Eatery digests patrons’ feedback

June 6, 2016

Arkansas-based fast-casual restaurant chain Slim Chickens, known for its tenders and wings, is rolling out a chicken-breast sandwich for taste-testing.

Testing is underway at Slim Chickens’ three Fayetteville locations, its Rogers store, and in Broken Arrow, Okla., near Tulsa. The restaurant chain is offering cayenne ranch and buffalo chicken sandwiches in Northwest Arkansas and cayenne ranch and Cajun chicken versions of the sandwich in Oklahoma.

Customers who select the sandwich are asked for feedback in a survey that takes about a minute to complete. That information goes straight to a few select Slim Chicken executives. So far, customers’ feedback has already resulted in changes to one of the sandwiches. The process is expected to continue for the next several weeks.

“Early indicators are positive,” said Sam Rothschild, Slim Chickens’ chief operations officer. “This is why you test.”

While the chain has offered sandwiches in the past, this is the first one made with a whole, premium chicken breast. Rothschild described the test sandwiches as being made from high-quality chicken and “fully dressed” with Slim’s sauce, pickles, lettuce and onions.

“We want our sandwich to stand out,” he said.

Slim Chickens has 35 restaurants — 25 are company owned and 15 are franchise operations — in Arkansas, Texas, Oklahoma, Illinois, Nebraska, Kansas, Louisiana, Missouri and Tennessee, with 21 other stores under construction. With the new stores, Slim’s is expected to have more than 50 restaurants open by the end of the year. The company said it hopes to have 600 stores in the United States by 2024.

Slim Chickens competes in the fast-casual segment, where operations focus on an enhanced dining experience compared with fast-food operations. While they don’t have a wait staff, fast-casual restaurants typically deliver patrons their food after ordering.

According to information provided by Chicago-based Technomic Inc., a research and consulting firm focusing on food and food service, sales at limited-service chains among the top 500 U.S. restaurant chains grew 5.5 percent to $211 billion in 2015. Sales at limited service chicken restaurants was up 9 percent. Limited service chains include fast food and fast-casual concepts.

Sales in the fast-casual segment alone were up 11.5 percent, and unit growth was up 9.6 percent in 2015, according to the report.

Darren Tristano, president of Technomic, said that portability, in the form of a sandwich, is something that consumers are looking for, and that adding a sandwich helps fast-casual operations compete with more traditional fast food’s convenience factor.

“One hand on the wheel and the other on a sandwich,” he said.

He added that Slim Chickens’ efforts to test the sandwiches locally are wise.

“They are getting consumers to validate the quality of the product,” he said. “It’s what successful brands do but not what everybody does.”

Rothschild said the sandwich sells for $3.99 by itself or as part of a combo meal at $6.49. Slim Chickens’ lowest cost combo meal, pre-sandwiches, was $6.99. He said that puts the Slim Chickens’ sandwich and combo meal close to fast food on price.

“We want people to come to us when they want chicken,” Rothschild said.


How McDonald’s Easterbrook can maintain momentum

February 4, 2016
Joe Cahill
Crains
January 27, 2016
http://www.chicagobusiness.com/article/20160127/BLOGS10/160129896/how-mcdonalds-easterbrook-can-maintain-momentum

McDonalds-all-day-breakfast-win-for-CEO-Easterbook.jpgAll-day sales of Egg McMuffins did more than reverse a three-year slump at McDonald’s: It has inspired confidence in CEO Steve Easterbrook and buys time for the new chief to lock in the elements of a long-term growth strategy.

Last fall, Easterbrook answered the prayers of many customers who had yearned for years to buy breakfast after McDonald’s long-standing 10:30 a.m. cutoff. This week, McDonald’s credited all-day breakfast for the lion’s share of a 5.7 percent rise in fourth-quarter sales at U.S. locations open more than a year. The quarterly increase, outstripping even the expectations of McDonald’s executives, was the second in a row and a sign that McDonald’s is finally moving in the right direction under Easterbrook, who replaced Don Thompson in March.

A pair of quarterly sales gains doesn’t mean Easterbrook has put McDonald’s on track for long-term sustainable growth. But together with some other recent moves, it shows he understands the challenges facing McDonald’s and will move aggressively to meet them.

If Easterbrook still has a long way to go, all-day breakfast gives him a bit more time to get there. He’ll enjoy a grace period of three more quarters, as extended breakfast hours continue to generate sales increases over periods that predate the change. That cushion will disappear in the fourth quarter, when McDonald’s will lap a quarter with all-day breakfast for the first time. “That will be the telling moment,” says Darren Tristano, president of restaurant consulting firm Technomic in Chicago.

During the next three quarters, Easterbrook must build on the success of all-day breakfast, which is bringing in new customers and others who hadn’t visited McDonald’s in years. Now he needs to turn them into regulars. Strong store traffic is essential to the long-term health of any fast-food chain. Guest counts at McDonald’s declined again for the full year of 2015, but turned upward in the fourth quarter.

Customer traffic will keep rising if Easterbrook gives people more reasons to keep coming back after the novelty of afternoon Egg McMuffins wears off. That requires steady progress in three key areas:

Service. Service slowed as McDonald’s menu grew more complex in recent years. Drive-in speeds lagged those of key rivals. Easterbrook has begun to address the problem by expanding on a menu-decluttering effort launched by Thompson. “Simplifying the process is what people want nowadays, and they’re finally addressing that,” says analyst R.J. Hottovy of Morningstar in Chicago.

On McDonald’s earnings call with Wall Street analysts on Jan. 25, Easterbrook said customer feedback shows improvement in “food quality, order accuracy, speed and friendliness.” But all-day breakfast adds a new layer of complexity, potentially undermining service speed and accuracy.

Ruthless purging of slow-selling items will be essential to keep restaurants running smoothly. Restaurant efficiency also could benefit from new technologies that allow customers to order via kiosks and mobile devices. McDonald’s is testing these systems in the U.S. but hasn’t set a date for national rollout.

Value. McDonald’s is still searching for a successor to the Dollar Menu, the low-price offering that drove its last turnaround, in the mid-to-late 2000s. The company badly needs a compelling deal for budget-conscious customers who faded away during the last recession and its aftermath. Always a bulwark of McDonald’s business, lower-income families matter even more today as affluent consumers migrate to fast-casual chains like Panera. “Value-conscious” consumers now represent about 25 percent of McDonald’s customer base, Easterbrook told analysts on the earnings call.

Early this month, McDonald’s began a six-week test of “McPick2,”which offers two menu items for $2. Easterbrook said initial response has been favorable and acknowledged the need to settle on a permanent value proposition this year.

“Value still has to be at the core of their menu,” Tristano says, noting most of McDonald’s rivals offer a low-price combo. “It’s what a lot of their customers want, and if they can’t get it they’ll go elsewhere.”

Listening. McDonald’s boffo launch of all-day breakfast shows what happens when a company listens to customers. For years, McDonald’s rejected customer pleas to extend breakfast service beyond late morning, citing insurmountable operational hurdles. Easterbrook pulled it off in a matter of months, a clear sign his efforts to winnow bureaucracy and accelerate decision-making based on market feedback are bearing fruit. “That shows the company is much more nimble now than it was before,” Hottovy says.

A streamlined management structure established last summer has “sharpened our focus,” and “removed distractions to speed up decisions and increase our ability to move winning strategies quickly across markets,” Easterbrook told analysts.

Of course, faster product rollouts won’t help if customers don’t like them. McDonald’s has struggled for years to cook up menu innovations that click with consumers. Remember, the Egg McMuffin isn’t a breakthrough innovation but a proven winner that McDonald’s made more available.

Acknowledging that all-day breakfast demand will “settle down” from its initial euphoria, Easterbrook said McDonald’s has more initiatives in the pipeline for 2016. We’ll see if he can come up with a hit new product—the true test of whether McDonald’s has developed an ear for customers’ ever-changing preferences.

“As long as they’re listening to the customer and giving them what they want, instead of trying to force something on the customers, they can be successful,” Tristano says.


This is what happens when McDonald’s listens to its customers

February 2, 2016
By Roberto A. Ferdman
Washington Post
January 25, 2016
https://www.washingtonpost.com/news/wonk/wp/2016/01/25/the-incredible-power-of-the-egg-mcmuffin/
It’s no secret that McDonald’s has been struggling. At a time when specialization is increasingly important in the food business, the brand has opted for breadth, offering everything under the moon: hamburgers, salads, yogurt parfaits and fancy chicken wraps. And it hasn’t worked. In fact, that’s putting it mildly.Each time McDonald’s has announced how much money it’s making, the company has been forced to share an embarrassing truth: Americans are eating less and less of its hamburgers, chicken nuggets and French fries. The routine became so consistently depressing that McDonald’s decided to quit sharing monthly performance data altogether in March.

But all of that seems to be changing: For the first time in a long time, McDonald’s is thrilled to tell everyone how it’s doing.

On Monday, McDonald’s said that same-store sales (those open for at least 13 months) increased by 5.7 percent in the last three months of 2015, more than twice what analysts had expected. The hefty jump is the largest the company has reported in almost four years.

The news comes on the heels of a major concession by the fast-food chain, which is no coincidence. For years, adoring fans pleaded with McDonald’s to extend its breakfast menu beyond the current 10:30 a.m. cutoff. For nearly as long, the fast-food behemoth shrugged off the ask, saying it doesn’t have the capacity to make breakfast and everything else at the same time. But this October, McDonald’s finally gave in, agreeing to offer Egg McMuffins and other breakfast fare from open to close. And the reaction has been overwhelmingly positive.

“All-day breakfast was clearly the primary driver of the quarter,” McDonald’s Chief Executive Officer Steve Easterbrook told investors in a conference call following the company’s earnings announcement. “We knew it would be.”

In some ways, the immediate success of all-day breakfast is a reminder of one of McDonald’s biggest follies: its inability to see itself what for what it is. Rather than embrace what its fans adore it for most — a place that serves hamburgers, French fries, chicken nuggets, and yes, an exceedingly popular breakfast menu — McDonald’s tried to become something other than itself, expanding its menu, largely with salads, wraps and other healthier but also more expensive fare, to mimic new competitors.

The Chipotles and Shake Shacks of the fast-food world have managed to sell pricier food, at least in part, because of their association with meaningful trends in the food world that prioritize good food over cheap food. But it’s a much harder pitch at cheap burger chains, which people visit for a respite from their (hopefully) healthier dietary regimen, rather than a reminder that they could be eating something better. It’s no coincidence that fast-food chain Sonic has flourished by accepting what it is, while McDonald’s has struggled by doing just the opposite.

The chain’s re-energized business can also be seen as a testament to the enduring popularity of the Egg McMuffin, arguably the most iconic breakfast sandwich in the world. The affordable egg sandwich, which was first served in the early 1970s, caught on so quickly that it helped popularize the entire breakfast sandwich category. But it hasn’t been replaced. Today, demand for it is such that the chain buys more than 2 billion eggs per year in the United States alone, or almost 5 percent of all eggs produced in the country.

“It’s one of the oldest items they’ve had on their menu, and it’s still one of the most popular,” said Darren Tristano, who is the president of Technomic, a food industry market research firm. “Selling it all daylong was a no-brainer.”

Since Easterbook became McDonald’s CEO last March, he has shown that he’s willing to not only listen to but also heed requests from the fast-food chain’s customers. The introduction of all-day breakfast is perhaps the best example, but during his short stint, he has already also shortened the McDonald’s menu and announced plans to switch to cage-free eggs and antibiotic-free chicken in the United States, among other things.

Tristano reminds that it’s too early to tell whether the most encouraging earnings in years is a sign of things to come. The real test will be what happens in the rest of 2016, and beyond. The excitement around all-day breakfast, and Egg McMuffins specifically, might not last, which even Easterbrook admitted to investors this morning. But the move has set an important precedent.

“I think listening to the customer is going to the most important rule McDonald’s has to follow,” said Tristano. “As long as they’re doing that, they should be fine, because the customer usually has the answer.”

When markets opened Monday, McDonald’s shares were up 3 percent on the news, but finished the day up less than 1 percent. Despite the company’s recent struggles, its stock is at a near all-time high.


Mcdonald’s Earnings Does the Company Think We’ve Reached Peak Burger

November 6, 2015

pictureBeth Kowitt
http://fortune.com/2015/10/23/mcdonalds-earnings-peak-burger/

The company’s executives seem to have other products on their mind, if yesterday’s analyst call was any indication.
Where’s the beef? McDonald’s is the biggest burger restaurant in the world, but you wouldn’t have known it from its third-quarter earnings call yesterday. Executives at the fast food giant uttered the b-word a mere six times. Two of the mentions came at the beginning and end of the call when CEO Steve Easterbrook repeated that the company was repositioning itself to be a “modern, progressive burger company.” By comparison, the execs referred to breakfast 17 times and chicken eight times.

The rare mention of the iconic product that has long defined McDonald’s MCD 0.19% is a sign that being a “modern, progressive burger company” might means focusing a lot of attention on…other things.

“I think you’re going to see them become more and more about other things and less about burgers and fries,” says Edward Jones analyst Jack Russo. “They want to be seen as giving people choice and being more healthy.”

If you look at the numbers, it’s clear why. The U.S. public may be burgered-out. There are 50,000 burger restaurants in the U.S.—that’s one for every 6,300 people, according to industry analyst Aaron Allen, who says that Americans eat 46 hamburgers a year on average. Of all the sandwiches sold in the U.S., he says three out of every five are burgers, and more than two-thirds of all the beef we consume comes in the form of a patty on a bun.

Of course, there’s been a surge in at least one category: the ballooning “better burger” segment. Allen found that some 50 national chains—from Shake Shack to Five Guys to Smashburger—have plans to expand, which will add thousands of locations in the coming years. And the proliferation is not just at burger joints. Darren Tristano of industry research firm Technomic says that the burger is also popping up in unexpected places, such as on Olive Garden’s menu or integrated into tacos.

But the pace of growth of the better burger segment is not in line with the growth of burger consumption, which Allen says lags behind population growth. We are already one of the top beef-eating countries in the world. How much more beef can we stomach?

“The only growth is coming from cannibalization,” Allen says. “We’ve capped out on the number of burgers we can eat. They’re really just swapping dollars.” He thinks McDonald’s has taken the biggest hit, noting that if you look at the growth of units added in fast-casual hamburger restaurants in the last three years, that’s approximately equivalent to the number of locations McDonald’s has closed.

The fast-growing chicken sandwich is giving the hamburger a run for its money. According to research firm NPD Group’s Harry Balzer, 2044 will be the year the number of chicken sandwiches consumed at lunch at all chains will surpass burgers for the first time. “Hamburgers are not on a growth cycle,” Balzer says, “but they’ve got a place in our lives.” He says that the chicken sandwich is not cannibalizing from hamburgers; instead it’s a change in how we eat chicken.

Allen, who has done an analysis of McDonald’s menu, says there are now more chicken-related items than anything else on the its menu, and McDonald’s now sells more chicken than beef.

It makes sense if McDonald’s wants to go whole hog on chicken. But McDonald’s can’t forget its roots. As Fortune noted last year in a story detailing McDonald’s woes, the company has a perception problem when it comes to quality:
A survey in Consumer Reports showed that McDonald’s customers ranked its burgers significantly below those of 20 competitors. It also had the lowest rank in food quality of all rated hamburger chains in the Nation’s Restaurant News 2014 Consumer Picks survey. Worse, McDonald’s ratings among diners put the chain at No. 104—on a list of 105 restaurants without table service. (Only Chuck E. Cheese’s scored lower.)

Whether it likes it or not and no matter how much chicken it sells, McDonald’s will always be known first and foremost for the hamburger. That doesn’t mean it has to compete with the better burger chains. It just needs to convince consumers that its burger has gotten better.


We want a ‘natural’ Big Mac. Why fast-food giants are finding it tough to deliver

November 4, 2015

2015-11-04_1641Peter Frost
Copyright © 2015 Crain Communication, Inc.
http://www.chicagobusiness.com/article/20151024/ISSUE01/310249994/we-want-a-natural-big-mac-why-fast-food-giants-are-finding-it-tough-to-deliver

Chain restaurants that want to jump on the all-natural beef, chicken or pork bandwagon better expect to wait in line.

While higher-end restaurants in Chicago and other big cities have long turned to niche natural-meat suppliers, McDonald’s, Subway, Chick-fil-A and smaller companies are competing for a limited supply of “clean-label” meats. In many cases, they’re being forced to get supplies from the other side of the globe or wait years for suppliers to catch up to the types of proteins consumers want today.

“The infrastructure just doesn’t exist today,” says Marion Gross, senior vice president of supply chain management at McDonald’s, the nation’s largest fast-food chain. “And no one can turn on a dime, especially when you do the type of volume we do.”

On a quest to improve the quality of its food and lure back customers who left long ago for competitors perceived to have higher food quality, Oak Brook-based McDonald’s is overhauling a portion of its supply chain. It plans to begin using hogs raised outside of gestation crates, eggs from cage-free chickens and chicken not containing antibiotics used to treat humans. On Oct. 19, the company said it also will begin serving sustainable beef in some areas next year.

But the systemwide changes won’t begin to take effect in the United States until 2017, and they won’t be finished until 2025, because of McDonald’s huge size.

U.S. meat suppliers, knowing they’re missing an opportunity, are investing millions of dollars to change farming practices and acquire “natural” brands to fill growing demand. But change takes time.

The primary factor driving deals “is the pursuit of growth and moving into markets where the growth is,” says Heather Jones, a BB&T analyst based in Richmond, Va. “It’s completely being driven by the consumer, and these companies realize it is way cheaper to buy than it is to build this on your own.”

Big meat producers like Austin, Minn.-based Hormel Foods, which in May agreed to buy Applegate Farms for $775 million, and Salisbury, Md.-based Perdue Farms, which bought Natural Food Holdings and its Niman Ranch brand in September for an undisclosed price, are augmenting their portfolios with branded organic and natural products primarily to compete better at retail, where consumers make decisions based on the label.

The takeovers also should help big meat processors learn from the upstarts and apply the lessons throughout their mass-market-sized operations. Randy Day, president of Perdue Foods, the food division of Perdue Farms, says the acquisition of Chipotle’s pork supplier, Niman Ranch, will help his company continue “a slow, thoughtful” expansion into antibiotic-free pork without compromising what made Niman successful in the first place.

Hardees and sister burger chain Carl’s Jr. had to look outside the U.S. to Australia to find enough steroid-free, antibiotic-free, grass-fed beef to supply its 3,000 U.S. restaurants for an unexpected hit. Its “all-natural” quarter-pound burger performed so well in limited tests that the chains are keeping it on menus indefinitely. The sandwich, which retails for $1.50 more than a conventionally sourced burger, has been the company’s best-selling new beef product over the past two years, says Brad Haley, chief marketing officer for Carl’s Jr. and Hardees, subsidiaries of CKE Restaurants of Carpinteria, Calif.
“Earlier generations were more concerned about counting calories, and this generation is more concerned about counting chemicals,” Haley says. “And this is not a surprise to our suppliers. They’re getting asked by everybody for this, but we just couldn’t get enough in the U.S. to meet our volume demands.”

DEMAND GROWS

Roti Mediterranean Grill, a Chicago-based fast-casual chain with 21 restaurants, likewise tapped Australian and South American cattle for dishes that will showcase the grass-fed, pasture-raised beef its customers have come to expect, CEO Carl Segal says.

“People absolutely want it,” he says. “There’s such a tight supply in the U.S. right now. Until the big producers realize there’s more and more demand for (natural meat) we’re still going to (have) tight supply, which is going to keep pricing very high. It’s frustrating.”

Market share for organic or natural chicken, beef and pork remains small. Aside from antibiotic-free chicken, which is 6.5 percent of the total chicken market by pounds, no other natural or organic meat holds more than 3.6 percent of its category, according to data from Chicago-based market research firm IRI/FreshLook.

But while analysts say it’s unlikely the majority of consumers will pay hefty premiums for grass-fed beef or chickens raised without antibiotics—supermarket prices of such products sometimes are nearly double those of factory-farmed meat—sales are outpacing conventional products by as much as a factor of six, the IRI data show. And they might have increased even faster if more supplies were available, analysts say.

“It’s going to take time for the farming and (agriculture) community to produce as much organic and antibiotic-free product as demand dictates,” says Darren Tristano, executive vice president of Technomic, a Chicago-based market research firm.

And demand is growing. Subway wants to convert to chicken raised without antibiotics next year and eliminate antibiotics from all meat within 10 years. Chick-fil-A plans to sell only chicken that is entirely free of antibiotics within four years. Earlier this year, Wal-Mart Stores asked its meat and egg suppliers to curb their use of antibiotics and provide animals with more humane living conditions. Perhaps wisely, it didn’t set a deadline.


Jimmy John’s Growth Fast-Tracked

September 25, 2015

20150918-175928-pic-444050051Debra Pressey
(c)2015 The News-Gazette (Champaign, Ill.)
http://www.news-gazette.com/news/local/2015-09-20/jimmy-johns-growth-fast-tracked.html

CHAMPAIGN — It was the “Slim 5,” a sandwich of salami, Italian capicola and cheese, that Seth Hobbs found himself ordering most when he was a college student and eating Jimmy John’s Gourmet Sandwiches “all the time,” he recalled.

Since he’s made the switch from customer to hardworking owner of two Danville Jimmy John’s franchises, his new favorite is the Italian Night Club, he said. That’s one of the heftier items on the menu, a genoa salami, capicola, smoked ham and provolone cheese sandwich topped with lettuce, onion, tomato, mayo and homemade Italian vinaigrette.

But it was more than just love of the food that drove Hobbs, a 27-year-old former ballplayer for the Joliet Slammers, to become a Jimmy John’s franchisee three years ago.

“It’s one of the fastest-growing chains out there,” he said. “And it’s one of the best profit margins for what you have to put into it.”

The chain Jimmy John Liautaud founded when he opened his first sandwich shop in Charleston in 1983 has been steadily adding locations and climbing national industry rankings.

Since 2007, the chain has quadrupled its number of shops, from 500 to more than 2,000, with most of them franchises.

Some recent industry accolades: Last year, Jimmy John’s was ranked No. 5 in Entrepreneur Magazine’s Franchise 500 list and No. 8 in its fastest-growing franchises list.

Nation’s Restaurant News 2015 Top 100 report ranked Jimmy John’s the nation’s seventh-fastest-growing restaurant chain, with 307 new locations added in 2014 to boost the total to 2,109. That was as of last year. A 2015 total wasn’t available from the company.

Keys to the chain’s growth have been simplicity, including speed of service, sports connections and consistent leadership, according to an NRN report.

Jimmy John’s remains far behind the global sandwich behemoth Subway, which has more than 27,000 U.S. locations, and more than 44,000 shops worldwide. But Subway’s sales declined about 3 percent last year, and it fell from second-largest to third-largest in both the NRN’s Top 100 and food industry research firm Technomic’s Top 500 Chain Restaurant Report Restaurants this year.

Meanwhile, three fast casual sandwich chains — topped by Jimmy John’s, Firehouse Subs and Jersey Mike’s — grew, according to Technomic.

Jimmy John’s, which leads that fast casual sandwich category, has “been moving at a very rapid pace,” Technomic Executive Vice President Darren Tristano said.

While Firehouse Subs and Jersey Mike’s don’t rival Jimmy John’s in unit numbers and sales, they’ve also been growing fast. Jersey Mike’s, the fastest-growing chain in the NRN Top 100, had a 29.3 percent growth in the latest year and third-fastest-growing Firehouse Subs saw its domestic sales grow 24.8 percent.

Tristano looks for Jimmy John’s to continue to do well because it offers comfortable dining environments, good food and a delivery service that sets it apart and boosts sales, he said.

Jimmy John’s caters to both college students and a more affluent customer in the Millennial generation, he said. Those college students who dined on Jimmy John’s while they were at school: “Most of them have grown up, and they’re continuing to eat at Jimmy John’s.”

Cost: $323,000 to $544,000

Hobbs graduated from Ball State University in construction management in 2011, started work on a master’s degree, then left to play professional baseball. Being an athlete prepared him well for the work and dedication the restaurant business requires, he said. As a franchisee, he puts in 75- to 90-hour work weeks.

With Danville being so close to Champaign, home to Jimmy John’s headquarters and multiple shop locations, he said, the name recognition for the brand was good in Danville, and his first Jimmy John’s shop at 3120 N. Vermilion St. did well “pretty much right off the bat.”

After opening his second shop at 306 W. Fairchild St., the first one took a bit of a hit in traffic, he said, “but we’re hoping it will bounce back.”

The North Vermilion location will be getting a new drive-through soon, he said, and he’s interested in adding more locations.

The initial investment in a Jimmy John’s franchise, not including the real estate, is $323,000 to $544,000 — including the $30,000-$50,000 franchise fee payable in a lump sum upon signing the agreement, according to the chain’s website.

That’s substantially more than the cost of opening a U.S. Subway franchise, which is $116,000 to $263,000, including the $15,000 franchise fee. But a Subway franchisee will pay the company more in royalties and kick in more for advertising a year, a total of 12.5 percent, compared to 10.5 percent for Jimmy John’s. And that 2.5 percent difference can be substantial for a franchise owner, Tristano said.

Firehouse Subs has an even potentially higher cost of initial investment for a new franchisee, from $131,150 to $928,405, with a single-unit franchise fee of $20,000, according to that chain’s website. And a franchisee can expect to fork over 9 percent of sales to the company a year, 6 percent in royalties and 3 percent for advertising.

Freaky working conditions

The speedy service hailed as one of the keys to Jimmy John’s success isn’t necessarily great for the company’s workers, according to one former Baltimore employee, Isacc Dalto, who was one of the founding members of the Industrial Workers of the World/Jimmy John’s Workers Union campaign in that city.

Both that campaign and an IWW campaign in Minneapolis went public in 2010, and both continue even after a union election that lost by a hair in Minneapolis that year.

Dalto, 25, worked for Jimmy John’s for one year before his hours were cut to one day a week, which, he contends, was in retaliation for union organizing, and then he quit. He continues to organize Jimmy John’s workers even though he is no longer an employee, he said.

Dalto said he has issues with Jimmy John’s “poverty wages,” sick day policy and a lot more.

“I was called in to work for a three-hour shift sometimes. You’re not allowed to call in sick. You are responsible for finding your own replacement. If you cannot find a replacement for yourself if you are sick, you are written up,” he said. “I was personally asked to work when I had pinkeye, which is not good for the public or customers, and beyond that, there’s a lot of issues with the flow of work and the pace of work. A sub is supposed to be made in 30 seconds on the assembly line.”

The company’s reference to subs “so fast you’ll freak” doesn’t make for such great working conditions for employees, Dalto contends.

“Comparable businesses, like Subway or Potbelly, don’t push workers at this breakneck pace. Aside from being miserable, it’s also very unsafe. People cut themselves when they’re doing this,” he said.

The Minneapolis IWW campaign included workers employed by one Jimmy John’s franchisee staging a work stoppage and picket, thousands of posters about the sick leave policy being posted and six employees being fired. The National Labor Relations Board ordered the employees reinstated in 2014, but they have never returned to work, according to the IBB.

Mum’s the word

Jimmy John’s seems to love social media, but the media maybe not so much?

Some 3.1 million people like a Jimmy John’s Facebook page, and many people post on it, some lovingly about the food, and the chain replies. Jimmy John’s also has more than 389,000 followers on Twitter and more than 34,000 followers on Instagram.

But news stories — which have been numerous as the chain has increased its footprint across the U.S. — often indicate the chain declined to comment, and that’s included no comments on everything from reports about an IPO in the offing to a controversial noncompete agreement required for lower-wage Jimmy John’s workers.

Reuters reported this past May that Jimmy John’s Franchise LLC was preparing for an initial public offering that could value the chain at more than $2 billion, including debt.

This past April, a federal judge in Illinois declined to grant an injunction sought by two former and current Jimmy John’s employees seeking to have noncompete agreements nullified, saying the employees lacked standing to pursue their claim because they had never been injured by the noncompete agreement.

In June, two U.S. senators, Chris Murphy, D-Conn., and Al Franken, D-Minn., introduced the Mobility and Opportunity for Vulnerable Employees, or MOVE Act, that would ban noncompete clauses for employees earning less than $15 an hour or $31,200 a year or the minimum wage where they live.

Liautaud wasn’t available for an interview for this story, and didn’t respond to questions that were emailed to him. A company spokeswoman solicited and received a list of questions from The News-Gazette on Sept. 9 after a local Jimmy John’s franchisee who was contacted for an interview contacted her, but in subsequent inquiries didn’t respond to any of the questions or requests for interviews, saying she hadn’t been able to reach the right people.

Several franchisees who were called and asked for interviews didn’t call back. One out-of-state franchisee who did answer his phone cut off the conversation after inquiring about whether there would be any negative references in the story about the Jimmy John’s chain. Another said franchisees aren’t encouraged to speak to the media.

Jimmy John’s: From 1 shop to 2,000-plus

1983 — Jimmy John Liautaud opens his first sandwich shop in Charleston, with the help of a $25,000 loan from his dad. He later opens stores 2 (Macomb) and 3 (Champaign).

1994 — Liautaud begins franchising.

2002 — Jimmy John’s is a 160-store chain.

2007 — 500th location opens.

2010 — The year store No. 1,000 opens, union organizing campaigns go public in Minneapolis and Baltimore. A vote in Minneapolis is 87-85 against union representation.

2011 — Liautaud and his wife, Leslie, pledge $1 million toward the construction of the new Stephens Family YMCA and Larkin’s Place play space. He also donates $50,000 to Promise Healthcare to help add a dental clinic.

2011 — Liautaud applies for Florida residency and says he may move his chain out of state because of tax increases.

2014 — With 2,000th locations, Jimmy John’s is ranked the sixth-fastest-growing chain by Nation’s Restaurant News, with sales of $1.5 billion.

2014 — U.S. Reps. Joe Crowley and Linda Sanchez ask the Federal Trade Commission and Department of Labor to investigate the hiring practices of Jimmy John’s. This comes after reports that the company requires low-wage workers to sign non-compete agreements “that severely impact workers’ rights,” Crowley says.

2014 — Reuters: Jimmy Johns Franchise LLC is preparing for an initial public offering in a deal that could value the chain at $2 billion-plus. The company declines comment.

2014 — The National Labor Relations Board orders a Minnesota franchisee to reinstate six Jimmy John’s employees fired for exposing company policies the IWW said could expose customers to sandwiches made by sick workers.

2015 — Some launch a Jimmy John’s boycott on social media with pictures of Liautaud posing with dead animal bodies. A new hashtag is born: #BoycottJimmyJohns.

2015 — NRN Top 100 ranks Jimmy John’s the seventh-fastest-growing U.S. chain, with sales of $1.8 billion.


With 27,205 Stores, Subway Gets Indigestion

August 17, 2015

Julie Jargon
Copyright © 2015, Dow Jones & Company, Inc.

Aggressive expansion in U.S. leaves chain with crowded footprint and slumping sales

Subway, suffering through its biggest slump in years, is testing just how sprawling a fast-food chain can get before it becomes too big.

In its 50-year history, the sandwich chain has penetrated seemingly every commercial nook in the U.S., from strip malls to laundromats to car dealerships. With more than 27,000 domestic restaurants, it boasts far more U.S. outlets than any other retailer. McDonald’s Corp. has about 14,300, and Wal-Mart Stores Inc., about 5,200. The only thing comparable is the U.S. Post Office, which manages 31,662 retail offices.

But Subway’s expansion has hit hurdles. Sales at its U.S. restaurants dropped last year for the first time in more than a decade, falling 3.3% to $11.9 billion. That made it the only major sandwich chain besides Quiznos, owned by QCE Finance LLC, to suffer a sales decline in 2014, according to restaurant research firm Technomic Inc.

Franchisees are frustrated, with some selling their restaurants at reduced prices, and perceptions of Subway’s food quality slipping, according to franchise owners, attorneys and restaurant consultants.

Priyal Patel sold his Subway in Prospect Heights, Ill., in May for $77,000. He bought it in 2006 for $195,000 and spent $85,000 to remodel it. “No one wants to buy a Subway now,” he said. “People are selling for whatever price they can get.”

Don Fertman, Subway’s chief development officer, said the transfer rate of stores from one owner to another has been steady for a number of years.

Subway, which is incorporated as Doctor’s Associates Inc., has slowed its expansion, but is far from halting it. It has been opening about 400 stores a year in North America since 2013, down from 800 to 1,200 before that and as many as 2,000 annually in the late 1990s. “I don’t see us going back to that level, but 800 is possible,” Mr. Fertman said in an interview.

Darren Tristano, executive vice president at Technomic, said Subway is already nearing the limits of growth. “The problem is that new restaurants have to steal share in order to be successful,” he said. “A lot of the weaker brands that Subway has fed off, like Quiznos and Blimpie, are not around as much. They’re going to struggle to steal enough share to be able to keep opening more stores.”

Mr. Fertman says Subways aren’t cannibalizing each other and that restaurants in the most Subway-dense markets actually have higher average sales. Subway’s international growth remains strong, with system sales up 12% last year to $7.7 billion.

Subway owes its growth in part to an aggressive franchising system. Other big fast-food chains, including McDonald’s, Restaurant Brands International Inc.’s Burger King and Wendy’s Co., long owned and operated a portion of their restaurants — in part, to test new products and study their customers. Recently, those companies have been selling those outlets to cut costs and focus on rent and royalty fees — a strategy that can mean more stable revenue and higher profit margins but that also risks undermining chains’ ability to maintain consistent quality in restaurants.

Subway, co-founded in 1965 by aspiring doctor Fred DeLuca, started franchising nine years later, and today its restaurants are 100% franchise-owned. To boost growth, it has used an unusual system of “development agents,” often former or existing franchisees who buy the rights to develop a region.

For adding stores, agents receive a portion of the 8% royalty fee Subway collects as well as half the initial $15,000 franchise fee. The agents can earn bonuses for opening restaurants ahead of schedule — or be penalized for falling behind, according to Subway’s franchise documents.

Opening a Subway typically requires an initial investment of just $116,600 to $263,150, compared with $1 million to $2.3 million to open a McDonald’s. Subways also need less real estate: their assembly-line system means kitchens can be as small as 300 square feet — less than a third that of the smallest McDonald’s.

Most restaurant companies employ their own people to scout for locations in the U.S. — in part to ensure new outlets don’t compete with old ones. And other chains have cut store counts when growth has overreached. Starbucks closed hundreds in 2009. McDonald’s closed restaurants in the early 2000s and has been trimming its U.S. store count this year.

Hardy Grewal, Subway’s largest U.S. development agent, said that while the system incentivizes expansion, “development agents aren’t stupid. We don’t open stores to close them.” Mr. Grewal owns five Subways in Los Angeles, and his agent territory includes 910 stores in Southern California and 1,000 in the mid-Atlantic. He said he’s focusing on moving restaurants to better locations and only expanding in properties with captive audiences, like airports.

“Any time you open more and more units, there’s always some impact,” he said. “People are still making some money — it’s just not what they used to make.”

Average sales per Subway restaurant in the U.S. declined last year by 3.1% to $475,000, according to Technomic. John Gordon, founder of restaurant consulting firm Pacific Management Consulting Group, found in a 2012 survey of sandwich-chain profitability that Subways average annual profits of $70,000 a store.

With sales down, he estimates that amount has fallen to $30,000 to $40,000. Mr. Fertman said Subway doesn’t have a full picture of franchisees’ profitability because they aren’t required to share that with the company.

Subway is facing other challenges. It suspended ties with its longtime pitchman Jared Fogle in July after federal authorities raided his home as part of an investigation that officials have yet to disclose. Mr. Fogle, through his attorney, has said he is cooperating with authorities. And Mr. DeLuca, the 67-year-old chief executive of Doctor’s Associates, who has been battling leukemia, has turned over management of daily operations to his sister.

Subway also scored five percentage points or more below the average of the limited-service sandwich category on food and beverage attributes in a recent consumer survey, according to Technomic.

Les White, who owns 47 Subways in Arizona and is chairman of an association that represents 6,500 Subway franchisees in North America, said Subway is working on initiatives to improve food quality, including the removal of preservatives and artificial ingredients. “What’s difficult about trying to change a company this large is it’s difficult to change things immediately,” he said.