Jack in the Box franchisees get what they want

CEO Lenny Comma struggled to improve the brand’s relationship with operators, a major hurdle for the burger chain, says RB’s the Bottom Line.
jack in the box drive thru
Photograph courtesy of Jack in the Box

the bottom line

Jack in the Box CEO Lenny Comma’s resignation, announced Wednesday, wasn’t expected. But it wasn’t a surprise, either.

The burger chain’s top executive had survived a lot over the past year. The company’s operators passed an unprecedented vote of no confidence and then loudly called for his replacement, ultimately intensifying their fight with multiple lawsuits.

Jack in the Box also faced pressure from an activist investor, which typically leads to the CEO’s departure.

More recently, however, it appeared that Comma had survived all of this. The company opted not to sell and instead refinanced its debt. It cut corporate overhead and now wants to add units. And then the chain started generating stronger same-store sales.

But through all this, operators have remained frustrated by their relationship with management and their perception that Comma wasn’t listening to them.

Jack in the Box franchisees had maintained that, despite the improving sales, things weren’t all that rosy. And they largely cheered Comma’s decision to resign.

“We have been optimistically hoping for a change in direction and we are pleased that Lenny and the board have come to this conclusion,” said Michael Norwich, chairman of the National Jack in the Box Franchisee Association (NFA), in a statement. “We wish Lenny and his family the very best and hope his successor embraces the talent and experience the NFA and its members have with this brand.

“Jack is an iconic brand that has great equities. We have great potential.”

The relationship with operators is key to the 2,200-unit brand, now more than ever. Jack in the Box has for years sold the vast majority of its company-operated stores to franchisees. It once owned the majority of them—now it operates less than 5%.

The company has not been growing, in part because those operators have been so busy purchasing existing locations.

That made the no-confidence vote and the lawsuit, filed last year over Jack in the Box’s use of its ad fund, so damaging. Operators that are angry with the brand are a lot less likely to grow more units. And with the refranchising done, Jack in the Box needs to get to unit growth to please investors and justify its existence as a stand-alone, publicly traded fast-food chain.

“Finally the JIB board listened to the franchisee association’s cries for the CEO to move on and let JIB be run by a more competent leader who is sensitive to the franchisees’ demand for new leadership,” said Robert Zarco, an attorney for the franchisees, in an emailed statement Thursday.

Few chains will be under as much pressure to grow in the coming years as Jack in the Box. The company is the smallest publicly traded fast-food burger chain, smaller than McDonald’s, Burger King and Wendy’s.

As a stand-alone company, it will have much less ability to keep pace with the technology spending of its larger rivals—spending that is already giving those chains advantages in speed of service, mobile ordering and other strategies.

On the other side, fast-casual burger chains continue to grow and compete for the higher-quality burger business that Jack in the Box targets.

Jack faces intense competition in its largest markets for that business. In California, it competes against the iconic In-N-Out Burger. In Texas, there is Whataburger, which is on pace to overtake Jack in the Box as the fifth-largest fast-food burger chain.

Competing against both larger, better-funded chains and smaller, faster-growing concepts will be a challenge for a stand-alone Jack in the Box at war with its franchisees.

Just three weeks ago, Comma told investors that the company’s management had planned a roadshow to talk with franchisees about the need to grow. “I think we are largely aligned in what needs to be done,” Comma said, according to a transcript on financial services site Sentieo. “There’s a sense of urgency around doing that.”

For what it's worth, Comma was a refreshingly forthright chief executive who did just about everything Wall Street asked of him: He sold Qdoba, sold off company stores, cut corporate overhead to the bone and refinanced the chain’s debt. All of that helped him survive a period of weak sales and angry franchisees. But the stock has barely moved this year as a result, and since peaking at more than $92 a share in early October, the stock is down 16%.

In the end, Comma likely chose to leave on his own terms, and his open departure date will give the company time to find a successor. Whomever that person will be, he or she will first need to get that franchisee relationship right.

CORRECTION: A previous version of this post had the incorrect title for Michael Norwich. He is the chairman.

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