Jack in the Box CEO blames labor costs for franchisee anxiety

Lenny Comma says operators are “looking for performance to improve.”
Photograph: Shutterstock

Embattled Jack in the Box CEO Lenny Comma on Tuesday blamed growing unrest in his system on the difficult operating environment—as rising labor costs combined with weak sales raise operators’ anxiety level.

But he also defended the company’s actions and said that the company and its franchisees are aligned behind the same goals.

“Franchisees are essentially looking for performance to improve,” Comma said during the San Diego-based company’s fiscal fourth quarter earnings call Tuesday. “That’s the driving force behind what you see publicly.”

“Their interests are shared interests,” he added. “Their goals are our goals.”

The National Jack in the Box Franchisee Association last month called upon the company to replace its CEO, meaning Comma, and has since asked for a seat on the company’s board and has filed a complaint with California regulators over a real estate reorganization.

The uprising, part of a growing period of unrest in the franchise business, came during a quarter in which Jack in the Box’s same-store sales rose 0.5%. And it has come as the chain has faced some pressure from multiple activist shareholders.

Jack in the Box over the past 15 years has shifted from a system in which 80% of its restaurants were company-owned to one in which franchisees operate 94% of the system’s locations. As such, the unrest could threaten the company’s efforts to convince operators to expand or remodel locations.

Still, he said, “We believe our mutual interests are very much aligned. We know Jack in the Box can’t be successful if our franchisees are not successful.”

Comma believes that much of the unrest in the Jack in the Box system can be blamed on labor costs. Many of Jack’s 2,200 locations are in California, where the minimum wage is $11 statewide and scheduled to go to $15 by 2022.

“The rising cost of labor has put pressure on franchisee” profits, he said. “They want to see stronger top line sales to cover their costs.” He said that has helped to create “anxiety” among a franchisee base that has seen lower profits.

Franchisees did mention some specifics. For instance, the company is currently searching for a new chief marketing officer. Comma said that operators are “connecting the dots” between the lack of a marketing executive and weak sales.

“They feel that if we had a CMO in place that would contribute greatly to driving up sales,” Comma said. “I don’t necessarily disagree that a CMO would be valuable to the team.”

At the same time, however, Comma said he has confidence in the current marketing team and that he wouldn’t be pressured to hiring someone quickly. “I’m going to do what’s right for the brand over the long term,” he said. “I’m afforded the opportunity to take the time that’s necessary to find that right person.”

And Comma also said that the company has been working to protect operator profitability by not going after value customers as aggressively as other chains.

The company did say that its same-store sales had a “slow” start to the current quarter, with same-store sales down between 1% and 2%.

Comma said the company began the quarter with a combination of $5 value bundles and a premium item in the form of a Ribeye burger. Sales of the burger weren’t as strong as the company expected, however, and so most of the chain shifted to a $5 BLT bundle “that has worked well for us” and lifted sales.

Jack has been more “aggressive” with value than it had in the past, and Comma said that the company expects to keep offering value for the bulk of the year. But he also said that the company has strenuously avoided overly aggressive discounting.

“Across the entire industry there seems to be almost a desperation for same-store sales and transactions,” he said. “A lot of things happening in the market are hypercompetitive and even a little irrational.”

As for the real estate reorganization that led to a complaint from franchisees, CFO Lance Tucker said the shift is being done to prepare for a possible change in the company’s finance structure. Jack in the Box controls the leases for 1,800 franchisee locations and created a new subsidiary to hold the leases.

“The structured changes will have no negative effect on franchisees and no effect on franchisee rights,” Tucker said. “This is work that needs to be done. It does not impact franchisee rights one bit. Their concern is perhaps fair but unfounded.”

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