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The Pipeline

Buzz (or its lack) affects Chick-fil-A, Cousins; plus a Zaxby's deal


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The controversy surrounding the remarks of Chick-fil-A CEO Dan Cathy is still swirling. A Facebook page launched a same-sex kiss-fest inside the chain’s eateries a few days after customers sympathetic to Cathy’s conservative values regarding marriage showed up in droves, egged on by former Arkansas Governor Mike Huckabee. He was merely one of many pundits on both sides of the issue weighing in.

The chain, you’ll recall, came under fire after a Chicago alderman announced the Atlanta-based outfit was no longer welcome in his ward (where a unit was to open) because management had donated millions to groups that oppose gay marriage. Boston Mayor Tom Menino followed the alderman’s lead while New York Mayor Michael Bloomberg declared Chick-fil-A was welcome. Cathy then repeated the company’s firm anti-gay marriage position during an interview on a Christian radio station.

But will the pipeline care?

Missing so far from the brouhaha, however, is word whether any of this will impact the chain’s pipeline (all of its 1,600 units are franchised). I called industry observers for their take. Predictably, it ranged.

Franchise expert Jordan Krolick said, “Consumers’ purchases of Chick-fil-A’s products, more than the CEO’s or politicians’ comments, will dictate the chain’s future development,” warning it could be “a slippery slope for communities’ leadership to impact development due to a certain viewpoint, whether revered or deplorable.”  

Consultant Frank Steed of Results Thru Strategy didn’t believe the controversy would alter the thinking of franchise applicants because Chick-fil-A’s views regarding religion are so well-known within the industry.

And an Atlanta-based public relations veteran who has worked in QSR and wished to remain anonymous expected Chick-fil-A “to recover” but lamented the lack of an apology from Cathy. “With today’s media environment, you have to control the message to not disenfranchise anyone who may be a customer, franchisee or employee,” the executive said.

In the end, Dan Cathy didn’t appear worried about that.

Media-starved out West

Media, meanwhile, is a significant concern for Cliff Jones, a first-time area developer for Cousins Subs in Arizona. He’s attempting to fill the pipeline for the Milwaukee-based chain’s sole outpost west of the Mississippi. He figures once franchisees have opened 20 restaurants, the chain will leverage radio and TV advertising. To date, there are 10.

Momentum appears to be in his favor. First-quarter restaurant sales in the state were up 7.5 percent (year-on-year) and economic forecasters at the University of Arizona expected a 5.6 percent hike for all of 2012. 

What’s more, Jones isn’t new to franchising. A former Subway, Re-Max and Cold Stone Creamery franchisee, he believes deeply in Cousins. “People ask me, ‘What makes Cousins different?’ It’s the food and the people,” he said. By people, he means the owners, whose late father and uncle founded the submarine sandwich shops in 1972. Jones currently operates a single unit.

To date, marketing consists of direct mail and local-store. School charitable promotions, for example, bring in business. Car dealerships that reward employees for hitting their numbers have helped expand the chain’s catering (now 20 to 30 percent of sales). By contrast, Subway’s 400-plus Arizona units are continually on television and radio. The silver lining, according to Jones, is that Subway has likely built out the state and isn’t offering new franchises.

Alison Bailin, a spokeswoman for the giant sandwich chain in Arizona, indicated in an email that Subway was in fact still offering franchises in the Grand Canyon State.

Besides food, Jones believes the recently lowered investment cost, which management dropped to $200,000 from $300,000, is attracting candidates. It was accomplished, Jones adds, by changing the equipment and décor packages. “For instance, in the store my wife and I opened we have reach-in refrigerated drawers and not a walk-in,” he said.

That combined with a $25,000 franchise fee and low rents ($20 to $25 per square foot), Jones figures he’ll have two more franchise agreements signed by the end of 2012 for a total of four. “We’re on a great trend,” he insisted.

Multi-unit deal for Zaxby’s

Franchise officials at Athens, Georgia-based Zaxby’s are probably thinking along similar lines, having recently induced Duane Hoover to sign an agreement that will result in 32 of the fast-casual eateries in Virginia over seven years. A company press release described the franchise veteran and son Carl, who formed Hoozax Food to manage the new restaurants, as “successful entrepreneurs with past experience in multi-unit franchises.”

That may be putting it mildly. Hoover told me how in 1975 he sold a piece of land to Wendy’s founder Dave Thomas, who opened a restaurant on it. “I was impressed with what I saw.  I got involved early and did extremely well,” he said, adding he and his family have since opened more than 100 Wendy’s, all in the Southeast. They also operate hotels and other restaurants; their entire holdings will ring up about $75 million this year.

Zaxby’s, a chicken specialist, happens to be headquartered near Hoover’s outfit in Suwanee, Georgia. Hoover, who was looking to expand into fast-casual, met with Zaxby’s management and discovered they, like his own team, were a conservative group when it came to expansion. “We talked with them and it seemed we had like minds,” Hoover noted, adding it’s crucial for franchisees to understand a franchisor’s company culture before inking an agreement.  

Hoover acquired for “a good portion of Virginia,” including Virginia Beach, a territory he knows first-hand having operated restaurants there. He also likes the state’s economy, where the unemployment rate, 5.7 percent in June, compares favorably to the national rate of 8.2 percent. It also contrasts sharply with Florida’s 8.6 percent rate; Hoover has Wendy’s units and a Mexican concept called Willy’s in that state.

But the downside, if there is one, is that land is costly (Hoover always purchases it). “You’ll pay $700,000 to $800,000 for a site, though site work isn’t as bad as in some areas,” he said. Zaxby’s ring up an average $1.7 million, he added.

Hoover is therefore counting on his company’s entrepreneurial skill and attractive interest rates from banks that have loaned him money for 40 years. “You take land and building costs, and assuming we work this right, our ROI will be quite good because the model makes sense.”

David Farkas has covered the restaurant industry for 25 years as a reporter and food writer. Submit your company’s development agreements to him  at dfarkas99@gmail.com.

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