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Chick-Fil-A: How to beat your competitors by using a completely different business model

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Trevor Kuntz

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As most of us know, the fast food franchise industry is not where the Fastlane money is.

High investment costs, low margins, high failure rates. This post is not going to convince you to open a fast food franchise, but it might help you see how one corporation is beating other corporations by using a VERY different business model.

This is a synopsis of a Hustle article. Link to original article at the bottom.

Chick Fil A is only open 6 days of the week, but has the highest revenue per location of any fast food company ($4.2M/store). Why?

In the fast food world, most fast food corporations have a VERY high financial barrier-to-entry for owning a franchise. On average, the cost to buy a franchise, get the real estate, build a building, and buy the equipment is between $1.6M and $3.2M. For this reason, most fast food companies won't even look at a franchisee application for someone with a net worth of less than $1M or liquidity of less than $500K.

Of course, if you have the money, the barrier-to-entry is not that high, so most fast food companies will accept any schmuck with enough money in the bank. The schmuck will invest $1.6-3.2M in the franchise and the corporation will take 4 to 8% of his revenue in perpetuity.

This is where Chick Fil A comes in. Chick Fil A operates in a completely opposite manner.

Instead of having a high financial barrier-to-entry and high franchisee-acceptance rate (for those with enough money), Chick Fil A has a very low financial barrier to entry and an EXTREMELY low franchisee-acceptance rate (regardless of money in the bank).

The financial barrier to entry for Chick Fil A is a mere $10k. Not much.

The franchisee-acceptance rate, however, is LOWER than the acceptance rate at Stanford. You have a better chance of getting a job at Google or getting into Stanford than you do of getting a Chick Fil A franchise. Each year, 60,000 people apply for a franchise and about 80 are selected.

If you do get accepted, you pay the $10k franchise fee, then Chick Fil A leases the real estate, builds the building, and buys the equipment. The franchisee doesn't pay for any of this and also doesn't own the building or the equipment. Chick Fil A also takes 15% of sales revenue and 50% of net profit (compare this with the 4% to 8% royalties at other fast food franchises). The franchisee gets between 5% and 7% of total revenue, or about $150,000 to $250,000.

Chick Fil A is playing the smart game. They are only taking people who are DEDICATED to the brand and to the franchise, regardless of their personal financial means. Chick Fil A's franchise "owners" cannot own another business, mostly cannot own another franchise location, and cannot have equity in the business. They are "owners" in name only. However, these Chick Fil A franchise "owners" make $150k to $250k per year and all they have invested is a $10k franchise fee and their time. Essentially, the "owners" have invested in a high-paying manager job.

Compare this with the franchise owner at McDonalds, who makes on average $150k/year on a $2.4M upfront investment, and a Chick Fil A franchise looks attainable to someone who wants to "own" a franchise. So it is already an attractive franchise and it is highly selective for only the best franchisees.

I would bet that one of the reasons Chick Fil A has the highest revenue per location is because of their screening process for franchisees and them recognizing that a business is only as good as those who lead it at the managerial level.

My challenge is to look at the way businesses in your industry are operating and ask what you could be doing differently to beat them, even if that idea is totally outside the current industry parameters.

 

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Kak

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As most of us know, the fast food franchise industry is not where the Fastlane money is.

High investment costs, low margins, high failure rates. This post is not going to convince you to open a fast food franchise, but it might help you see how one corporation is beating other corporations by using a VERY different business model.

This is a synopsis of a Hustle article. Link to original article at the bottom.

Chick Fil A is only open 6 days of the week, but has the highest revenue per location of any fast food company ($4.2M/store). Why?

In the fast food world, most fast food corporations have a VERY high financial barrier-to-entry for owning a franchise. On average, the cost to buy a franchise, get the real estate, build a building, and buy the equipment is between $1.6M and $3.2M. For this reason, most fast food companies won't even look at a franchisee application for someone with a net worth of less than $1M or liquidity of less than $500K.

Of course, if you have the money, the barrier-to-entry is not that high, so most fast food companies will accept any schmuck with enough money in the bank. The schmuck will invest $1.6-3.2M in the franchise and the corporation will take 4 to 8% of his revenue in perpetuity.

This is where Chick Fil A comes in. Chick Fil A operates in a completely opposite manner.

Instead of having a high financial barrier-to-entry and high franchisee-acceptance rate (for those with enough money), Chick Fil A has a very low financial barrier to entry and an EXTREMELY low franchisee-acceptance rate (regardless of money in the bank).

The financial barrier to entry for Chick Fil A is a mere $10k. Not much.

The franchisee-acceptance rate, however, is LOWER than the acceptance rate at Stanford. You have a better chance of getting a job at Google or getting into Stanford than you do of getting a Chick Fil A franchise. Each year, 60,000 people apply for a franchise and about 80 are selected.

If you do get accepted, you pay the $10k franchise fee, then Chick Fil A leases the real estate, builds the building, and buys the equipment. The franchisee doesn't pay for any of this and also doesn't own the building or the equipment. Chick Fil A also takes 15% of sales revenue and 50% of net profit (compare this with the 4% to 8% royalties at other fast food franchises). The franchisee gets between 5% and 7% of total revenue, or about $150,000 to $250,000.

Chick Fil A is playing the smart game. They are only taking people who are DEDICATED to the brand and to the franchise, regardless of their personal financial means. Chick Fil A's franchise "owners" cannot own another business, mostly cannot own another franchise location, and cannot have equity in the business. They are "owners" in name only. However, these Chick Fil A franchise "owners" make $150k to $250k per year and all they have invested is a $10k franchise fee and their time. Essentially, the "owners" have invested in a high-paying manager job.

Compare this with the franchise owner at McDonalds, who makes on average $150k/year on a $2.4M upfront investment, and a Chick Fil A franchise looks attainable to someone who wants to "own" a franchise. So it is already an attractive franchise and it is highly selective for only the best franchisees.

I would bet that one of the reasons Chick Fil A has the highest revenue per location is because of their screening process for franchisees and them recognizing that a business is only as good as those who lead it at the managerial level.

My challenge is to look at the way businesses in your industry are operating and ask what you could be doing differently to beat them, even if that idea is totally outside the current industry parameters.

This is fascinating and supports my theory that company culture of professionalism and excellence starts a the very top.

Trevor sent this to me in response to my Professionalism episode of KBRS. This is worth a bump and a discussion.

Chick Fil A pays very similarly to McDonalds... So why is the experience so much better? Leadership.
 

Johnny boy

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All they did was use the word "franchise" for a model that basically eliminated the point of having a franchise.

Which makes me very confused as to how they are growing at 15% and are larger than almost all other fast food brands. They aren't using franchise money to grow. I went and got a sandwich at one a few weeks ago and there were around 10 employees all walking around outside when only about 4 of them would've been enough. I don't know how that's working for them but it is. Can't argue with 10B revenue a year.

Good for them.
 

daivey

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thanks for the info, didn't know that about Chik-fil-a

so you're more of a "partner" with them.

but i think with Mcdonalds, you're still a "partner". they want you to succeed.
 

The-J

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The reason for this? Unlike other franchise models, Chick-fil-A — not the franchisee — covers nearly the entire cost of opening each new restaurant (which, according to its financial disclosures, runs from $343k to $2m). The franchisee only pays the $10k franchise fee.


Chick-fil-A pays for (and retains ownership of) everything — real estate, equipment, inventory — and in return, it takes a MUCH bigger piece of the pie.


While a franchise like KFC takes 5% of sales, Chick-fil-A commands 15% of sales + 50% of any profit.

Franchisees own basically nothing. They're more employees than anything, making between $150k-$250k/yr working 60 hours a week. They're expected to be the operator/GM, working ~60 hours a week or so.

Ultimately, it's a well-paid job. But it's the CONTROL that Chick-Fil-A keeps.

I wouldn't say franchisees get a raw deal (it's a well paid job, similar to what you'd make running a McD's but you'd have to invest a hell of a lot more), but it's hardly like owning anything.

That's what I find so genius about the model. What they've essentially done is make it so that only the most dedicated people who align with the company's values can be allowed to operate one of these franchises. They're not looking for wealthy owners looking to make some cash, they're looking for people who CARE. The belief is that the alignment with Chick-Fil-A's values is what makes a location successful (NOT the financial position of the franchisee), and that belief seems to have been more or less correct.

The article mentions Wendys, which to me is one of the most hit-or-miss restaurants out there. Some Wendys locations are absolute trash. Others are amazing. Every Chick-Fil-A I've had (with the exception of the one at NYU lmao) has been consistent.

It's not even really a franchising model at this point, but a model where operators are chosen based on their commitment to the customer and the company and are paid based on store performance.

It works.
 

eliquid

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All of the Chick fil a owners I know have told me the same basic story.

They accept people that are in the local church to be owners/partners. This is ONE of the reasons they can not own another location ( there are a few others of course ). There are a few very rare exceptions to this, but the owner/partner has to be in the local church where they are wanting to franchise. I do know 1 person who actually owns a 2nd Chick fil a, but there was an exceptional reason behind it.

I see it as a great model. They basically want general managers to run their locations and you have to have XYZ background and small upfront capital to play ball. Considering $250k would be a dream salary to most people living in the world and $10k is obtainable to most as well, it's about finding the right local fit afterwards for Chick fil a

Most people don't care about control. They care about looking successful and making money. Many of those people would be happy with the $250k and a "stable" job and bragging they "own" a Chick Fil A.

We know the different story though. But we aren't "most" people either.

Just depends on what you are looking for.

Part of the reason Chick Fil A is successful, is because they own most of the control and just have general managers running the locations. Making their brand even more solid in terms of user experience and expectations.

I'm never let down at a Chick Fil A. I can't say that for any other fast food restaurant except a close 2nd to Wendy's, but I live in an area where we USE to have extremely good Wendy's, which all happen to be owned by the same person ( Junior Bridgeman ) before he sold them all in 2016.

I also find corporate operations tend to be better ran as well. There are a few "corporate" ran McDonalds in my general area. Those specific stores have a much better experience and expectation than the ones owned by a franchisee that I have visited.
 

Ravens_Shadow

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One of my first jobs ever was being the chick-fil-a cow and going to various events in that ridiculously hot cow suit. Paid really well though for what it was.
 

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