S2 E14: How Chick-Fil-A Franchises Found Success
The inventor of the chicken sandwich has humble beginnings. Discover how Chick-Fil-A became a nation’s favorite, despite never opening on Sundays.
In this 10-minute run through, The Wolf breaks down the restaurant’s humble beginnings, how a chance opportunity to buy up cheap chicken turned into a money spinning idea, and how founder S. Truett Cathy developed the 2-part franchise strategy that dominated the company’s growth for decades.
No one knows franchising like The Wolf and his unique takes and thoughtful analysis make this a not-to-be-missed episode.
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Episode Transcription
The Wolf of Franchises:
Welcome to Franchise Empires, where aspiring entrepreneurs learn exactly what it takes to become a successful franchise owner from one location to 10 and beyond. I’m the wolf of franchises. Chick-fil-A is closed every Sunday despite being open 52 less days each year. Though they generate more revenue per location than any restaurant in the world, their success is no accident. Here’s how they did it.
Narrator:
The Wolf of Franchises is the CEO of Wolf Pack Franchising, as well as a creator at Workweek Media. All opinions expressed by the Wolf and podcast guests are solely their own opinions and do not reflect the opinion of Wolf Pack franchising or Work Week. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. The Wolf Work Week and Wolf Pack Franchising may maintain positions in the franchises discussed on this podcast.
The Wolf of Franchises:
To learn about their success today, we must go back to the beginning. Chick-fil-A was founded by Truett Cathy, a restaurant tour in Atlanta, Georgia. Cathy opened his first restaurant in 1946 after he returned home from World War ii. This restaurant was a diner called Dwarf House, named because of the small size and limited seating it provided. Truett had expanded to a second dwarf house location by the early 1960s, but it tragically burnt down in a fire.
This set him back quite a bit as he was really depending on the sales from that second location to help pay down some debt. Unfortunately, for him to make matters worse, the insurance payment from the burnt down restaurant never came through. So rather than rest and wallow in his own pity, he immediately looked to revitalize his menu at the original dwarf house in an effort to boost sales.
This is when he got a call from a poultry supplier that would change the trajectory of his life. The poultry supplier that called Truett Cathy had just fulfilled a large order for a local airline. The airline had specific size requirements for each cut of chicken as it had to fit into a small enough meal casing so that it could go on the plane and be delivered and handed out to each passenger.
Certain cuts of meat were just too large for the airline, so the poultry supplier needed to offload a bunch of extra chicken as quickly as possible before it went bad. So, Cathy snatched this opportunity, and he began to purchase all the remaining chicken so that he could experiment immediately after hundreds of trials and samples given to customers the dwarf house. Truett felt like he had perfected the formula for what is now known as the original chicken sandwich.
It’s a breaded chicken breast, two pickles laid on a buttered and toasted bun. The sandwich had to be made using a pressure cooker, though to increase the speed in which it could be cooked, and he also baked it in peanut oil to improve the taste. To this day, Chick-fil-A doesn’t say that they invented chicken, just the chicken sandwich. The sandwich was an immediate hit at Dwarf House, and Cathy knew he had to open a whole restaurant that was based around just this one sandwich.
So with the trademark for Chicken Filet already taken, he settled for Chick-fil-A and opened the first location in an Atlanta mall in 1967. As a fun fact, the A in Chick-fil-A actually represents the quality of their chicken and the level of service that they looked to provide. Just like the sandwich itself, the restaurant Chick-fil-A took off immediately, which left one question for Truett Cathy to answer.
How can he expand this business? There’s a lot of methods to expansion both inside and outside of the franchise model. You can take on debt via loans, you can raise money from investors, or when it comes to franchising, you can outsource capital and the operations to franchisees. These are all different ways that a small business can turn into a big business.
Truett Cathy developed a two-part strategy, which combined low debt and stringent franchisee requirements. And this decision, this two part strategy, has dictated Chick-fil-A success for decades. So part one, funding stores using profits only. Truett and Cathy was born back in 1921, so we lived through the Great Depression, which began in 1929. There’s a quote from him that reads, Back then you bought something. If you had the cash to buy it with debt, you have to worry about it. So his philosophy was to mitigate risk by limiting debt.
It’s a strategy that’s worked incredibly well as the company, even to this day, has virtually zero debt on its balance sheet. Early on, however, this meant that he was only going to expand through restaurants inside of malls. Why? Malls you might ask. Mall locations require far less construction and are much lower square footage than a free-standing restaurant.
So, this enabled Cathy to expand the Chick-Fil-A brand, the lowest possible cost. However, by the 1980s between McDonald’s, Burger King, Wendy’s, KFC, and other fast-food restaurants, competition for drive through and free-standing restaurants was starting to heat up. So this led to Chick-Fil-A’s First ever free standing restaurant in 1986. And that leads us to the importance of the second part of his expansion strategy. That second strategy is franchisees selection and requirements. You may not know it, but Chick-fil-a’s franchise offering is actually far less expensive in the traditional fast food brands.
For instance, a McDonald’s franchise can cost anywhere from 1.3 to 2.3 million per restaurant. But Chick-fil-A just a $10,000 franchise fee. That’s because Chick-fil-A pays for literally everything, including the real estate equipment, marketing, food supplies, et cetera. There’s pros and cons to this model for sure, for Chick-Fil-A franchisees, but for Chick-fil-A is the franchisor. That low price barrier, that $10,000 franchise fee only allows them to cast a ridiculously wide net for potential new operators. Imagine comparing $10,000 to 1.3 to 2.3 million for McDonald’s.
The operators that are available Chick-fil-A are just vastly larger and higher than McDonald’s and other fast food brands. Fast forward to today, and that’s resulted in 60,000 plus applicants annually, of which Chick-fil-A only accepts about 80 to a hundred of that’s an acceptance rate of barely 0.15%, which statistically speaking means that you have a better chance of getting it to Harvard, Stanford, or even the United States Secret Service.
In addition to the low acceptance rate, Chick-Fil-A rarely allows operators to run more than one store, and they require each store to be actively run. Often meaning that operators spend six days a week inside their location because of that low acceptance rate and strict operating requirements. Chick-fil-A is able to filter through all their franchise operator candidates and only end up with the ones they want. The passionate franchisees. Think about it, that’s a really strict interview and application process. You’re only going to stick that out if you really want to be a Chick-fil-A operator.
So these passionate franchisees who are already armed with that great chicken sandwich product that drew it, Cathy perfected back to the 1960s, they trigger a beautiful domino effect at each Chick-fil-A restaurant that keeps customers coming back every time with a great sandwich to serve customers and passionate franchisees. Those franchisees are able to motivate and inspire their employees, which leads to that amazing customer service that you’re used to at Chick-fil-A.
Restaurants. Between the passionate franchisees, the motivated employees, the great sandwich, and the great service, what does that result in? Repeat customers? That’s the domino effect that Chick-Fil-A has, and because of that, they’re not only scaling flavor like many other fast food restaurants can do, they’re also scaling hospitality, and they’re the first brand to really figure out how to do that. And to date, I’ve yet to see another franchise like them as of 2022. Chick-fil-A is about 55 years into their journey as an American company, while the approach they’ve taken definitely comes at the cost of less locations being open, their growth has begun to accelerate in recent years.
They’re now opening a hundred restaurants annually. They have the highest average revenue per location in the world, has the top satisfaction rating among fast food restaurants, and they have the third highest total revenue of any fast food restaurant despite having thousands of less locations for comparison, McDonald’s comes in at second in the fast food world from average unit volume, and they’re at 2.9 million.
Chick-fil-a’s average unit volume in 2021 was 8.1 million per location for those that weren’t located in a mall. That’s based on 1800 locations that they were able to record data from, and 46% of those 1800 operators did as well or better than the 8.1 million in revenue. The highest performing Chick-fil-A, it did 17.1 million in revenue.
That’s a ridiculous number for a single restaurant to do. So assuming Chick-fil-A doesn’t deviate from their current growth methods, I believe they’re on the slow and steady path to becoming the most valuable restaurant franchise in the world.
Yes, even more valuable than McDonald’s. Why? Because they have a deliberate expansion strategy that prioritizes both the customer experience and the profitability of each restaurant over the success of the system as a whole. When you look at other restaurant franchises and really other franchises in general, their primary focus is expanding locations because when more locations open, the revenue across the system increases which results in the franchise org collecting more royalties.
Chick-fil-A, on the other hand, is happy to go with a slow and study approach, only opening locations when it’s matched with a passionate operator that can maximize its value. Other franchises are unlikely to ever take this approach, given our time intensive it is. And also the fact that, let’s face it, folks, the reality is controlled growth doesn’t produce as many headlines and isn’t as sexy.
Chick-fil-A is okay with that, and they have been since Truett Cathy founded this concept back in 1967. But as we’ll see, Chick-fil-A is playing the long game, and because of that, I think the Chick-fil-A is going to win in the long run.
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