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Jack in the Box franchisees critical of the chain’s refinancing plan

Operators say they worry about what happens “when the debt needs to be repaid.”
Photograph: Shutterstock

Jack in the Box franchisees, which had pushed for a sale and new management, were unsurprisingly not satisfied with a corporate strategy that includes neither.

The National Jack in the Box Franchisee Association (NFA) released a statement late Thursday critical of the company’s decision to forgo a sale in favor of a securitized debt refinancing strategy, as well as the board’s backing of CEO Lenny Comma.

“The JIB board has shown zero interest in franchisee concerns by ignoring every attempt we have made to share our grievances,” the NFA said in a statement. “Disputes are inevitable when one of the parties is unwilling to communicate. Our issues will continue to fester and worsen with the board’s commitment to keeping the status quo.

“They are leveraging up the balance sheet with debt at the same time our transactions continue to drop, as seen in the 2.2% decrease in transactions in the second quarter. We are worried about where that leaves franchisees when the debt needs to be repaid and the current management has moved on.”

The comments came after a quarter in which Jack in the Box said its same-store sales rose 0.2% but had improved by more than 2% in the early part of the current quarter.

The reaction by operators highlights Jack in the Box’s primary challenge as a stand-alone company that is almost entirely franchised. Now that the chain is not going to be sold, it has to find a way to grow with what it has, and that growth has been tough to come by for the past few years.

The chain operates slightly fewer restaurants than it did five years ago, though system sales are up 11% over that period. Same-store sales have been mostly flat for the past two years since they rose 3.1% in the fourth quarter of 2016.

Franchisees operate the vast majority of the chain’s more than 2,200 locations, and the NFA says it represents 1,900 of those franchisees. Angry, unhappy franchisees are a lot less willing to remodel locations or add new restaurants.

That puts the onus on Jack in the Box to find a way to improve relations with its operators. Speaking on the company’s earnings call Thursday, Comma argued that the company has a “strong franchise offering,” with eight straight years of same-store sales growth and “some of the highest margins in the industry.”

“From our standpoint as the franchisor, we’re focused on driving success of this business for all of the operators,” Comma said. “We’re focused on growing the business. And so, to be honest with you, we don’t want to spend a whole lot of time on the disagreements from the standpoint that it creates news. Instead, what I want to do is focus on the business at hand.”

Still, the NFA noted in its statement that tensions have increased between the association and the brand for the past year after the association passed a vote of no confidence in management and demanded a change in the CEO post.

The dispute clouded an effort to sell the company, and as Jack in the Box announced plans to pursue a refinancing strategy instead of a sale, its board announced that it unanimously supported Comma.

To franchisees, however, the decision to pursue securitization, a type of financing instrument popular in franchising and pioneered by Domino’s, represents a further focus on financial engineering and not on improving sales and operator profits.

In particular, franchisees have focused on Jack in the Box’s cuts to corporate overhead, or general and administrative spending.

And now operators, who have filed a lawsuit against the company, say that the securitization plan, “coupled with its short-slighted, discount-laden marketing strategy, is a severe hindrance to system growth.”

“Management cannot expect to … maintain successful growth while there are so many unresolved franchise issues,” NFA member Dino Savant said in a statement. “You would think that while they were taking their victory lap during today’s call, they would lament the fact that their relationship with their largest stakeholder is in such disarray.”

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