Brands like Jack in the Box believe operations not only help profits but can lead to sales growth. / Photograph: Shutterstock.
Papa Johns didn’t focus a lot on improving its operations during the pandemic. It was too busy from the massive influx of demand for its pizzas amid a shortage of available workers.
“During the pandemic, all the focus was just on keeping the restaurants safe and keeping the restaurants open,” CEO Rob Lynch said in an interview. “A lot of things fell by the wayside, including good operating principles and the discipline to measure and keep track of how we were performing relative to the things we know that lead to great operations.”
Operations have risen to the forefront of the industry in recent months. Brands are working on speed, quality and efficiency as they look to recover margins that have taken a hit from soaring food and labor costs, and as they realize that better operations yield long-term sales growth.
Brands are adding technology and reshaping their kitchens. Franchisors are looking for margin improvement ideas and are passing them onto their franchisees. And companies are working again to speed service.
While the efforts aren’t quite as sexy as a new product or a major acquisition, operations are an important long-term consideration for fast-food chains, particularly franchises. Customers prefer visiting restaurants where service is faster and friendlier and stores are cleaner. And franchises that can find efficiencies improve profitability, which encourages franchisees to open more units, or at least prevent closures.
Operations, Jack in the Box CEO Darin Harris told attendees at the ICR conference in January, “enables us to drive guest satisfaction and keep our guests coming back. And if we focus on growing restaurant profits, we can increase operating margin. And as a result, franchisees will want to open more restaurants and help us expand our reach.”
Profitability is a major focus of brands’ operations efforts. Several restaurant companies have seen their restaurant-level cash flow take a hit over the past year as rising costs ate into margins and companies couldn’t raise prices fast enough to offset them.
The bankruptcy filing this month of the 118-unit Burger King franchisee Meridian Restaurants Unlimited highlighted what those costs can do to a company already struggling to generate sales. The company’s wage rates rose 33% over the past two years while food costs rose by 20%.
McDonald’s operators, meanwhile, watched per-store cash flow drop by $100,000 last year. Burger King, Tim Hortons, Popeyes, Domino’s, Wendy’s and others have seen per-store profits fall, typically to levels below where they were before the pandemic.
“All of us in the industry have faced these dramatic headwinds with commodities,” Harris told investors earlier this month, according to a transcript on the financial services site Sentieo/AlphaSense. “We’re not able to take enough price in the near term to overcome it.”
Jack in the Box last year began an effort to cut 200 basis points from restaurant costs through improved “financial fundamentals” and better equipment, in addition to improved training for management and employees. The training effort in particular, he said, has helped drive better customer satisfaction and sales. Same-store sales last quarter at company-owned restaurants, where the effort is focused, rose 12.6% last quarter.
Some franchise efforts can run afoul of franchisees when they’re perceived to be too aggressive. McDonald’s this year instituted more frequent inspections of restaurants, coupled with tougher standards, called PACE. The effort has generated pushback from franchisees, given that many fear the inspections could prevent them from being able to expand or keep their stores when they come up for renewal.
At the company-operated fast-casual chicken chain Pollo Tropical, the company has focused on several operations efforts to rebuild profits, with some success. The chain is focused on training, simplifying its operating model, improving productivity during busy periods and working on IT infrastructure, Interim CEO Dirk Montgomery told analysts earlier this month, according to Sentieo.
Those efforts have already had an impact, with restaurant-level profit margins improving to 16.2% of sales in the fourth quarter, compared with 14.1% in the third quarter. The company is targeting restaurant operating margins of 18% this year.
At Burger King, where operations challenges are believed to be a contributing factor in its struggles over the past few years, the company has focused intently on operations for the past 18 months. Parent company Restaurant Brands International named Tom Curtis, former operations executive with Domino’s Pizza, to be its North American president.
Since mid-2021, RBI CEO Josh Kobza said, guest satisfaction has improved 40%. In the fourth quarter, franchisee profitability improved 40% from the same period a year earlier. At Carrols Restaurant Group, which operates one in seven Burger King restaurants in the U.S., free cash flow hit a two-year high in the fourth quarter.
Burger King sister company Popeyes Louisiana Kitchen is also focused on operations, said Patrick Doyle, RBI’s executive chairman. The company is working to streamline its kitchens, important for a brand that has shifted from one focused mostly on bone-in chicken to one that sells a lot of chicken sandwiches and other boneless options.
Many brands have been adding technology, such as automated ordering and new kitchen equipment, to improve efficiency and cut back on how much walking employees have to do, including brands like Checkers and Taco John’s.
At the Mexican chain, for instance, the brand has tested new equipment that connects a taco warmer directly with the point-of-sale system and equipment that automatically dispenses frozen Potato Oles into a basket.
As for Papa Johns, the operations effort follows three years of unprecedented sales growth. But Lynch believes the effort to improve speed and quality can drive more sales in the long run. He said the effort has already cut the “out-the-door” time for its pizzas from 30 minutes to 20 minutes.
“That’s where we want to be,” Lynch said. “That gives us a fighting chance to get our pizzas out to customers in less than 30 minutes.”
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