🍟 7/18/2022 – How Is Chick-Fil-A So Successful?
SPONSORED BY HOT CHIKN KITCHN
You all know that when it comes to emerging franchises, unit economics are the first thing I look at. So when Hot Chikn Kitchn reached out for this sponsor slot, I was pumped because I had already covered them in early May!
They have fantastic unit economics and are an incredibly “franchise-able” concept, as their simple menu is reminiscent of In-N-Out’s approach, but instead they sell Nashville hot fried chicken based meals. Spicy chicken is definitely the hottest (pun intended) segment of fast casual restaurants right now.
If you’re an aspiring or existing restaurant owner, and are looking for the next big brand, Hot Chikn Kitchn is 1000% worth reaching out to!
The Chick-Fil-A Domino Effect
Chick-Fil-A is closed every Sunday, meaning it has 52 less days to generate sales on an annual basis.
Despite this fact, they still generate more revenue per location than any restaurant franchise or chain in the world!
Many have speculated as to how Chick-Fil-A has developed such an affinity for their product. To fully understand this, we need to go back to the beginning of Chick-Fil-A.
How Chick-Fil-A Was Started
Chick-Fil-A was founded by Truett Cathy, a restaurateur 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.
He had expanded to a second Dwarf House location by the early 1960’s, but it tragically burnt down in a fire. This set back Cathy quite a bit, as he was depending on the sales from that second location to help pay his debt down.
Unfortunately for him, the insurance payment never came through, so 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 Truett Cathy’s career…
Chick-Fil-A is Born
The poultry supplier that called Cathy had just fulfilled a large order for a local airline. The airline had size requirements for each cut of chicken, as it had to fit into a small enough meal to fit on the plane for each passenger.
Certain cuts were too large for the airline, so the owner was looking to offload the remaining chicken as quickly as possible before it went bad.
Truett Cathy snatched at the opportunity – he purchased all the remaining chicken and began experimenting.
After hundreds of trials and samples given to customers at Dwarf House, he perfected the formula for the original chicken sandwich:
A breaded chicken breast, 2 pickles, laid on a buttered and toasted bun. The sandwich had to be made however using a pressure cooker to increase the speed in which it could be cooked, and baking it in peanut oil to improve the taste.
To this day, Chick-Fil-A says they “didn’t invent chicken, just the chicken sandwich”.
The sandwich was an immediate hit, and Cathy knew he had to open a new restaurant that was entirely dedicated to it.
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.
Fun fact: The “A” in Chick-Fil-A represents the quality of their chicken, and the level of service they look to provide.
The restaurant took off immediately, which left one question left to answer: how to expand Chick-Fil-A?
The Chick-Fil-A Success Strategy
There are many methods to expansion, both inside and outside the franchise model. Taking on debt via loans, raising money from investors, outsourcing capital and operations to franchisees, are all different ways a small business can grow.
Truett Cathy’s 2-part strategy, which combined low debt, and stringent franchisee requirements, has dictated Chick-Fil-A’s success for decades.
1. Fund Stores Using Profits Only
Truett Cathy was born in 1921, thus he lived through The Great Depression that began in 1929.
“Back then, you bought something if you had the cash to buy it. With debt, you have to worry about it”.
Thus, his philosophy was to mitigate risk by limiting debt, a strategy that has worked incredibly well, as the company has virtually zero debt on its balance sheet to this day.
Early on however, this meant expanding by only opening restaurants inside of malls. Mall locations required far less construction, and were much lower square feet than a freestanding restaurant, so it enabled Cathy to expand the Chick-Fil-A brand at the lowest possible cost.
By the 1980’s, between McDonald’s, Burger King, Wendy’s, and KFC all opening drive-thru stores, the competition was heating up. This led to Chick-Fil-A’s first ever freestanding restaurant in 1986, and leads to the importance of the second part of the expansion strategy
2. Franchisee Selection & Requirements
You may not know it, but Chick-Fil-A’s franchise offering is far less expensive than traditional fast-food brands.
For instance, a McDonald’s franchise can cost you anywhere from $1,314,500 – $2,313,295 per restaurant. But Chick-Fil-A will cost just a $10,000 franchise fee!
This is because Chick-Fil-A pays for everything, including the real estate, equipment, marketing, food supplies, etc. There’s pros and cons to this model for Chick-Fil-A franchisees, but for Chick-Fil-A as a franchisor, the low price barrier allows them to cast an incredibly wide net for potential new operators.
Fast forward to today, and that’s resulted in ~60,000+ applicants annually, of which Chick-Fil-A only accepts ~80 of. That’s an acceptance rate of just 0.13%, which means you have a better chance of getting into 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 1 store, AND they require each store to be actively run, often meaning that operators spend 6 days a week inside their location.
The Chick-Fil-A Domino Effect
Because of the 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!
These passionate franchisees, who are already armed with a great product, trigger a beautiful domino effect at each Chick-Fil-A restaurant, that keeps customers coming back every time:
- Passionate franchisees motivate their employees
- Employees are inspired to provide the top-notch customer service Chick-Fil-A is known for
- The great customer experience combined with a tasty product drives off the charts customer loyalty
Chick-Fil-A is 55 years into their journey as an American company. While the approach they’ve taken comes at the cost of less locations being open, their growth has begun to accelerate in recent years:
- Opening 100+ restaurants annually
- Highest average revenue per location in the world
- Has the top satisfaction rating among fast-food restaurants
- Has the 3rd highest total revenue of any fast-food restaurant, despite having thousands of less locations
Their 2021 average unit volume for standalone locations was a whopping $8,142,257!
Assuming Chick-Fil-A doesn’t deviate from their current growth methods, they’re on the slow and steady path to becoming the most valuable restaurant in the world (yes, even more valuable than McDonald’s).
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, their primary focus is expanding locations – because when more locations are open, system revenue increases which results in the franchisor collecting more royalties.
Chick-Fil-A on the other hand is happy to go with a slow and steady 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 how time intensive it is, and also the fact that controlled growth doesn’t produce as many headlines.
Luckin’ Coffee Eyeing Return to The US
The saga of the “Chinese Starbucks” is quite the story. After defrauding investors, getting delisted from the Nasdaq, and nearly shutting their doors forever, the brand has somehow survived. Not only are they now franchising in China, but they be re-listing on the US stock exchange in the next year (and I wouldn’t be surprised if they franchise in the US too!)
Subway Eyeing International Growth
Given the over-saturation of Subway’s in America, it’s great to see they’re finally prioritizing international markets. They’ve already signed 8 master franchise agreements in the past year, which translates to ~5,000 future restaurant openings.
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