Convenience Store Food Service Consultant- Dean Dirks: News, Articles, Events

February 19, 2009

Fast Food Franchisee Challenges

The fast feeder’s discount strategy is paying off with same store customer counts growing from the prior year.

While discounting has increased customer counts, the results haven’t helped the bottom lines of foodservice franchisees. The chart below shows how the leading fast-food restaurants increased store traffic by anywhere from 2,000 to almost 127,000 customers in the mid to later-part of 2008 — mostly due to their recently launched discounted menus.

The problem is that quick-service restaurant (QSR) profitability comes from royalties and does not equate into franchisees’ profits. For example, McDonald’s franchisees have formally fought the dollar menu because of its lack of profitability. Taco Bell is experiencing a 50 percent (yes, that is right) profit decline overall as its 79-cent, 89-cent, and 99-cent menu comprises 50-to 60 percent of the sales mix. While these price points drive sales, they may not drive profits.

Subway has discounted foot-longs to $5 from $7, while food costs have risen by 26 to 32 percent. The $5 foot longs account for about 65 percent of the chain’s sales mix. While sales have been maintained, and in some cased grown, the net profit for each store has actually dropped.

In addition to higher food costs, discounted menus create higher labor costs. Before the discounted menu, it took 1,000 units at $7 to produce $7,000 in sales. At that volume level, the location could be manned with two people. Now it takes 1,400 units to produce the same $7,000 in sales. Labor costs go up to produce those 400 incremental dollars because at key times three people are needed to man the location instead of two. Basically, Subway is adding labor dollars to product the extra amount in sales.

In the stand-alone QSR world, these factors are catastrophic. In the convenience store industry, increased customer counts will build incremental inside sales. It may come down to a basic philosophy in how you view foodservice. Do you want your food service to make money or do you want it to draw customers to the store?

At the end of the day, QSR companies focus on royalty growth, stock value and sales per store. These financial successes help franchise companies sell units to new franchisees.

This is February’s article I wrote for csnews.com; it can also be found here: http://www.csnews.com/csn/search/article_display.jsp?vnu_content_id=1003938137

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1 Comment »

  1. Hi Mr. Dirk,
    Businessweek just released an article called “The Accidental Hero” which argues that the $5-footlong has increased both sales and profits and is a big hit with franchisees. Do you have any thoughts on this piece? (See http://finance.yahoo.com/career-work/article/108119/the-accidental-hero.html?mod=career-selfemployment)

    Comment by Dr. Duru — November 15, 2009 @ 3:58 am


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