC announced at the beginning of the year that it would install free Wi-Fi at about 550 pubs under its managed pub estate, Marston’s Inns & Taverns. The Prince George pub in Brighton, East Sussex, offers an all-vegetarian menu and a vegetarian-friendly wine list. And in August, Wetherspoon announced a new initiative pairing craft brewers from the U.S. with U.K. brewers, as part of an effort to seize upon U.K. consumers’ heightened interest in craft beer. The U.S. brewers produce their beers in the U.K. for sale at Wetherspoon pubs.

Honest chicken

Thanks in part to the recent crop of “better chicken” concepts opening in London, emerging chicken-focused concepts will flourish in 2014, a trend closely tied to growing consumer interest in sourcing, preparation and menu transparency. Pret a Manger, for instance, touts that its chicken is starch-free, phosphate-free and sourced from a higher-welfare supplier in Suffolk. Expect to see chicken increasingly described as “free-range,” “locally sourced” and “hand-battered.” We’ll also see more American influences in the form of barbecue chicken and buttermilk fried chicken, as well as simpler cooking techniques that let the quality of the chicken speak for itself.

KFC in the U.K. touts that its chicken on the bone comes from only British and Irish chickens, and that chicken goes from the refrigerator to a breading of flour and the chain’s 11 signature herbs and spices and then to the fryer within two minutes. Little Chef touts that its Crispy Chicken Platter features 100% chicken breast fillet.

Other takes on fried chicken include Scream’s Southern-Fried-Style Chicken fillets served with barbecue seasoned chips, Jubo’s Chicken Roll with Korean fried chicken fillet, kimchi slaw and gojuchang mayo, and Clutch’s Love Me Tenders, fried chicken tenders in a peanut and chilli crust.

These dishes also illustrate U.K. consumers’ growing appetite for spicy heat, also evidenced incurries that pack a little more punch than chicken tikka masala; the rising popularity of Mexican cuisine; and the cult-like following of London-based Nando’s, the fast-casual concept specialising in flame-grilled piri-piri chicken. Neutral-flavoured, food-cost-friendly chicken offers an ideal protein platform for showcasing the vibrant flavours and colours of chillis from around the globe.

Migration of street food

Fueled by younger consumers’ demand for authentic and unique offerings, chefs are looking to global street foods for menu inspiration for their brick-and-mortar restaurants. Trendy street-inspired dishes starring on menus include Venezuelan arepas, Chinese jian bing and bao, Taiwanese hirata buns and Italian arancini.

KFC U.K. got in the game last year, introducing a limited-time Streetwise Sweet Chili Wrap featuring a chicken mini-fillet, sweet chili sauce, lettuce and cheese wrapped in a tortilla. And London-based fast-casual chain Leon introduced a Thai Green Chicken Curry box, featuring slow-cooked shredded chicken thigh, roasted aubergine and bamboo shoots served on brown rice.

Looking ahead, ethnic beverages like Mexican aguas frescas and horchata will carve out a wider niche on the menu. Also watch for dynamic flavour mashups from different cuisines and the continued growth of food trucks serving ethnic and fusion street foods.

Telling the sourcing story

Transparency is now top-of-mind for operators who want to keep customers confident in their brand. Use of eco-friendly food packaging, such as recycled or reusable cups or stemware, is increasing along with a growing commitment to ethical food sourcing. Next year will bring a surge in brand campaigns communicating quality and traceability. Watch for package logos denoting animal welfare standards, in-restaurant signs documenting supplier sourcing, and marketing initiatives focusing on the use of British and Irish products.

A good example is the Olive Branch Pub in Clipsham. Its website highlights a story about head chef Sean Hope’s recent lobster fishing trip, to source the freshest lobster for dishes such as grilled lobster Thermidor and a fresh lobster claw and tail meat with lobster tortellini. The site also provides a list of the pub’s suppliers and producers—not just the names of the farms but also the actual farmers with whom the Olive Branch works.

For its part, McDonald’s U.K. invited three young British farmers to get a behind-the-scenes look at operations inside McDonald’s stores as the part of its Progressive Young Farmer Training Programme. The mentoring-focused programme, according to McDonald’s, “aims to help young people looking to work within agriculture kick-start careers in the industry by providing them with the blend of farming and business acumen needed to succeed in today’s modern farming sector.”

The programme has the added benefit of providing a fresh, interesting supply-chain story that McDonald’s—which also announced in April that it was switching to serving 100% Freedom Food pork raised on farms that meet strict animal-welfare standards—can share with consumers.

Similarly, fast-casual burrito specialist Chipotle, whose Food With Integrity philosophy/sourcing model has won acclaim in the U.S., notes on its U.K. website that it uses Freedom Food chicken, Farm Assured beef and free-range pork.

Key Takeaway

The trends driving restaurant growth and innovation are all driven by consumer demands for transparency, high-quality and -flavour, and flexibility. Restaurant operators should examine and pay attention to these trends but follow the lead of their own customers and those they are trying to attract.

For American Restaurant Chains, the Future is Mexican

November 15, 2013

1025_fast_food_mexican_630x420Yum! Brands’ (YUM) most profitable fast-food chain in the U.S. isn’t Pizza Hut or KFC–for years, it’s been Taco Bell. With the success of Doritos Locos Tacos, the upscale Cantina Bell menu, and breakfast (available nationwide next year), Taco Bell’s comparable sales have been up for seven consecutive quarters, including a 2 percent increase in the most recent period.

The chain’s financial results are just one sign of the growing popularity of Mexican food in the U.S. Data from food researcher Technomic show that sales at Mexican-style restaurants grew 9.3 percent in 2012, outpacing the 5.8 percent increase among all limited-service restaurants. In fact in the U.S., tortillas outsell burger and hot dog buns, tortilla chips eclipse potato chips, and salsa tops ketchup, according to an Associated Press report.

“We know that for the U.S. to have a successful year, it’s important for our most profitable U.S. brand to do well, and we certainly have a lot going in our favor at Taco Bell,” said Yum chief executive officer David Novak during a recent earnings call. The late-night gordita joint now accounts for 60 percent of Yum’s operating profits in the U.S. There are 5,704 Taco Bells in the U.S., about 32 percent of Yum’s total in the country.

The burger-and-fries business, meanwhile, has seen better days. McDonald’s (MCD) same-store sales grew only 0.7 percent last quarter, Wendy’s (WEN) was up 0.4 percent, and Burger King (BKW) fell 0.5 percent.

Mexican quick-service restaurants offer “high value and appeal with millennial consumers and affluent groups,” says Darren Tristano, an executive vice president at Technomic. Popular burrito purveyor Chipotle (CMG) has led the way, and the 1,525-store chain just reported a same-store sales increase of 6.2 percent in the last quarter.

Even casual-dining giant Chili’s Grill & Bar (EAT), where comparable sales fell 1.9 percent last quarter, is looking for a rebound via its Mexican menu. “When you look at tacos, quesadillas, fajitas, that category represents really the biggest category that we have at Chili’s. Bigger than burgers,” said Wyman Roberts, CEO of Brinker International, Chili’s parent company, during an earnings call on Wednesday. Chili’s Mexican food, he said, will give the chain an edge over casual-dining rivals.

The plan for Chili’s is to focus on that part of its menu. A spokesperson for the restaurant chain wrote in an e-mail: “Mexican is a menu category our guests have given us all the permission in the world to expand, and with Southwestern ingredients already a part of our flavor profile, it is the natural next step in Chili’s menu innovation.”

So while burger and pizza chains remain the most popular in the U.S., diners and those trying to capture their attention are increasingly moving in a south-of-the-border direction.

Industry Evolution

October 1, 2013

U.S. restaurant chains of all stripes are taking on fast-casual attributes to evolve their concepts and remain relevant to consumers.

Change is one of the few constants in the restaurant industry. Whether restaurants are adding another daypart, updating the décor or introducing new prototypes, the best foodservice operators understand that, to succeed in the business, they should be aware of the unpredictability of the industry and be open to evolving.

In the past few years, we’ve seen many U.S. concepts make some key changes to keep up with the restaurant industry’s best performer: the fast-casual segment. Thanks to customisable and craveable options, premium ingredients and quick service, growth of the fast-casual segment is outpacing that of the quick-service and full-service sectors. As reported in Technomic’s Top 500 Chain Restaurant Report, turnover for the restaurant industry as a whole from 2011 to 2012 increased 5.2%, including a 5.8% rise in limited-service turnover and a 4.5% increase in full-service turnover. In comparison, turnover for the fast-casual segment increased 13.0% from 2011 to 2012, and that growth is expected to continue.

To compete with fast-casual restaurants, quick-service and casual-dining operators are branching out of their comfort zones to find different ways to reach new consumers as well as retain their customer base. Full-service chains such as Applebee’s and Red Lobster have introduced fast-casual elements to attract on-the-go consumers, and Burger King, which receives most of its business from drive-thru and carryout orders, added delivery service to increase its convenience factor. Other chains like Auntie Anne’s and Chick-fil-A are using food trucks to generate brand awareness by bringing their food to festivals, sporting events and community gatherings.

It’s not just existing chains that understand the need to evolve. The latest crop of limited-service pizza concepts, which includes Pie Five Pizza Co. and MOD Pizza, functions more like a Chipotle than a Pizza Hut. Patrons create their pizzas by making their way through an assembly line-style queue, choosing a crust, sauce, cheese and toppings as they go. They then receive their pizzas in minutes, sometimes by the time they reach the cash register. This style of ordering allows diners to be much more involved in the pizza-making process than at a traditional limited-service pizza concept, where patrons usually don’t watch the preparation of their pizzas. The customisability and quick service are some of the reasons why Technomic predicts made-to-order fast-casual pizza concepts are the next “better burger.”

Below are some examples of operators thinking outside of the box in order to keep their concept relevant in the ever-changing restaurant industry.

Full Service to Limited Service

In the U.S., the limited-service sector is growing at a faster rate than the full-service segment, leading some of the country’s top full-service chains to experiment with limited-service prototypes. In August, midscale chain Bob Evans launched Bob Evans Express, a new counter-service prototype for nontraditional venues such as corporate offices, universities and shopping malls. The new format, which offers a limited menu of hot foods along with packaged items, was designed to expose patrons who otherwise wouldn’t have the time to visit a sit-down Bob Evans restaurant to the chain’s signature homestyle breakfast and lunch offerings.

Earlier this year, U.S. casual-dining seafood chain Red Lobster began testing a new limited-service offering, Seaside Express, at two of its Florida locations. Patrons visiting the restaurants can choose either the standard full-service Red Lobster dining experience or order from the Seaside Express counter, which offers a menu of mains such as burgers, sandwiches and flatbreads, priced between $6.99 and $8.99 (approximately £4.50 and £5.79). After ordering, customers seat themselves and a server brings out their food. Because patrons pay for their meals at the counter, the concept is meant to appeal to diners who are pressed for time and may not like waiting for a cheque to be brought to the table. It also appeals to those looking for a discounted Red Lobster experience—the Seaside Express menu features lower-priced mains compared to Red Lobster’s standard menu.

Also earlier this year, Applebee’s expanded its limited-service model, Applebee’s Express Lunch, to 23 company-owned locations in the U.S. The format, first launched in Kansas City in July 2012, is similar to Seaside Express, in that patrons choose to either sit down and be waited on or order their meal from the Express counter, then seat themselves. The menu features pick-two combos starting at $6.99.

Applebee’s launched a fast-casual offering, Applebee’s Lunch Express. Patrons order at a counter then seat themselves, and a server brings their food to their table.

Applebee’s launched a fast-casual offering, Applebee’s Lunch Express. Patrons order at a counter then seat themselves, and a server brings their food to their table.

The Un-Delivered Pizza

Today’s trendiest limited-service pizza concepts don’t focus on delivery—in fact, most don’t even offer it. Fast-casual pizza concepts such as Uncle Maddio’s Pizza Joint and Blaze Fast Fire’d Pizza are revolutionizing the limited-service pizza industry by specializing in create-your-own personal pizzas. Thanks to high-tech pizza ovens that cook pies at incredibly high temperatures, patrons no longer have to call ahead to place a takeaway order or sit at their house waiting for a pizza to be delivered. Now, customers can simply line up at a counter, choose their crust, sauce and premium toppings, and either have their pizzas ready for them by the time they reach the cash register or brought to their table by a server in minutes.

One of the largest points of differentiation is that these fast-casual pizza concepts focus on dine-in service. Instead of operating out of small, minimally decorated counter units, these restaurants feature a hip, chic décor and plenty of seating to attract dine-in consumers. Most also menu adult beverages, a characteristic that attracts value-seeking consumers on a dinner date or group outing who may not have the funds to visit a full-service restaurant and provide a tip.

Décor at Uncle Maddio’s Pizza Joint units (top) includes abstract wall dividers and a word wall, dominated by the phrase “Served with love.” Pie Five Pizza Co. units feature science-themed murals, such as a periodic table that replaces the elements with Pie Five pizza ingredients.

Décor at Uncle Maddio’s Pizza Joint units (top) includes abstract wall dividers and a word wall, dominated by the phrase “Served with love.” Pie Five Pizza Co. units feature science-themed murals, such as a periodic table that replaces the elements with Pie Five pizza ingredients.

These new concepts haven’t gone unnoticed by the quick-service pizza sector. Pizza Inn, a U.S. pizza chain that consists mostly of buffet and counter-service restaurants, launched its own fast-casual made-to-order pizza concept, Pie Five Pizza Co., in 2011, which has since grown to 14 locations. Sbarro, another U.S. quick-service pizza chain, is set to debut a fast-casual pizza concept, Pizza Cucinova, later this year.

Not all pizza chains are launching fast-casual concepts; some are instead choosing to incorporate fast-casual elements into their existing concept. Within the past few years, Domino’s Pizza has converted dozens of restaurants into its Pizza Theater prototype. The model still functions like a typical Domino’s Pizza unit but features a comfortable dining room and an open kitchen for patrons to watch the preparation of their pizzas. Other new elements to the Pizza Theater prototype include ordering kiosks, electronic order tracking, and chalkboards where customers can doodle and leave feedback while waiting for their order.

Quick-Service Delivery

In contrast, some quick-service concepts are updating their concepts by adding delivery services. In 2012, Burger King launched delivery in the U.S. at select locations in Washington, DC, and has since expanded the service to select markets in 14 states, from California to Illinois to New York. The chain boasts that hot food is delivered hot and cold food is delivered cold, thanks to new innovative packaging. The service is designed for large orders (a minimum order amount of $10 is required), so in addition to Burger King’s standard offerings, the delivery menu also features several large combo meals, like a four-sandwich bundle with fries and an option with 10 cheeseburgers and 20 chicken nuggets.

A loyalty program specifically for customers using the delivery service has been implemented to bring in more users. Those who use the service and are enrolled in the loyalty program receive a free sandwich with every fourth order.

Burger King launched delivery service in select markets in the U.S. The delivery menu features Burger King’s traditional offerings along with large combo meals.

Burger King launched delivery service in select markets in the U.S. The delivery menu features Burger King’s traditional offerings along with large combo meals.

It will be interesting to see if the service succeeds and if other concepts will be inspired to launch delivery. Burger King says customers in the U.S. have embraced the new option, and it continues to expand delivery to other U.S. markets, most recently to Washington State and Minnesota. But so far, it appears only one other major U.S. quick-service chain, White Castle, has followed suit. The popular burger chain has been testing delivery at a restaurant in Columbus, OH, since earlier this year and recently added delivery to a second site in Columbus, but it hasn’t discussed any plans to expand the service nationwide.

Key Takeaways

While the fast-casual segment is booming in the U.S., it is relatively new in the U.K.—only seven of Technomic’s Leading 100 U.K. Chain Restaurants are classified as fast casual. However, all of those chains posted turnover increases in 2012, and three of them–Patisserie Valerie, PAUL and Le Pain Quotidien–reported double-digit turnover growth. As a group, they increased sales by 8.5% and grew their unit count by 6.6%.

With these numbers, along with the recent entry of U.S. fast-casual concepts like Shake Shack and Five Guys Burgers and Fries in the U.K., we can expect the U.K. fast-casual sector to continue growing. Thus, it’s likely we’ll see top quick-service and casual-dining chains in the U.K. evolve their concepts to compete with the growing fast-casual segment.

Pointed Complaints at Quiznos

May 30, 2013

More Franchisees Take Aim at the Denver-Based Sandwich Chain, Claiming Corporate Greed is Shortchanging – and Closing – Stores

Quiznos’ long-standing friction with disgruntled franchisees has surfaced again in a new round of lawsuits.*Since December, 10 suits have been filed in Denver District Court, alleging that the Denver- based sandwich chain has treated its restaurant owners unfairly.*The claims are similar to those in a long history of related legal actions — that the company has taken actions to increase corporate profits at the expense of franchisees who are struggling to break even.*Analysts say the new legal disputes signify more problems for a chain already beset by declining sales, store closures and stiff competition in the sub-sandwich sector.*The latest lawsuits come three years after Quiznos agreed to a $95 million settlement with 6,900 class-action franchisees who said the company overcharged them for supplies and failed to provide adequate marketing support.

In the new round of lawsuits, store owners claim Quiznos continues to overcharge by forcing them to buy food at marked-up prices from a Quiznos-affiliated supplier.

“The hidden mark-ups, which are the keystone of Quiznos’ scheme, have generated massive profits for Quiznos while simultaneously driving its franchisees to financial ruin,” one of the lawsuits says. Most of the suits contain similar or identical language.

The lawsuits allege that Quiznos management increased the use of coupons for free and discounted food — costs that are absorbed by restaurant owners — in order to make the franchisees buy more food at marked-up prices from Quiznos’ supply affiliate.

Denver attorney Jeffrey Cohen, representing the franchisees, said he would offer no additional comment.

Quiznos issued a brief statement and said it would not comment further.

The statement reads: “We believe that these lawsuits are completely without merit. Quiznos management team will not allow these lawsuits to distract us from our mission. We remain committed to delivering a premium product and experience to our guests, and helping our franchise owners grow their sales and profits.”

Named as defendants in the suits are a number of Quiznos corporate entities, including its franchising arm; the supply affiliate; the company’s majority owner, investment fund Avenue Capital Group; and former owners Richard E. and Richard F. Schaden.

Franchisee John Portrera of Petoskey, Mich., a longtime critic of Quiznos’ management, said he shut down his restaurant Dec. 31 after 4 1/2 years because of mounting losses and resulting personal turmoil, including a divorce.

“What they’re doing is criminal,” he said. “I lost my savings. I lost my wife. I cashed in my life insurance policy. I lost everything, but now I’m so happy just to be out of it.”

Portrera said that even though his restaurant was rated highly by Quiznos in categories such as customer satisfaction and cleanliness, he lost about $400,000, including his initial investment and operating losses.

Disputes between franchise companies and their franchisees are relatively common, but few have the persistence and animosity as Quiznos’.

For example, Burger King restaurant owners sued the parent company in 2009, arguing that they were losing money by being forced to sell some menu items for $1. The suit was settled 17 months later, with both sides saying they would collaborate on future pricing decisions.

Analysts say Quiznos’ friction with franchisees has created a debilitating spiral of store closures and declining revenue.

“The sales decline and the heavy couponing have really made it tough for franchisees to make a profit,” said Jonathan Maze, an analyst and writer for Franchise Times magazine. “Quiznos charges a lot of money (to franchisees) for its food.”

University of Denver finance professor Mac Clouse said some restaurant chains with franchise supply agreements use their buying power to acquire food at low prices, and then pass the savings on to franchisees.

Yet the lawsuits claim that Quiznos has taken the opposite approach — using economies of scale to negotiate low prices for bulk-food purchases, then reselling the food at higher prices to restaurant owners.

Quiznos is privately owned and is not required to report financial results to the Securities and Exchange Commission. However, some of its performance metrics can be found in franchise disclosure documents that the company is required to file in some states.

The documents show that Quiznos collected much more money from selling food and supplies to franchisees than it took in from royalties based on sandwich sales.

The supply company, American Food Distributors LLC, which Quiznos describes as an “affiliate,” had 2011 revenue of $225.3 million. Quiznos’ franchise operation, QFA Royalties, collected 2011 royalties and fees of $73 million from franchisees.

The disclosure documents show that the chain’s number of stores fell from 4,381 in 2009 to 2,834 in 2011, a decline of 35 percent over two years. At the peak in 2006, there were more than 5,000 outlets.

Total revenue for QFA Royalties has plunged 41 percent in two years, from $123 million in 2009 to $73 million in 2011. Net income declined by a similar margin in that period, from $47.7 million to $28.4 million.

“Quiznos has struggled, primarily because they’re in an intensely competitive market,” said Darren Tristano, executive vice president of food-service analysis firm Technomic.

“It’s always been a difficult relationship between the parent company and the franchisees,” he said. “It seemed as though they had gotten past that (with past settlements), but now they’re battling again.”

Former McDonald’s CEO and ‘Hamburger U’ Founder Has Died

January 18, 2013

Fred TurnerFred L. Turner, one of the first employees of McDonald’s Corp. and the founder of its Hamburger University training program, died of complications from pneumonia Monday night. He was 80.

Mr. Turner wrote the company training manual and is credited with tripling the chain’s restaurant base during his time as CEO. Friends say he was known as “the heart and soul” of McDonald’s.

“His influence on McDonald’s cannot be overstated,” said Mike Roberts, a former McDonald’s president. “Ray (Kroc) was the visionary, but Fred was the heart and the soul, the operational thrust of the company.”

Known for working side by side with restaurant employees, Mr. Turner wrote the company’s first operations and training manual in 1958. It still serves as a basis for restaurant operations — no small thing for a company renowned for its consistency.

Mr. Turner founded McDonald’s Hamburger University, a training program for managers, franchisees and company employees, in 1961. McDonald’s now has seven Hamburger University campuses, including one on its Oak Brook campus that was named after Mr. Turner in 2004.

Mr. Turner, a longtime resident of Deerfield, kept an office at McDonald’s and remained involved in the company until his death.

A Des Moines, Iowa, native, Mr. Turner attended Drake University after a stint in the U.S. Army. He approached McDonald’s founder Ray Kroc about becoming a franchisee. But Kroc was so impressed by Mr. Turner that he persuaded him to join the company in 1956, said longtime friend and business associate Al Golin.

“Then he became a one-man operations department,” said Golin, who began media representation of McDonald’s around the same time. “The first couple of years he was with McDonald’s, I never saw him because he was out opening McDonald’s, personally, every one of them.”

Kroc and Mr. Turner worked closely together until Kroc’s death in 1984.

“Ray was the charismatic supersalesman, and Fred really was the man who made things go,” Golin said. “He was a very hands-on person.”

Golin recalled a trip to Russia about 20 years ago, when McDonald’s was opening its first restaurant there. Company executives attended a party at the Kremlin in advance of the opening, he said.

“I saw Fred the following morning and said, ‘Where were you?'” Golin said. Mr. Turner had been at the restaurant. “While we were eating caviar and drinking champagne, he was worrying about the french fries and the buns being toasted right.”

Mr. Turner was named president and chief administrative officer in 1968. He became president and CEO in 1974, stepping up to chairman and CEO in 1977, and remaining in that role for a decade.

The Oak Brook-based burger giant more that tripled its restaurant base and expanded into new markets around the world during his tenure as CEO.

Ted Perlman, chairman of the Havi Group, a Downers Grove-based McDonald’s supplier, called Turner “a guts guy.” He recalled one afternoon in the 1960s when Turner returned from lunch with a wider, thicker napkin than McDonald’s was making available at its restaurants.

Perlman recalls Mr. Turner asking why McDonald’s wasn’t using them. “I said, ‘Fred, it’s going to cost you two-and-a-half times as much,'” Perlman said, to which Turner responded, “Did I ask you what it’s going to cost?” The napkins were changed shortly thereafter.

Mr. Turner’s style was best suited to the company’s entrepreneurial period and the ’60s, ’70s and ’80s, Perlman said.

“The environment was more conducive back then, when you could cut through things and didn’t have to worry about who got promoted where,” Perlman said.

Putting training systems in place and establishing programs such as Hamburger University for McDonald’s “has been an important pillar for their growth and success over the past 50 years,” said Darren Tristano, executive vice president of Technomic, a Chicago-based food-industry research and consulting firm.

“One of the biggest elements of McDonald’s success has been its consistency, that the customer knows what to expect in terms of food, service and speed,” Tristano said. The chain’s emphasis on training, he added, has been critical to establishing that level of consistency.

Mr. Turner stayed on as chairman of McDonald’s until 1990, when he was named senior chairman. He continued in that role until 2004, when he retired and became honorary chairman.

Outside his career at McDonald’s, Mr. Turner served on the boards of Aon, Baxter, and W.W. Grainger, among others.

He was also a committed philanthropist. He co-founded the Ronald McDonald House Charities, which serves families of children who are seriously ill and provides care for children in underprivileged communities.

Mr. Turner and his late wife, Patty, avid music lovers, endowed a jazz studies professorship at Drake University, which also opened a Fred and Patty Turner Jazz Center in 2011. Turner was involved in the creation of World War II aircraft exhibits at O’Hare International and Midway airports.

The son of a fisherman and biscuit salesman, Mr. Turner was “a larger-than-life character,” his daughter Teri Turner said.

While the executive was in a fishing club whose membership included Gen. Norman Schwarzkopf, “he was more interested in going fishing with the guy around the corner,” she said.

Mr. Turner also told everyone to call him by his first name, including his children and grandchildren. “He’d said, ‘I’m Fred, I’m your friend,'” Teri Turner said, adding that when her daughter occasionally called him Grandpa, he’d say, “You know you can call me Fred.”

Teri expressed gratitude that Mr. Turner was able to spend time with his family before he passed away.

“There was a moment when he looked at us and said, ‘Who had a better life than me?'” she recalled him saying. “‘I did something with my life. I made a difference.'”

Mr. Turner is also survived by daughters Paula Turner and Patty Sue (Bob) Rhea and eight grandchildren. Visitation will be from 3 to 9 p.m. Friday at the Patty Turner Senior Center in Deerfield, with the funeral at 11 a.m. Saturday at Holy Cross Catholic Church in Deerfield. In lieu of flowers, the family has requested donations to Ronald McDonald House Charities or the Patty Turner Senior Center.

Subway Eats Competition’s Lunch

January 17, 2013

AnyOctober.jpgLEXINGTON, Ky. — For all but two of the largest six players in the sandwich sector, the recession has not been kind. That’s despite the sector growing 3 percent a year since 2007, according to market researcher Technomic Inc. In short, the biggest guy on the block got bigger.

Other than Subway franchised outlets, only Jimmy John’s Gourmet Sandwich Shops saw significant gains, going from a 1.8 percent share of the sector’s sales to 3.7 percent. Yet even Jimmy John’s has seen its high rate of growth in franchise units come down from 28 percent in 2008 to 17 percent in 2011. As it reached 600 units in 2008 and then the 1,000 franchise mark in 2010, it became increasingly harder for Jimmy John’s to grow at the same high rate. Meanwhile, Subway is the 25,000 shop chain that keeps rolling along, growing at a steady 3 to 5 percent in units as if the Great Recession and credit crunch had never occurred.

Giant’s market share gets bigger

Shop owner Dave Tennyson, chairman of the independent group, the North American Association of Subway Franchisees (NAASF), which represents Subway franchise owners, attributes Subway’s success to his franchisor and its brand efforts. “We serve a quality product at a great value.” He also thinks that the sandwich chain’s size and early start matters. “We are the kings,” says the franchise owner of several shops in Florida. “We have our market share and newcomers are trying to steal a part of it.”

Competitors may be trying to steal a part of Subway’s market share, but it looks like Subway is eating their lunch.

From 2007 to 2011, the Subway franchise chain went from 39 percent to a whopping 47 percent of sales in the $24 billion sandwich segment. Arby’s, which is also in Technomic’s list of the top six sandwich chains, dropped from 17 percent to 12.6, according to Technomic figures. Quiznos fell from 9 percent market share to a dismal 3.8, and Blimpie slid from 1.3 to 0.5.

SandwichMarketPlayers_0“Subway has hit critical mass,” declares restaurant unit economist John Gordon, president of San Diego-based Pacific Management Consulting Group. Industry watcher Gordon says that Subway has the marketing advantage of being one of the first sub sandwich chains. He thinks the chain has reached the point in its size where it is easier to add to positive brand recognition as the company refines its business model. “Subway has a healthy halo around its public activities. They were able to highlight the customization of the sandwich exactly as the customer wanted it, right before their eyes,” says Gordon.

Arguably franchisor Doctor’s Associates Inc. can pin Subway’s success on a secret weapon — it has empowered its franchise owners more than any of its competitors.

“Two of the groups that play an important role in moving the Subway business forward are our franchisees and our development team,” declares Subway chief development officer Don Fertman to Blue MauMau. “Franchisees are the heart and soul of the Subway family. They are on the front lines daily and our success depends upon their ability to provide the best customer experience, which is what keeps our fans coming back.”

DAs: Stores proliferate when franchising is delegated to franchisees

Early on, Subway trusted local franchise developers to handle franchise sales and development instead of relying on headquarters to take care of it, as many other franchisors did.

Restaurant expert Gordon emphasizes that when the Subway chain was small, it pushed franchising authority to local development agents (DAs). These firms resemble a sort of master franchise that sell franchises for an area, receive royalties and support franchise owners through their own field operations managers. “The developer agent model helped considerably because it facilitated the development of large, multiunit franchisees,” says Gordon. Unlike Quiznos, most of Subway’s development agents operate franchises.

“Our development agents help build profits through effective marketing and by building restaurants through smart development. They tirelessly work to implement the programs that help our franchisees grow their businesses,” says Doctor’s Associate’s chief development officer Don Fertman.

That push of franchising authority back to licensed business owners is counterintuitive for most franchisors. Quiznos, which at one time had 4,500 franchises and now has probably under 2,000, is characterized by small mom & pop owners who own one store.

“The growth of Jimmy John’s, Firehouse and Potbelly are driven by the availability of capital, which has recently been problematic,” observes Gordon. “Single-unit operators are hard-pressed to get credit. The risk is perceived to be too high by the lending community.” Gordon quickly adds that a reasonable return on capital also drives franchise sales. “Subway has the least expensive build-out of all these guys,” he states.

The franchisor’s delegation to franchisees isn’t just in selling licenses — it is also found in the brand’s national supply chain, franchisee association and, until recently, its national marketing efforts.

IPC: Costs drop after franchisees create national purchasing co-op

Subway franchisees have gained control of purchasing, an area that franchisors typically govern. In the beginning Subway founder Fred DeLuca wasn’t particularly enamored with the idea. Obviously the franchisor had concerns about turning national purchasing over to franchise owners. But to his credit he not only allowed the Independent Purchasing Cooperative (IPC) to come into being once the majority of franchisees voted for it, but also assisted with some of the early administrative costs.

That cooperative of, by and for franchisees, with its pricing transparency, has effectively kept food prices down.

“The purchasing co-op in the group of franchisee-run groups in Subway is probably the most important,” declares Keith Miller, a California Subway franchise owner of three shops. He is the chairman of the Coalition of Franchisee Associations, which represents franchisees of some of the largest brands in America.

“When you look at franchise systems in trouble, you can usually point to an unprofitable situation stemming from the high cost of goods. You can often attribute that to the franchisor increasing their rebates from vendors. What the purchasing co-op does is protect us on a couple of fronts. Instead of a basic purchasing group by the franchisor, who really has little incentive to get the absolute best pricing for goods, the franchisee purchasing co-op has every reason to hire the best professionals to not only get the best pricing, but also work to lower that pricing through more efficient distribution.”

ChangeInShopNobyBrand_0“It also protects franchisees from high prices caused by vendors who have to give rebates to the franchisor in order to get the order,” says Miller, who was also the chair of the NAASF from 2000 to 2001 in the first year it was created.

Franchisees know for what purpose items are purchased, what their price is, and what the revenues and expenses are in their cooperative, according to NAASF chair Dave Tennyson. “Franchisee cooperatives are a huge asset to franchisees, especially in times like now when beef prices are increasing. It becomes a great concern, considering that meatball subs and club sandwiches have beef and pork. By having a cooperative in place that is led by the franchisee community, it is able to secure pricing for us where we are placed in a good position going into the second and third quarter of 2013. My equipment prices are looking better and better.” He adds “We have an elected franchisee board that leads the cooperative and the cooperative’s employees. At the end of the year we release the financial statements to franchisee members.”

Only two major sandwich brands in the top group have a purchasing cooperative: Subway and Arby’s. Arby’s has an Atlanta-based national purchasing cooperative called ARCOP. It is directed by an elected board of six Arby’s franchisees and one franchisor representative. “We have total transparency with the membership for things like revenues, expenses, sourcing fees and obsolete inventory,” a spokesperson for the cooperative said. The firm’s financials are available to membership.

SFAFT: Ads grabbed when franchisees directed national marketing efforts

Subway’s franchisees once stood out because they had control of national marketing efforts through the Subway Franchisee Advertising Fund Trust (SFAFT), in contrast to the more traditional approach of the competition, where franchisors ran national advertising and branding.

The results were phenomenal.

When franchise owners oversaw an ad trust cooperative that marketed Subway foodservices in the 2000s, Miller observes, “We boomed in the early 2000’s, and that had a lot to do with the NAASF recommending and the franchisor allowing the System Advisory Council. It’s always positive when the franchisees are truly integrated into the decision-making process.” That innovative and collaborative franchise model was initiated by Andrew Selden, a Minneapolis-based franchisee attorney, working through the NAASF. Selden is a follower of William Deming’s business model of giving front line players decision-making ability to accomplish total quality transformation in a system. The new System Advisory Council incorporated a broad array of franchisee decision makers — Development Agent advisory council, international purchasing cooperative, ad trust and NAASF delegates — along with franchisor reps. When this group of leaders said do it, it was done.

Franchisee Miller says that while he served on the SAC from 2000-2002, “I never saw Fred (DeLuca, franchisor Doctor’s Associates founder and CEO) go against the decisions of the System Advisory Council.”

Costs tumbled. Ads grabbed. Operations tightened.

While the story of Jared Fogle and his weight loss on Subway sandwiches that consumers saw was the external manifestation of this revolution, behind the scenes it was the new System Advisory Council that pushed Subway forward in a major way. “We made huge changes during the early SAC days.  . . . SAC ordered major changes in bread cuts, added seasoned breads, added sauces, improved our meats, and required the folding of meats on the subs instead of the previous flat setups.”

“What is amazing is that after these changes in the early 2000s we saw an 18 percent average unit volume growth in stores, yet not a single direct competitor changed a thing for two to three years. That gave Subway owners a big jump. We followed that by rolling out toasters — I think that was in 2004.” Providing toasted subs was a jolt to the competition. As the recession hit, franchisees experimented with, then rolled out a national $5 footlong campaign.

The $5 footlong was invented, supplied, marketed and retailed nationally by franchisees and the ad cooperative. Bloomberg reported “The $3.8 billion in sales generated nationwide by the $5 footlong alone placed it among the top 10 fast-food brands in the U.S. for the year ended in August, according to NPD Group. That puts the $5 menu’s success just a notch behind KFC [led by another franchisee marketing cooperative] . . . ”

Competitor Quiznos followed a traditional corporate management approach of franchisor executives telling store owner-operators what to do. Disconnected from the stores, its top-down management made misstep after misstep. Thousands took it to court for alleged hidden kickbacks that benefited the franchisor, but pumped up store costs for franchisees. Then there was its special million sub giveaway (free subs). That promotion cost Quiznos franchisees roughly $2.25 for a normal $5.29 six-inch sandwich. At the same time Subway franchisees found areas to flatten costs with their $5 footlong. That made them $1.20 per footlong, while increasing sales.

In its complex balancing act, the sometimes reluctant and accidental empowerer of franchisees, Doctor’s Associates, fights for more control, like it did over what it considered a key function for a franchisor, deciding on advertising. It won a strategic legal battle against franchisees and took over the ad trust fund in 2010. It now oversees the professionals and the organization that the franchisees once did. Franchisees still retain an advertising advising council that recommends, but doesn’t have the final say.

NAASF: Systems improve from strong independent franchisee association input

Only one other competitor of the Subway chain has an independent franchisee group. Quiznos has seen the new incarnation of one, a result of the largest franchise settlement to date in quick service restaurants. The new group is struggling.

“Communication is key,” declares Tennyson, North American Association of Subway Franchisees chair, about how a collaborative franchise culture is fostered. Having an independent association also helps.

“It’s a huge asset to have an independent franchisee association in place, especially if there is a franchisor that is open to what the association has to say,” says Tennyson. He thinks that systems without independent associations risk the creation of an information bubble, deluding themselves that franchisees will address real concerns with franchisors. “An independent franchisee association is a place that franchisees can go and talk candidly. We can resolve it in a professional manner with the franchisor or bring up new ideas and best practices to improve the system.”

Tennyson speaks about how Fred DeLuca, CEO of franchisor Doctor’s Associates Inc., regularly participates in their membership and board meetings and the ease with which the two heads communicate with one another.

One result of this collaboration is that the NAASF helped its franchisor redo system standards to better reflect operating realities. “Doctor’s Associates is redoing the field operations manual,” the Association’s chair states.

The future of sandwich QSRs

All of those structures have helped in the past, but the future is still unwritten. Market researcher Technomoic reminds us that newcomers are heating up the edges of the market.

For one, Firehouse Subs is growing like gangbusters, ending the year at 576 franchise units. Some 50 percent of its locations are owned by multiunit franchisees. Its CEO Don Fox tells Blue MauMau that comparative store sales grew 7.84 percent, while systemwide sales grew 35 percent in 2012 from $285 million in 2011. “We currently have about 110 multiunit franchisees,” says the Firehouse CEO.

Darren Tristano, executive vice president of market researcher Technomic, thinks the future for “better sandwich” companies is bright and will likely play out in the continued success of Jimmy John’s and Firehouse Subs.

“Like the better burger segment, consumer desire for a better sandwich and a willingness to pay for quality and gourmet will have play with the premium-positioned chains,” observes Tristano. “Fast casual sandwich shops will gain momentum and share over time as older players continue to fade and Subway makes sandwiches commonplace in our daily habits. Affluent consumers will trade up and full service patrons will trade down for similar quality with lower price and the convenience of a fast casual model.”

New McDonald’s CEO Don Thompson likely brings extra value with his years of experience

April 4, 2012

By Emily Bryson York, Chicago Tribune reporter

March 23, 2012

Big Macs aren’t going anywhere. Egg McMuffins aren’t either. As McDonald’s begins its CEO transition, expect very little to change in the short term.

The Oak Brook-based company announced late Wednesday that longtime CEO Jim Skinner will retire at the end of June, and Chief Operating Officer Don Thompson, long considered heir apparent, will take over.

Thompson, 48, is taking the reins at a high point for the burger giant, on a roll with nearly nine years of global sales growth. But a number of challenges lie ahead, including soaring commodity costs, a stronger U.S. dollar and maintaining its own breakneck pace. The chain also is under pressure to continue international expansion.

Those who have worked with Thompson say he is up to the demands.

“He’s a very talented executive for McDonald’s, a very bright individual who’s been around 22 years and held many jobs that have allowed him to contribute great value to the system, including COO and president of the U.S., a very important job,” Skinner said in an interview. “He’s the real deal.”

Thompson, through a spokesman, declined to comment for this story.

“I’m excited to see where he takes the business,” said Morningstar analyst R.J. Hottovy. As president of the U.S. business, Thompson was a big force behind the McCafe beverage rollout, which added smoothies, frappes and espresso-based beverages to the fast-food giant’s menu, boosting sales, Hottovy said.

“I’m curious to see how he can take that success and apply it to other parts of the business, how well he navigates international growth, which will probably be his legacy,” he said, adding that Thompson has been preparing for this role.

“In grooming him, he’s been jet-setting the last couple of years in the global markets for McDonald’s and has gotten to know them and identify talent in each one of them,” Hottovy said.

Asia looms large on the list of priorities.

Darren Tristano, executive vice president of Chicago-based Technomic, described the chain’s global opportunities as “China, China, China.”

Although chains like Pizza Hut and KFC, both owned by Louisville, Ky.-based Yum Brands, have become ubiquitous in China, Tristano said that their presence can be an opportunity rather than a hindrance for McDonald’s in one of the world’s most coveted markets.

“Yum has opened the door for the Chinese to look at American brands and fast food,” he said, adding that burgers don’t necessarily compete with pizza and chicken. “Yum has laid a lot of groundwork for fast-food chains to move in.”

McDonald’s does business in 119 countries, with 19,000 restaurants and 66 percent of its sales outside the U.S. The chain has been remodeling its restaurants around the world, a program expected to boost sales and brand perception. France, Australia and Canada are among the most complete markets.

“They’re going to be doing a lot more remodeling and re-engineering at existing units which will continue to give them some (sales) increases,” by store, Tristano said. “They’ve got a lot of stores to get through, which will probably take three years.”

With more than 14,000 locations, the United States lags other countries. About 33 percent here have been remodeled on the interior, 16 percent on the exterior.

But additional challenges lie in the not-too-distant future.

McDonald’s is facing pressure from rising commodity costs. As the world’s largest restaurant chain by sales, it benefits from leveraging its size in purchasing food. However, the company has projected its food costs will increase 4.5 percent to 5.5 percent in 2012, which creates a tough balancing act between franchisee profitability and keeping prices low.

Tristano noted that McDonald’s already is coming up with solutions. The chain recently tweaked its dollar menu, removing some items and introducing an extra value menu with items that will cost more than $1 but are expected to represent value for the money.

He added that McDonald’s also may face earnings pressure as the U.S. dollar recovers. While the dollar has been weak, the company has done well in international markets, and those profits have looked even better expressed in U.S. dollars.

“They’re getting gains not just from growing sales but from currency translation,” Tristano said. “The dollar at some point will strengthen, and when that happens some of those currency translations may impact the success they’ve had internationally.”

McDonald’s continues to face the challenge of keeping up with a string of success. After nearly nine years of increasing global same-store sales, the chain has stuck with value promotions while adding higher-priced and more premium products to compete with such chains as Starbucks and Panera.

“(Defending) their market share may be the biggest challenge they have,” Hottovy said, adding that they’re well-positioned to do it with a diverse menu, competitive prices and an unrivaled marketing budget.

Company watchers are wondering how the gregarious Thompson’s tenure will stack up against that of Skinner, a reserved executive with a dry sense of humor.

“He has a natural leadership aura,” Michael Donahue, a former McDonald’s executive, said of Thompson. “He’s tall and affable, really outgoing, warm and inspiring.”

Donahue described Thompson as a “homespun” guy, “ready to roll up his sleeves with anyone.” He recalled a motivational speech Thompson made called “Pick Up the Cup,” which “was another way of saying everybody has a job to do, and if you’re walking in a parking lot and see a cup, you pick it up.”

McDonald’s stock closed down 1 percent Thursday, the first trading day following the announcement, at $95.80.


Twitter @emilyyork