Jack in the Box executives don’t think much of their competitors’ value push.
Lenny Comma, the San Diego-based chain’s CEO, hammered the quick-service sector’s emphasis on value, saying that the chains are sacrificing their franchisees’ long-term financial health for their own, short-term gain.
“At the end of the day, what’s out in the marketplace is very aggressive,” Comma said on his company’s fiscal second quarter earnings call on Thursday. “We’re not as aggressive. We’ve been saying for a long time that it’s not sustainable.”
He said all of the major quick-service chains pushing value are asset-light businesses with large franchisee bases, meaning they’re hurting the profits of the operators responsible for running the restaurants.
“I don’t think a business is being responsible putting a strategy in place that in the short-term makes the corporation look strong but in the long-term makes franchisees” not as strong, he said.
Jack’s same-store sales declined 0.1% in the quarter ended April 15. That disappointed investors, who expected more from the chain, given its own value push in the period. Jack started offering various menu items from $1 to $4.
Investors sent the company’s stock down more than 7%.
Comma said that Jack’s performance was poorest among transactions less than $5, suggesting that the chain’s more profitable, premium items were working and that it was losing customers to competitors’ discounts.
Yet he resisted suggestions that the company do more to compete on value.
“At the end of the day, the consumer is choosing us for more than just value,” Comma said. “We don’t want to train them to trade down. We can turn on the juice, but at the end of the day we don’t think it’s worth the squeeze.”
Many of Jack’s competitors reported sales growth in the early part of the year, led by a 4.2% same-store sales increase at Burger King, 2.9% at McDonald’s and 1.6% at Wendy’s. But others have struggled, too, including Sonic, which reported a 2.9% decline in the quarter ended Feb. 28, and a 1.7% decline at Steak ‘n Shake.
Comma said that Jack in the Box offered some value to “stay competitive and at least keep our competitors within our sights.”
“The value wars have negatively impacted the margins of our competitors,” Comma said.
Jack in the Box is adjusting to life as a single-chain company that is mostly franchised. Jack is selling off company stores to franchisees—it operates 188 of the chain’s 2,245 units, less than half the 371 locations it operated a year ago. It ultimately plans to operate just about 6% of its restaurants.
It also recently closed the sale of Qdoba to Apollo Capital to focus exclusively on its fast-food burger chain.
The company has hired a consultant who can help reduce general and administrative spending so it is more in line with other, mostly franchised companies.
Jack’s efforts will include the sale of a corporate support center, with plans to consolidate its San Diego offices from two to one.
“The company has been very good about reducing G&A in the past,” Comma said. “We’re confident we can do that going forward. But as we look at the business, we don’t want to miss opportunities to find efficiencies because we’re caught in old paradigms.”
He also noted that the company just hired two C-level executives who “just got out of training.”
That includes Lance Tucker, recently hired away from Papa John's to be CFO, and COO Marcus Tom, former Caribou Coffee and Einstein Bros. Bagels executive.
One of the strategies the company is working on is simplification. That includes getting rid of some ingredients and also replacing some kitchen equipment with more versatile equipment. The goal is to make for a “faster, more consistent guest experience.”
Comma said the company has “a number of cheese sauces” and a lot of different breads. “We can consolidate some without drastically changing the product to make it easier,” he said. “We’ll do some taste testing to make sure we don’t ruin anything.”