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Sowing Seeds

Jack in the Box development strategy helps fertilize markets


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Jack in the Box

Jack in the Box is planting the seeds for future investments.

Here’s yet another strategy franchisors can employ to grow in virgin territory: Open company-owned stores to establish a presence in a market and then find a suitable franchisee to purchase those units.

Wes Salous was doing just fine operating IHOP restaurants in Oklahoma City and a few other markets around the central United States, but he figured he’d about tapped out his growth options.

So Salous and his two equity partners sold their IHOPs in Oklahoma and bought seven corporate-owned Jack in the Box restaurants.

Jack in the Box has been selling corporate-owned stores to franchisees for about a half-dozen years now. But the Oklahoma City quick-service restaurants stand out because they are the first sold as part of a new seeding strategy the company put in place in a handful of mid-sized markets across the United States. It’s an aggressive effort by the franchisor to increase penetration, especially these days when franchisee financing is hard to find.

It was helpful, Salous says, because his company, BMW Investment, was able to take over operation of existing units without spending large sums up front for development.

Now Salous is working with his partners to improve operational efficiencies while also planning for future expansion of the Jack in the Box brand.

“Business has been OK. There is a lot of potential to improve it,” Salous says, adding that ultimately, “we hope to blanket the state.”

Seeding fits strategy 

Salous is the perfect example of the type of franchisee Jack in the Box is looking for, both for its seeded locations and in markets where franchisees will build their own restaurants. He has a track record of successful restaurant operations and he wants to expand the market further, which is a requirement for franchisees looking to buy into those seeded markets, says Vanessa Fox, division vice president of franchise business development for the company.

After years of owning most of its stores corporately, Jack in the Box is focused on finding franchisees. The company has gone from being about 20 percent franchised in 2004 to 76 percent at the end of fiscal 2012. It sold 97 company-owned stores to franchisees last year, though the deal in Oklahoma City was the first “seeded” market. 

Under the seeding program, Jack in the Box opens company-owned restaurants with the sole purpose of establishing a presence in a market and operating the restaurants until it can find a suitable franchise partner to purchase them. Other seeded markets where the company is seeking franchisees include Tulsa, Oklahoma; Kansas City, Missouri; Indianapolis; and Cincinnati. Interest in the program has been strong, Fox says. Additional deals are being negotiated with franchisees who appreciate the shared responsibility for opening the restaurants, the day-one cash flow and the “low-investment proposition.”

Jack in the Box

Oklahoma City was the first “seeded” market for Jack in the Box, which sold 97 company-owned stores last year.

“People really love the fact that Jack in the Box is willing to take the risk of entering a new market rather than putting all the risk on a franchisee’s shoulders,” Fox says.

Meanwhile, Jack in the Box officials like dealing with franchisees because local operators often have a better understanding of dynamics that drive business in their markets, from where to develop to how to maximize advertising and marketing efforts. The challenges associated with seeding markets aren’t that different from a typical situation, she adds. The biggest one is finding the right franchisee partner who has the capital and the experience to operate the restaurant well.

Franchising also creates an additional stream of revenue for the company, as it controls the lease agreements on restaurants it has sold, says Brian Luscomb, spokesman for the restaurant chain. Ultimately Jack in the Box expects to have about 80 percent of its restaurants franchised, company officials say. 

Franchisees beware

Seeding markets is not a particularly common way for a franchised company to grow, but it can make sense when the franchisor is well capitalized and loans are difficult to find. The strategy also allows the company to establish its brand name and goodwill in new markets, says Robert Zarco, founding partner with the Miami-based law firm Zarco, Einhorn, Salkowski & Brito.

Franchise relationships that result from market seeding can work out well, he says, if franchisors have the best interests of franchisees in mind and if franchisees do the proper due diligence to make sure they are entering good deals.

One of the problems with seeding, he says, is that when franchisors open restaurants or stores in a new location, they typically pump extra advertising and marketing into the market as well, which results in an uptick in sales during a “honeymoon period.” Franchisees need to make sure they take those increased sales in mind when they are bidding to purchase the seed stores.

“A lot of franchisees don’t know this is a honeymoon blip,” Zarco says, adding that such an investment calls for an intense study of expenses and sales. “I recommend to franchisees that they take whatever the gross revenues are for the first six months and take 20 percent off of that as a conservative number to see whether the unit financials still work.”

Jack in the Box officials acknowledge the potential for sales decreases after the honeymoon period, but add its locations come with several advantages other restaurants might not have, such as all-day breakfast.

The company also plans to stay involved with the franchisees after they sign deals and offer them incentives designed to continue sharing risk, Fox says. Franchisees discovered as part of the seeding program still pay a 5 percent marketing fee, but they will be able to work with a local marketing manager to determine how three-quarters of that amount will be spent.

“There is a strategy around where and how they spend this money,” she says. “It’s not just they pay the 5 percent and don’t know where it’s going.”

They’ll also be granted a longer period of time to begin further development than other operators so they can familiarize themselves with the brand. And Jack in the Box reduced its royalty fees by 2.5 percent for two years and waives the $50,000 franchise fee, Fox says.

Corporate also stays deeply involved in assisting franchisees, even after the new partners complete a 10-week training program. Regional franchise directors also stay in communication with franchisees to ensure things are working well. 

“If they identify any weak spots,” Fox says, “they will bring in corporate resources necessary to help mitigate those challenges.” 

 

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